As individuals sadly lost their loved ones to this disease, businesses around the globe struggled to stay afloat through forced closures, capacity limitations, industry shutdowns, and crippled supply chains. A liquidity crisis slammed businesses across the board, and COVID-19 added a new layer of complexity for companies who tried to obtain capital to weather the storm.

As the world headed into the uncharted territory of a worldwide pandemic, investors in both debt and equity markets reacted to shifts and changing conditions in several interesting ways, and the lessons they learned and the actions they take this year will set the stage for everyone’s access to capital in the years to come.

Debt Markets

Prior to COVID-19, some analysts and debt underwriters encouraged debt issuers to exercise caution after the tenth straight year of economic expansion [1]. Several years of substantial increases in total lending had created an environment with a high potential for defaults and losses in the case of an economic setback; [1] the total value of corporate debt due in 2020 had surpassed $1T [6].

As we have been reminded throughout history, growth isn’t perpetual. All economies experience slowdowns after long periods of growth for one reason or another. As we saw this past year, the warning of an impending downturn proved prophetic, though no one was expecting the cause to be a global pandemic.

When the initial wave of uncertainty around COVID-19 set in during March 2020, the debt market flipped on its head, paving a path to the worst debt-raising year since 2015 [6]. Starting in mid-March, the corporate bond market completely crashed, as investors sold off their holdings and fled to safety amid fears of downgrades and defaults.

Many institutional and private investors found new homes for their cash in distressed debt funds, which caused the total size of those funds to quadruple, to nearly $1T between March 15 and April 1 [6]. Simultaneously, other special situation funds ballooned as institutions sought to hedge against losses amid the new market and economic turmoil.

These funds offered high-yield debt capital to companies in shambles that were regarded as too risky for loans by other conventional or direct lenders, often costing borrowers two to three times more than conventional loans and establishing a place of last resort for businesses being pushed towards bankruptcy [6].

Meanwhile, the same uncertainty caused a free fall in conventional lending and direct lending as the impact of closures wracked the economy. The wells of direct lending activity that had been steadily growing over the past several years quickly dried up as conditions brought on by the pandemic created a liquidity crisis for both businesses and creditors.

Companies that were unable to access PPP or SBA loans often found themselves unable to qualify for credit as banks tightened their credit requirements for new loans. Business owners who lacked longstanding relationships with creditors found themselves without many options, and forced to utilize distressed debt and special situations funds.

These distressed debt and special situation funds — often labeled “COVID-19 opportunity funds” — were the source of 29.9% of debt funds raised in the first half of 2020, and arose from after contributing only 19.7% of debt capital raised in 2019 [9]. 

The first half of 2020 saw an annualized decline of more than 30% in total debt funds raised compared to 2019 [10]. By June 30th, total funding came to $48M — down significantly from the $145M of capital raised over the course of 2019.

The second half of the year saw significant support from PPP loans, with Federal Reserve purchases bolstering the corporate bond market and interest rates falling to historically low levels, which allowed firms that had survived the first wave of closures to refinance their debt.

The Federal Reserve’s buying activity helped calm the corporate bond market, and provided a backstop to many companies rated above BBB [6]. Most unrated or downgraded companies have found issuing bonds to be significantly more expensive under COVID-19.

Though to a significantly lesser degree than in the early months of COVID, look into the rest of 2021 and beyond features continued uncertainty in the debt market. The size, impact, and prevalence of distressed debt funds are expected to remain large until business restrictions and limitations (such as closures, limited capacity, and limited functionality of various businesses) are lifted.

The debt overhang among companies that took on debt to avoid closing shop is going to create ripple effects across the debt market for years to come. An increase in high-yield debt offerings will likely lead to a wave of loan defaults and bankruptcy proceedings in the coming years. Confidence and general feelings of stability will take time to return.

However, the near-zero interest rates anticipated by analysts at PwC through 2021 should promote recovery and growth for those businesses that will have survived through the pandemic [7].

EQUITY

Prior to the advent of COVID-19, equity markets were poised to extend a decade-long surge that saw a 270% increase in the number of private equity deals between the low point of 2009 through 2019 [2]. Growth in PE deals was expected by firms of all sizes ranging from less than 25M up to 500M, and with a record of $1.25T in “dry powder” available to investors, everyone though 2020 would be a very good year [3].

