Who’s investing in work comp services now?

Several years ago it was smaller private equity firms who bought companies for $75 – $200 million, built them up, and sold them off. Then it was the bigger PE firms who put together a couple of these and hoped to sell them for more than they paid – and were mostly successful.

One of the first deals was way back ten years ago – and what’s transpired with that deal is emblematic of the evolution of the industry.

PMSI was sold by owner Amerisource Bergen after the PBM industry’s founding company just kind of melted away. HIG Capital picked it up for  about $50 million, and quickly brought in one of the most talented managers I’ve ever had the honor of knowing – Eileen Auen. Greatly aided by a major cash infusion, Eileen and her team turned the all-but-buried company around. HIG profited  handsomely when it was sold to Stone River and merged with Progressive Medical, a deal that was backed by Kelso.

The new company, renamed Helios, grew and was eventually sold to OptumRx, a division of giant health insurer UnitedHealthcare.

Optum is what is known as a “strategic” buyer. Strategics are investors that buy assets to add to its existing operation, ideally leveraging existing infrastructure, customers, systems, and suppliers. The result is infrastructure costs (and ideally supply costs) are reduced and revenues increased.

So, we have strategics such as Optum, Mitchell (see acquisitions of Pharmacy Benefit Managers), and Paradigm buying companies that somehow make the whole greater than the sum of the parts.

I’d note that some of these transactions seem a bit of a stretch, but, hey, I’m not the one who went to Harvard Business School, so what do I know.

The financial investors are the other entities still in the game.  Of late, it’s been the giants – Carlyle, Stone Point, KKR – investment firms with billions in ready cash, deep knowledge of the business, and the savvy needed to pick out management teams and business models that will flourish in what is a declining industry – workers’ comp.

We haven’t seen much activity on the small end of the deal world – except for Adva-net and a couple smaller transactions things have been pretty dull of late.  While there are a bunch of smaller companies in various geographic and/or service niches, there’s been precious little trading activity over the last couple of years (with a couple exceptions)

There’s one more investor type that’s getting more active these days – distressed asset investors. Their strategy is to find companies that aren’t doing well financially and buy them – sometimes out of bankruptcy or just before they tank.

I’d expect we’ll see more of the distressed asset folks making the rounds in Las Vegas in six weeks, finding out what’s up and who’s making it and who isn’t.

What does this mean for you?

The work comp service industry is getting awfully mature.