Savvier patients are transforming the healthcare sector, and private equity investors would do well to invest real time, skill and effort to marketing efforts as part of their value creation plans, according to fractional growth executive provider Chief Outsiders.

Healthcare has long been a sweet spot for private equity, offering plenty of opportunities for investors to do what they do best to drive returns: streamlining operations, cleaning up balance sheets, building industry platforms through M&A drives and tapping industry talent to steer companies to new heights. But as with any sector, competition for opportunities eventually drives up prices and as companies mature, value creation requires greater sophistication to deliver the massive growth that warrants fat exit multiples.

That said, healthcare is such a diverse and complex part of the economy, there’s no shortage of businesses in need of private equity’s basic playbook. And while overall deal activity has been sluggish, healthcare roll-ups are booming, as private equity investors buy and build their way to new industry powerhouses around a given theme. In terms of particular segments, healthcare IT and patient services are proving popular for the asset class.

However, patient services plays may require something more to make the most of value creation efforts. Patients are becoming savvier, and are willing to shop around, gather referrals and second opinions to make the most of their healthcare spend. In a sense they’re employing the same behaviors as when they’re spending on non-health related goods and services. And if they’re consumers now, patient servicers have to adjust their sales and marketing efforts to reflect that.

Chief Outsiders is a fractional growth executive provider that works with several private equity firms to do just that and argues that consumers will only be getting smarter, so healthcare businesses have to deliver sales and marketing efforts to match them. These efforts have to address the various perspectives of the healthcare ecosystem, build off actual market research, tailored to the unique needs of the enterprise with concrete metrics to track progress. Such efforts may seem less crucial at the moment, but given the broader market conditions, investors would do well to press every value creation lever possible.

According to data gathered by PitchBook, the total deal value for PE investments was $79.9 billion, which is still a ways down from 2021, when that value was a whopping $201.6 billion. Broader factors like interest rates and steep asset prices played a role in that decline, but PE firms remain bullish on the long-term prospects of the sector and are still keen to build platforms through acquisition sprees.

The apple of their eye

“Private equity firms are keen on rolling up all kinds of practices,” says Joe Grace, a Partner at Chief Outsiders, with a specialty in direct-to-consumer marketing, and a career that includes a long tenure at Web MD. “I was working with one PE firm that was rolling up a number of practices involving women’s health and really focused on growth through acquisition exclusively.”

“There’s a lot of value to consolidating a number of distressed practices under one umbrella,” says Sarah Polk, a Partner at Chief Outsiders, with experience in healthcare that includes medical devices, life sciences, biopharma and more. “The pandemic left a lot of these businesses struggling, so PE investors can build a regional or national platform around a theme without paying a premium for any particular asset.”

One theme that’s growing in popularity among PE groups is clinical research. Steve Figman, a fractional CMO at Chief Outsiders with experience at pharmaceutical, biotech, medical device, healthcare, and technology companies, says: “I’m seeing a lot of PE activity around consolidating clinical investigation sites, built on the idea of delivering efficiencies in patient recruitment and financial infrastructure, which can resemble Mom & Pop operations in this segment.”

Patient services and value-added care is another theme that’s inspiring such consolidation plays. “These roll-ups make sense,” says Todd Lunsford, a CMO with Chief Outsiders, with years of healthcare experience. “They’re accretive from an EBITDA standpoint, so that’s attractive, but once the PE investors are through with that first operational roll-up, they’re left holding a bunch of practices that may not have bought into a shared revenue generation model.” And what’s left is a highly independent, locally focused operation that will complicate any broad value creation initiative.

But even if the PE firm is working at effectively integrating all those disparate acquisitions into one business, there is still common resistance to applying a traditional value creation lens, one that includes sales and marketing efforts, to the sector. “A lot of these facilities that have grown up over time were never marketing-focused,” says Polk. “They never set up a strategy to actually continue growth. The attitude among doctors and specialists was that if they built it, the market would come to them.”