With the onset of the virus, equity markets exhibited highly volatile behavior, free-falling during the first half of 2020, followed by a steep recovery in the second half of the year.

COVID-19 hit the equity markets quite early in 2020. As uncertainty set in, many would-be sellers decided to delay going to market, and chose to wait for a better exit environment to materialize before continuing with their plans. Those that couldn’t hold out often sold their distressed companies at a significant discount.

Meanwhile, fundraisers suffered a significant reduction in new investments — on pace for the lowest annualized amount since 2015. The initial shock gave both buyers and sellers cold feet, resulting in a general market freeze.

According to Pitchbook, deal volume contracted by 26% compared to Q1 2019 and featured the lowest volume since Q2 2014 [4]. Most of this initial decrease came from a reduction in middle-market transactions that involved companies valued between $100M and $500M [4].

Their difficulties only got worse in Q2 2020, when middle-market deal activity (valued under $500M) saw a 55% decrease in transaction volume compared to Q1 2020 and a 61% drop compared to Q2 2019 [10]. COVID-19’s impact on M&A activity varied across industries, with some reaping the benefits and others not being so lucky.

Consumer and discretionary goods made up 8% of Q2 2020 activity, down from 17% the year prior [10]. Industrial companies saw a similar drop, from 17% in Q2 2019 to 8% in Q2 2020 [10]. Meanwhile, the healthcare industry dominated Q2 2020 M&A (which is understandable given the state of the world) with 30% of deal volume — more than double the concentration in 2019 — while most others remained within a few percentage points of their five-year average [10].

The drop in overall deal volume over the first two quarters did not change the character of the investors, with 84% of buyers being strategic, and domestic U.S. buyers accounting for 90% of transactions, consistent with the preceding few years [9].

After an incredibly rocky second quarter, the private equity market made a significant recovery in the second half of 2020. Jonathan Simnett from the corporate law firm Hampleton Partners was reported as saying in mid-May, “[t]he brakes have been slammed on funding until investors are able to create maps to navigate uncharted territory” [5].

As dealmakers adjusted to the new normal and learned how to complete deals remotely in a shutdown world, Q3 saw transaction volumes spike by 76% over Q2 [11] as higher valuations and slightly more stable conditions attracted sellers and increased confidence in the short term. Fundraising efforts yielded substantially better results, thanks in part to a rise in institutional investing in private equity with 66% of institutional investor contributing to PE in 2020 [12], which gave buyers the resources and confidence to return to market and seek new opportunities.

The upward trend that started in Q3 continued through the rest of the year. In all, 2020 deal volume ended 16% lower than in 2019, and deal value dropped by 19% [14]. Though far short of 2019’s predictions, this outcome was far better than the 50 to 60% losses experienced in the first half of the year.

According to a survey of 200 PE firms conducted by the National Bureau of Economic Research, managers believe that 40% of their portfolio companies were negatively affected by the pandemic to a moderate degree, while 10% of holdings were significantly negatively affected [13].

So where do we go from here? Analysts are at odds about what to expect in the short- and long-term of 2021 and beyond. Most believe the impact of COVID-19 will continue to weigh down deal volumes until COVID-19 restrictions are lifted, vaccines distributed, and businesses return to functioning at normal capacity.

Some predict a negative future, and argue that the lost growth potential, contractions in business, reductions in revenue and cash flow, damaged supply chains, and increased debt balances for many firms will result in lower projected returns for private equity funds and overall discouragement.

Others argue that record-high “dry powder” (which has reached over $1.45T as of March 2021, all of which is expected to be deployed within the next 5 to 7 years) will drive a prosperous 3-to-5-year climb. As more buyers compete in the marketplace, valuations will increase, and thereby benefit sellers, exiting PE firms, and companies in need of capital as they reassess their strategies going forward.

If you add that 53% of surveyed US executives plan on increasing their M&A investment in 2021 [7], it appears that the coming years will be prosperous for middle-market companies looking to transact, whether they intend to grow or sell their business.

CONCLUSION

The COVID-19 pandemic created a level of uncertainty that few private companies had ever experienced, and according to most observers, its effects are likely going to be felt for the next few years. It is difficult to predict what the future will bring.

