3 min read February 2024 — In an interview with Invest:, L.A. Galyon, managing partner at Brentwood Capital Advisors, discussed the firm’s navigation through a challenging market, innovative strategies for success and evolving trends in healthcare banking.
What have been some key milestones and achievements for the firm in the last 12 months?
Over the past 12 months, one of our biggest milestones has been navigating the challenging market, particularly since the Federal Reserve started raising rates in 2022. This introduced a lot of uncertainty, which generally affects the market negatively. Merger and acquisition (M&A) volumes have significantly decreased. Both companies and investors find it difficult to make decisions in such an unsettled market. The period from early 2022 to the summer was decent, but from the summer of 2022 to the third quarter of this year, the pace of transactions slowed considerably. In conversations with investors and private firms, they’ve observed a decline in deal quality while the deal volume remained consistent. Many deals did not close. This trend of fewer quality deals, with larger investment banking firms experiencing layoffs, as I’ve learned from recent calls with colleagues in New York. We’ve also seen candidates looking for new jobs who have been laid off from their firms, reflecting a wider trend in investment banking.
What are some strategies you’ve implemented over the last 18 months to achieve success?
In such markets, being focused and targeted is crucial, regardless of whether you’re in investment banking, legal or consulting industries. Relying on generalist strategies and waiting for clients to reach out is ineffective. We concluded our planning session last month, where each banker covering different sectors updated business plans for market engagement. These plans outline key trends in each segment, strategies for approaching prospects, referral sources and clients, assessing market size and business potential for 2024 viability. Larger Wall Street firms many times wait for clients to approach them, but that approach is less effective in current, tougher market conditions. This is one reason for the layoffs and reductions in force seen across our industry. With M&A volumes down significantly, many firms are likely overstaffed for the current market demand, leading to delayed but necessary workforce reductions.
What are some of the key trends in healthcare banking, especially considering technological advancements and market dynamics?
The COVID-19 pandemic accelerated certain trends in healthcare banking. A critical dynamic to understand is the distribution of healthcare spending. According to a recent article, about 45% of the $4 trillion spent on healthcare goes to middlemen and payers, which is problematic as it limits direct care to patients. Our focus is on clients involved in technology, outsourced services, or healthcare providers who provide more value while lowering costs. From the provider’s perspective, the challenge is delivering high-quality care at a low cost.
Care is increasingly moving from expensive settings, like in patient hospitals, to home-based environments. Providers should aim to treat patients in lower-cost settings without compromising quality care. We assess technology and tech-enabled businesses, such as software or revenue cycle companies, on their ability to make healthcare providers more efficient and reduce overall system costs. Providers should aim to treat patients in lower-cost settings without compromising care quality. In today’s healthcare landscape, high cost and low quality are unsustainable. Our strategy is to anticipate and align with future high value trends, such as telehealth and digital healthcare, away from traditional facility-based care.
What differentiates Brentwood Capital Advisors from other firms in the market?
In the last five years, many of our respected competitors have been acquired, many by banks. Historically, banks tend to mismanage such acquisitions. This has given us an advantage, as we remain independent. Unlike larger, bank-owned firms, our narrow focus & size, allows us to be lean and nimble. We can quickly refocus our strategies, which is crucial in evolving markets like those during COVID-19. For example, the pandemic accelerated the shift from traditional inpatient nursing home care to home-based care. This shift was evident in our successful closure of 11 deals in the post-acute space in 2021, primarily focused on home care delivery and supporting software. This adaptability and focus on evolving healthcare trends set us apart from larger, less agile firms.
How does the firm foster innovation among its bankers and how does this benefit clients?
The companies we work with are often innovators themselves. They identify areas that aren’t being addressed effectively and create businesses around these opportunities. When you look at investments, whether private or public, the significant returns usually come from the first movers, those who identify and address an important market or a business segment. They lead the sector, unlike others who follow the same model as those before them, yielding only average returns.
A great example of this is our work with EnableComp. It has been one of our best clients over time, and we’ve represented the team a number of times. It innovated the hospital reimbursement cycle, specifically in workers’ compensation, which is quite complicated with different rules governing payment in each state. The firm saw an opportunity to develop a technology-driven solution and outsource this part of the reimbursement cycle from hospitals, greatly increasing efficiency and the results for their clients.
The experienced team at EnableComp recognized an inefficient reimbursement model in hospitals and significantly improved it, which was beneficial for health systems. This company started small but grew significantly, leading to a recapitalization by Welsh, Carson, Anderson & Stowe in 2021. Its success is unique because it didn’t follow an existing model; it essentially created a new tech-enabled solution for the worker’s compensation market. This innovative mindset is what we seek in our clients and we work to help them identify and capitalize on unique market opportunities.
How do you envision the industry evolving over the next 12 months to three years?
Predicting the industry’s evolution is challenging. In the healthcare sector, providers often break even on Medicare and lose money on Medicaid, relying on commercial insurance for profits. However, large commercial insurance providers like United and Anthem have significant negotiating power over smaller providers, many of whom are our clients. In addition, many payers are now providing care in addition to insurance and the administration of claims. Competing with these giants is extremely difficult. The key to success in this environment is to be high quality yet low cost, offering indispensable services. Regarding disruptions in healthcare, areas like cancer care are moving towards value-based models.
Our advisory business, established in the late 1990s, along with a co-investment vehicle, reflects our narrow focus on creating a world-class healthcare advisory firm. We put our client’s interest first, giving the best possible advice with no conflicts of interest. We are also specialists, like an orthopedic surgeon for knee operations, versus a general surgeon. This specialization allows us to compete with larger firms, as we have in-depth knowledge of our sectors that a generalist firm may lack.
Are there any particular services you plan to incorporate in the near future?
We’ve been considering expanding our industry coverage, particularly into the pharma services landscape, which we currently do not cover. This sector is challenging to build from scratch, especially since Nashville, despite its 450 healthcare companies, doesn’t have a significant presence in pharma services. These companies are mainly located in the Northeast, closer to major pharma companies. Our approach would likely involve hiring talent specialized in this sector. If we can build a business organically, we’ll start there. But if we determine that adding talent that fits our culture is a more feasible approach, that’s the direction we’ll take.
How do you assess the current market compared to the last 12 months?
I’d say the market today is more normal. Looking back, the underwriting done in the industry gradually declined from 2018 to 2021, affecting both debt and equity. Currently, capital providers are exercising more diligence and conducting thorough research prior to making any new investments. This is a positive change, as it indicates a more cautious, informed and sustainable approach.
During 2021, some deals were, frankly, astonishing in their lack of prudence, but they still went through. Such situations often occur when capital is flowing freely, leading to excesses in the market. The challenges many companies face today result from these excesses. If you strip away the capital structures from these businesses, you’ll find that the underlying business is still fundamentally sound. The issue arises when businesses are burdened with excessive leverage, which is unsustainable and hinders their operational effectiveness.
For more information, visit:
