Archimed managed to avoid a “covid reset” that is hampering private equity exits from healthcare investments with its sale of Vita Health Group, partner Robin Filmer-Wilson told PE Hub Europe. A switch into mental health and a partnership with the UK’s National Health Service helped elevate Vita’s revenues to a level that attracted strategic buyers, he added.
Spire Healthcare Group bought Vita in October for £74 million ($90 million; €85 million), giving healthcare-focused investor Archimed a 4.5x return on investment and 25 percent annual return over the roughly eight years it held the UK healthcare provider.
Such returns on exits are not easy in the healthcare market right now – if they can be made at all, said Filmer-Wilson.
“It’s been horrible,” he said. “It’s been really, really challenging and a lot of deals have been pulled from the market or just not happened, or entrepreneurs are still hoping for valuations from 18 months ago.
“The psychology is yet to reset. A number of companies were hoping to grow into those valuations – get to 20-30 percent growth a year, like a lot of companies did during covid. But the covid reset has well and truly come, so very few companies are anticipating any significant revenues from covid-related work.”
Vita has been hitting those growth numbers, reporting average annual revenue growth of 33 percent and EBITDA growth of 49 percent, according to a release. Its projected revenues and EBITDA for the 2024 fiscal year were £100 million and £10 million, respectively.
“In a market such as this you want to make sure you can sell your company because it has strategic value,” said Filmer-Wilson. “If it’ll just add a bit of revenue to the top line, then people just don’t feel compelled to do it.”
That only ‘best-in-class’ companies are of interest holds true across sectors, including for private equity buyers, said Allan Bertie, head of European investment banking at Raymond James.
“When the market reopens, people default to quality on the basis that if they’ve called it a bit too early, it’s still always going to be a good business,” he said. “If the market picks up, they’ll make a lot of money. If the market plateaus, it’ll still probably make money because it’s the best-in-class business. If it means they’ve got to hold it for five years instead of three, it’s a pretty safe bet. Whereas on something that’s a bit more challenging, needs changes, needs further investment or other acquisitions, each of those levers carries further risk.
“The best are getting done at the higher prices, and those that aren’t the best are at a lower multiple, if they happen. That’s the risk-adjusted return.”
Pivot
Archimed grew Bury St Edmunds-headquartered Vita’s revenues by pivoting towards mental health. When Archimed bought the company, then called RehabWorks, in 2015, it was “purely focused on musculoskeletal”, said Filmer-Wilson.
“We saw a real opportunity to move into mental health, which was a bit of a buzzword at the time, but it wasn’t really part of the regulatory landscape,” he said. “I still say it’s probably not part of the regulatory landscape, but it’s very much a must-have for the corporate and public markets.
“We saw real opportunity to consolidate that market, which historically had low margins, had not really focused on customer care and quality and was under-invested from a technology perspective.”
The pivot was natural as there is “huge correlation” between mental health and musculoskeletal ailments, he added.
“If you’ve got back problems, it’s typically because you are stuck on your desk with lots of stress coming through your neck and that goes into your back. It makes complete sense for the two to be looked at with a combined offering.”
After developing Vita’s technology platform, the company could target larger customers, including the NHS. “When they saw what the private market was offering in terms of market-leading services for its customers, they couldn’t ignore it and they knew that they had to turn to the private market for support,” said Filmer-Wilson.
All of that plus several add-ons made the company a “must-have acquisition for a number of strategic players in the area”, he said.
Archimed’s own next acquisition could come in pharma service, which “was less exciting for us a while ago, because the valuations were just a bit too high”, said Filmer-Wilson. “Now I’m much more interested on those and pushing some of those discussions from years before a lot harder.
“Some sub-sectors might be less interesting, like consumer health, because consumer sentiment is slowing down a little bit.”
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