As JP Morgan CEO Jamie Dimon recently put it, “This [was] not a normal recession. The recessionary part of this you’re going to see down the road” [8]. Risk of high inflation due to unusually high government spending throws a wrench into things, but assuming the Federal Reserve is able to maintain the general state of the economy (as it has often proven to do), the continued release of pent-up investment demand, low interest rates, and the encouraging downward trend of coronavirus hospitalizations and cases in the US and abroad should bring optimism and hope in the coming years.

SOURCES

[1] Tree Line Annual Report 2020 (2020). Underwriting a New World. Retrieved March 13, 2021, from https://treelinecp.com/wp-content/uploads/2020/11/Tree-Line-Annual-Report-2020.pdf

[2] Middle Market Private Equity Update Q3 2020 (2020). Retrieved March 14, 2021 from https://greenwichgp.com/wp-content/uploads/2020/10/GCG-Q3-2020-Middle-Market-Private-Equity-Update.pdf

[3] Middle Market Update Q2 2020 (2020). Retrieved on March 14, 2021 from https://greenwichgp.com/wp-content/uploads/2020/08/GCG-Q2-2020-Middle-Market-Update.pdf

[4] Pitchbook. (2020, January) COVID 19’s Influence on the US PE Market. Retrieved on March 14, 2021 from https://files.pitchbook.com/website/files/pdf/PitchBook_Q1_2020_Analyst_Note_COVID_19s_Influence_on_the_US_PE_Market.pdf 

[5] Loten, A. (2020, March 25). Startup Funding Dwindles Due to Coronavirus Slowdown. Retrieved February 3, 2021, from https://www.wsj.com/articles/startup-funding-dwindles-due-to-coronavirus-slowdown-11585175702

[6] Olsen, R. (2020). Private Companies and COVID-19: Accessing the Debt Markets During and After the Crisis. Retrieved on March 10, 2021 from https://www2.deloitte.com/content/dam/Deloitte/xe/Documents/About-Deloitte/me-private-companies-covid-19-accessing-debt-markets.pdf

[7] PWC. (2020). 2021 Outlook: M&A leads the economic recovery. Retrieved on March 3, 2021 from https://www.pwc.com/us/en/services/deals/industry-insights.html

[8] Eisen, B. & Benoit, D. (2020, July 14). ‘This Is Not a Normal Recession’: Banks Ready for Wave of Coronavirus Defaults. Retrieved on March 3, 2021 from https://www.wsj.com/articles/this-is-not-a-normal-recession-banks-ready-for-wave-of-coronavirus-defaults-11594746008

[9] Pitchbook. (2020, July) H1 2020 Global Private Debt Report. Retrieved on March 14, 2021 from https://files.pitchbook.com/website/files/pdf/PitchBook_H1_2020_Global_Private_Debt_Report.pdf 

[10] Pitchbook. (2020) GCG Middle Market Private Equity Update Q2 2020. Retrieved on March 3, 2021 from https://greenwichgp.com/wp-content/uploads/2020/08/GCG-Q2-2020-Middle-Market-Update.pdf

[11] Pitchbook. (2020) GCG Middle Market Private Equity Update Q3 2020. Retrieved on March 3, 2021 from https://greenwichgp.com/wp-content/uploads/2020/10/GCG-Q3-2020-Middle-Market-Private-Equity-Update.pdf 

[12] Henry, P., Fumai, F., Taylor, T. L., & Jagat, P. (2020, November 05). The growing private equity market. Retrieved April 10, 2021 from https://www2.deloitte.com/us/en/insights/industry/financial-services/private-equity-industry-forecast.html

[13] Gompers, P. A., Kaplan, S.N. &  Mukharlyamov, V. (2020, October). Private Equity and COVID-19. Retrieved on March 3, 2021, from https://www.nber.org/papers/w27889

[14] Pitchbook. (2020) GCG Middle Market Private Equity Update Q4 2020. Retrieved on March 3, 2021 from https://greenwichgp.com/wp-content/uploads/2021/01/GCG-Q4-2020-Middle-Market-Private-Equity-Update.pdf

Kaden LeFevre contributed to this report. 

The post Covid-19 Impact on US Private Capital Raising Activity in 2020 appeared first on InvestmentBank.com.