The new patient paradigm

Polk cites the fact that while that may have been ten to fifteen years ago, it’s no longer the case. “There is actual competition for patients now, and those patients are more educated and willing to drive for better care,” says Polk. With so much information available online, patients aren’t taking what their doctors or even insurance companies are saying at face value.

Grace saw that roll-up of women’s health care businesses struggle mightily after a shopping spree. “There was little effort around any customer facing assets, so the websites were left a mess, with ineffective and inefficient messaging across the board, but it simply wasn’t a priority,” says Grace. With a more discerning consumer base, it’s hard not to see the dangers here. So how should PE investors be looking at this generation of patients?

Of course it starts with a given enterprise. “Venture capitalists have taken the lead with a lot of the direct-to-consumer plays in the healthcare space, but in the last few years, private equity has started building a brand around some services, with orthodontics, telehealth and erectile dysfunction solutions growing to include male pattern baldness as a few examples,” says Lunsford. “ In those cases, the consumer is naturally an integral part of the equation, but there’s untapped potential well beyond that.” He cites the chance to build the entire investment thesis around a particular consumer segment, one that could bend the cost curve.

“I’ve been exposed to a lot of concepts along these lines,” says Lunsford. “Senior citizens are the source of a lot of high costs and bad customer experiences, so what if there was a business that could bend that cost curve down by 30-50%, simply by offering better telehealth and focused on better social determinants on health? That kind of enterprise is very attractive to payers.” And payers are a gateway to big hospital systems and physician groups who then deliver referrals to the business.

Polk argues that healthcare marketing can’t discount the payers. “They’re another audience to address and they’re interested in better outcomes and lower costs, which, in tandem with more discerning patients, is already reshaping the industry,’ says Polk. She notes the rise of acute care centers that are focused on chronic conditions. “Twenty years ago, it was the surgeons that made the money while ERs drained resources. Now, the number of acute care centers are growing and they are very profitable since they focus on what they do best.”

But Figman cautions against segmenting these audiences too rigidly, which can happen with a lot of knee-jerk marketing techniques. “It’s better to think of these audiences holistically, as if they were part of the same ecosystem.” Patients are certainly keen on better outcomes, and no doctor or payer wants to deal with patients who are dismayed by their experience.

Turn platforms into performers

Some private equity investors in the lower middle market may balk at the focus on growth, with their reliable playbook that focuses on back-office synergies among the various acquisitions in a roll-up, when that might be enough to secure a substantial return. Why should they devote any time or capital to a sales and marketing effort to generate sustainable, not to mention, attractive growth?

“When a PE company is doing a roll-up in a fragmented industry, they're buying businesses that look good and have plenty of cash flow, but aren't necessarily growing gangbusters,” says Grace. “They're creating growth through the rollup, when there are no more companies to buy, all that’s left is a big organization with modest growth. So what’s the plan to add more juice to the equation?”

And as much as one might argue that the private equity owner can simply sell that roll-up as is, the competitive landscape argues that no one has the luxury of running on a series of modest wins. PE shops need a few outsized hits to attract new LPs and bigger allocations. And that requires convincing buyers they aren’t just getting a good company. They’re getting a good company that can become a great one.

Those buyers have even tapped Chief Outsiders to kick the tires of a potential acquisition. “We’ve been hired to review the quality of the sales and marketing operations, and our judgment has been part of the negotiating process,” says Polk. “And private equity firms can hire us to do the same for their own acquisitions as well.” So there’s little chance a potential buyer won’t examine how a given business tackles those better-educated consumers and the whole ecosystem that determines the actual bottom line.

But for the PE firms looking to differentiate themselves by investing in healthcare with an eye on best practices for growth, how should they go about building a “growth engine” at that new investment? For that answer, be on the lookout for the second half of our healthcare conversation, where we discuss the best strategies for thriving today.