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Buyouts: Five Questions with Madison Capital's Adam Willis

July 24, 2017—by Sarah Pringle

  • Healthcare makes up >20% of lender’s portfolio
  • Unrealistic value expectations of “me too” companies lead to failed processes
  • Diverse pool of capital providers drives up debt multiples

Adam Willis serves as a managing director at Madison Capital Funding, where he heads up the lender’s healthcare efforts and leads a dedicated team.

Madison, with more than $8 billion in assets under management, is distinguished by its stable base of capital. The Chicago group is the mid-market lending subsidiary of life insurer New York Life Investment Management.

Madison in 2016 deployed north of $700 million in capital across 25 healthcare investments, marking a record year for the firm. Willis remains optimistic that 2017 will be a banner year for its healthcare platform, which today accounts for more than 20% of Madison’s overall portfolio.

What’s your sentiment on today’s healthcare market and what does Madison look for in its investments?

Everyone expected a potential lull in healthcare and it's been just the opposite. It continues to be a growth driver for Madison and it continues to be a hot area for investing for other acquirers. [The year] 2016 was a record year, but it doesn’t seem like anything has skipped a beat.

Our investment strategy has a top-down approach at a high level. Any business we invest in offers an improved quality of care, reduces costs or makes the healthcare market more efficient. If you meet that criteria, it's more of a subsector-by-subsector analysis. For example, is there market concentration? Is there potential reimbursement pressure or regulatory changes?

Anything revolving around the [Obamacare] exchanges, or in businesses where Medicaid has driven growth: Those are the areas where you're seeing more hesitation for investment. It’s the areas where potential Obamacare changes can have an impact.

Are todays high prices sustainable from both an M&A and debt perspective?

Multiples across both are at all-time highs. I can’t recall an asset of quality that sold for less than 9x. A mid-level asset is trading for 9x to 11 x EBITDA and these are getting Sx to 6x leverage.

Healthcare multiples are second only to technology multiples. Do I think valuations will normalize with any sort of recession? Yes.

Healthcare will continue to be a huge portion of the global economy so I don't see the premium that healthcare gets relative to the overall market changing. Maybe the headline value, but not the premium.

Why are we seeing so many broken or stalled sales processes?

What you’re seeing are a lot of “me too” companies. If one deal trades in a space [at a healthy valuation], everyone that’s an owner in that segment goes to market and tries to sell. But oftentimes the quality is lower.

Bankers are saying, “I’ll get you 12x because this other company just traded for 1 x.” That’s why there are a lot of busted processes.

There’s an unrealistic expectation of value based on those precedent transactions. While sector is important in value determination, company quality drives the ultimate price.

What do you think keeps healthcare GPs and LPs up at night?

There’s a ton of interest in the space without a huge number of quality assets. There’s a lot of underlying frustration among sponsors with an inability to get transactions to close. The amount of capital trying to invest in healthcare is both general and healthcare-specific. There’s also been a lot more lower-middle-market deals, and so the amount of capital that sponsors can put in a given deal is diminishing.

From a fundraising perspective, if you’re paying 12 times EBITDA for every business you’re investing in that doesn't look good. It's a hard message to tell LPs because all these PE firms are raising money saying they’re not auction chasers. If the transactions you do don’t follow along that protocol, your LPs start to wonder. But in the healthcare market there are very few truly proprietary deals. It speaks to all the "me too" processes.

What about healthcare lenders?

From a lender perspective, the amount of available capital, the diversity of capital providers - from regulated banks to unregulated FinCos and BDCs - and the continued interest in healthcare [are] driving up debt multiples. That makes it more difficult for the longer-term debt players to find places to invest their capital.

You have a lot of "healthcare tourists" playing the sector with a lack of healthcare expertise, which can be dangerous at the peak of the market. It's creating, like private equity, very competitive processes for lenders. It's a never-ending cycle of leverage driving enterprise value and enterprise value driving leverage.

Action Item: Get in touch with Madison Capital’s Adam Willis at adam_willis@mcfllc.com