According to The National Institutes of Health, the United States had near-highest levels of obesity, heart and lung disease, and cancer screenings. In 2012, 25% of senior citizens had to declare bankruptcy due to medical expenses or were forced to mortgage their residences. The U.S. healthcare system was crumbling and the Patient Protection and Affordable Care Act (ACA) became the pioneer for major changes in health insurance. Under it, hospitals and primary physicians had to change procedures financially, technologically, and clinically to produce better health outcomes, lower costs, and improve accessibility.

What is the healthcare industry and its major subsectors?

The healthcare industry has a direct effect on the quality of life of people. Healthcare is defined as the diagnosis, treatment, and prevention of disease, illness, injury, and other physical and mental impairments in humans (Technofunc). Doctors, dentists, nurses, pharmacists, and other care providers provide services to treat patients through methods such as preventive or rehabilitative care. The healthcare industry is formed of numerous subsectors including pharmaceutical services, diagnostics, medical technologies, and managed healthcare. Given that baby boomers are approaching the age for more healthcare services and social security, this demographic has propelled the industry. Payor services and pharmaceutical services have generated the most return throughout 2016 and in 1Q 2017. Though payers often question the growth of the industry, payor services have emphasized the need to accommodate for technological capabilities and to diversify into new groups and populations. The pharmaceutical industry is valued highly given the performance of buyouts. Private owners have acquired numerous big pharma companies because of novel, innovative products that are being created rapidly. The Wall Street Journal notes some examples, including GlaxoSmithKline acquiring Stifle Laboratories and Grifols acquiring Talecris Biotherapeutics.

The medical devices subsector has faced numerous challenges because of inconsistency with FDA regulations and varying payor systems (Liang). As a result, venture investors have lowered their investment and deployment within this sector. The key issue is that most businesses in this subsector started off as one-product companies and raised large amounts of capital without considering clinical utility and economic benefits. Today, there is a movement towards utilizing molecular diagnostics and personalized medicine making a diverse portfolio of products critical. To accommodate for this development, the medical devices market will take time to grow so that business models can progress.

The biotechnology subsector garners its value by developing, manufacturing, and marketing patented medicines that generate billions of dollars in revenue. Biotechnology firms are far more young, innovative, and rapidly grow compared to pharmaceutical companies (WHO). Biotech companies’ biological processes that utilize microbes and cell lines to produce treatments. The biopharmaceutical company, Amgen, researches insulin injections and complex treatments such as gene therapy to replace defective genes. Over the last year, the biotech industry has seen considerable growth compared to the S&P 500. Over the past five years, the performance of the NASDAQ Biotechnology Industry has been impressive as it has outperformed the S&P 500 by 60.20% (Yahoo Finance).

Major Trends in the Healthcare Industry for 2017

Though President Trump’s campaign centered around repealing the ACA, he has taken a far softer tone in office. Democrats stand firm on their united decision to not repeal the healthcare plan, and Republicans in Congress are divided on the issue given the drastic implications a repeal could have. A potential change the Trump administration could make to the ACA is to limit cost-sharing subsidies under the ACA (Kurtzleben). Republicans identify this as one of the main flaws under the Obama administration in regards to the ACA. The administration was spending money that Congress had not fully allocated to reimburse health insurers, providing insurance to working-poor individuals. The new bill proposed by Republicans to replace ACA was vetoed as some Republicans felt that new bill still had too much governmental control. The Trump administration is looking into the possibility of allowing states to experiment by applying for waivers. An example of such a waiver is that some states can expand Medicaid given specific work requirements.

Unlike the ACA, MACRA, otherwise known as the Medicare and Access and CHIP Reauthorization Act of 2015, has received bipartisan support among Democrats and Republicans. MACRA is a set of laws that cap Medicaid and Medicare reimbursement at zero unless specific criteria of quality are met (Nephrology). This act is intended to emphasize value-based care and transparency, especially when consolidating with those in private practice who have difficulty with contracting, implementing IT infrastructure, and measuring quality. Though Obama’s administration had a large role in driving the country to undertake MACRA, a repeal of ACA would not be a repeal of MACRA. Under MACRA, alternative payment models can be developed and accountable care organizations can join large organizations and health plans to create more transparency.

Healthcare providers are aware of the difficulties pertaining growth and are lowering unit costs and maintaining margins to keep their business stable. Organic growth is not nearly as common as growth through consolidation and acquisition. Due to tightening reimbursements and an aging baby boomer population, organic growth will be more difficult to attain (George). The report notes that many people are under the impression that we will have lower healthcare costs when people live longer and utilize novel treatments far more. However, 2017 is an indication of how health systems are struggling financially. With aging populations, healthcare providers utilize the acute care model which depends on preventive and rehabilitative actions that are time-sensitive and require frequent intervention. These providers have utilized this model far too much and there needs to be a greater emphasis on having low cost models and a reinvented model (Henry). As a result, many of these organizations will be undergoing acquisitions to better approach their communities appropriately. 2017 will be a year where many health systems will be restructuring and be acquired due to financial challenges. One of the main factors affecting healthcare is government regulation. This has affected the pharmaceutical and biotechnology companies the most given the higher quota of trials and tests required for a drug to be considered for approval for the FDA. The average drug takes approximately 12 years to develop and has an average of a $5 billion investment cost (FDA). Unemployment is also impacting this sector as many Americans, over 50%, get their health insurance from their employer and are unable to have insurance if they are unemployed. As a result, they spend less money on health-related services and products.

Within the healthcare pipeline, disruptors are emerging. Contrary to popular opinion, they are not hospital companies, insurance companies, or pharmaceutical companies that are continually undergoing rapid changes. Disruptors are technology companies that are merging health services companies that do not fit into a traditional category in the healthcare industry, such as urgent care centers (Harrison). Disruptors have begun to develop a critical role in the healthcare ecosystem as they are transforming the way existing healthcare providers conduct business. Many technology and retail companies have expressed an interest in health and have begun to enter this space, which is threatening other traditional health insurance companies.

How do business valuations differ in Healthcare and across its subsectors?

The subsectors within the healthcare industry are valued by consumers differently. The equipment industry consists of manufacturers of healthcare equipment and medical devices. The Medical Device and Diagnostic Industry creates products including medical instruments, drug delivery systems, diagnostic equipment, and cardiovascular devices. Hospitals and doctors utilize this equipment when treating patients given their wide myriad of conditions. Medtronic, one of the world’s largest medical device companies, specializes in producing devices that are implanted into patients during surgical procedures. However, Medtronic’s valuation is significantly lower than the sector average (Collins). This results in a cheap, affordable stock for investors despite the ratios being in line with the equipment industry average. Given that this is a large subsector, a distribution industry can also be highly valued as it would increase efficiency.

Healthcare facilities are the healthcare providers in the healthcare sector. These are the locations where doctors practice medicine and diagnose and deliver medicines to patients. Companies can provide healthcare and social services through hospitals, doctors’ offices, nursing homes, and outpatient surgery sectors. Harvard Business This industry’s growth is lower that the healthcare sector’s growth, and it can be attributed to the increasing amount of pressure to generate revenue. The top 50 organizations in the industry generated less than 30% of the total revenue. This includes the hospital industry which had a combined revenue of $700 billion a year (Harvard Business Review). With emerging treatment methods and the latest equipment, costs are extremely high to maintain equipment such as CT and MRI machines. The labor cost of doctors, surgeons, nurses, and radiologists are an immense portion of the revenue, up to 40%. Thus, it becomes a large expense for these organizations to undertake. To reduce costs, many competing facilities and health insurance companies attempt to merge to create more cost-effective care without compromising quality.

The Life Sciences Research and Development area is decreasing in valuation in the US, Canada, and Europe. Countries in Asia are outpacing these countries due to the costs of running clinical trials to be far less than in developed countries. In addition, there is a wide availability of naïve patients that are more willing to enroll in clinical trials which allows for a faster rate of approval. Inflation-adjusted biomedical expenditures for research and development have fallen over the past few years while continuously growing in Asia (Chakma).

Political Policy Changes and the Affordable Care Act

President Joe Biden seems to have clinched his position as the 46th president of the United States of America. The Democratic party maintained a majority in the House of Representatives, but it seems that they will not win the Senate. A Republican controlled Senate would make it more difficult for Biden to push forward his agenda. Regarding health care policies, we can expect the Biden administration to expand coverage for Americans (Young).  The Trump Administration has spent the past 4 years trying to get rid of the ACA (Keith). It is expected that the Biden presidency will push to undo those efforts, expanding the reach and scope of the health care reform (Young).

When the ACA was first enacted under the Obama administration M&A activity in the healthcare space saw a significant increase. Health care practices merged together in an effort to increase leverage in health care contracting as well as control increased costs of having regulated overhead percentages (Singer). “Government spending necessary to set up and operate the exchanges vastly exceeded the amount saved by private-sector insurers, leading to an increase in total administrative costs” (Book).

It is possible we see similar activity if the Biden administration is able to push their agenda through congress. That being said, there have been indications from the Biden camp that more pressure could be put on hospitals and pharmaceutical companies looking to merge (Gooch).

Covid -19 Acceleration of Telemedicine

The Covid-19 pandemic has been a turbulent time for virtually every industry in the global economy. Hospitals and the healthcare industry as a whole have been in the center of all the action, landing in the top five sectors impacted by the pandemic (Caldwell). 

Health care businesses are hurting in many ways, and one of the major areas is sharply declining revenue from elective or non-essential care. Due to the massive volume of Covid-19 patients most, if not all, of these elective procedures and treatments have been postponed (Caldwell). Health care providers in the U.S make a significant amount of their revenue from these expensive procedures, and conservative estimates show that hospitals in the U.S are losing over a billion dollars per day (Farr).  

Executives of these health care companies seem to have recognized these problems early in the pandemic, already having strategies in place by early March (Caldwell). According to an Ernst & Young report earlier this year, 75% of health executives were already undertaking some form of a digital transformation program, and half were allocating at least 25% of their capital to digital capabilities (Caldwell). The current Covid-19 landscape has accelerated the use of telehealth. Teladoc Health, the largest telemedicine software provider in the United States, reported 2.8 million virtual visits in Q2 2020. That more than triples the visits in Q2 of 2019 (Commins). It is evident that telehealth is being implemented at an unprecedented scale, and this is reflected in M&A activity in the digital health sector. According to Business Wire, Global VC funding for companies in the Digital Health sector brought in $10.3 billion this year. This is 43% higher than 2019.

Telemedicine is a bright spot within healthcare that is helping to offset the sharp declines in elective procedure revenue. The question looking forward is once a successful Corona vaccine is made available to the public, will Telemedicine implementation and use subside or will it be the new norm.

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David U. Himmelstein & Steffie Woolhandler, Government funds nearly two-thirds of U.S. healthcare costs, American Journal of Public Health (2015), http://www.pnhp.org/news/2016/january/government-funds-nearly-two-thirds-of-us-health-care-costs-american-journal-of-pub (last visited May 7, 2017).

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Kate Harrison, 10 Healthcare Technology Disruptors To Watch, Forbes (2015), https://www.forbes.com/sites/kateharrison/2015/08/13/10-healthcare-technology-disruptors-to-watch-all-led-by-women/ – 22362d7048ef (last visited May 7, 2017).

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Curran Aiyer and Jonas Kurihara contributed to this report.

The post Healthcare 2021: Trends, M&A & Valuations appeared first on InvestmentBank.com.

U.S. Media and Telecommunications Deals Hold Steady Despite COVID-19

(1)

Coming off a down year in 2019, the U.S. Media and Telecommunications industry was surprisingly resilient in its response to the economic effects of the pandemic. The crisis meant more people stayed home and streamed movies or shows, played video games, and listened to music.

This helped keep demand within this industry high and enabled investments in this sector to shoulder less risk than quite a few other industries. 

Deal Volume

(1)

Deal volume in Media and Telecommunications started off normal through February, with about 129 deals according to PWC data (1). However, when COVID-19 fully hit, the industry saw a dramatic reduction in deal volume from March to June.

Volume in the second half of the year increased, which help to compensate for the slower preceding months. By the end of the year, Media and Telecom M&A activity had achieved a level comparable to that of 2019 (2). 

Deal Value

U.S. Media and Telecommunications deal value in 2020 resulted in a total of about $99 billion or more in transactions, according to sources at PWC. (1) This came as a surprise to some, because deal value managed to remain healthy by year’s end, despite the pandemic.

A large portion of the deal value stems from changes in consumer behavior over the year. As consumers were in lockdown, the craving for media and telecom services in the home soared.

More apps and streaming services became available and active competitors expanded to possess the technology and resources necessary to deliver what consumers desired. Internet, telecoms, and other media all experienced similar deal values throughout the year. 

Trends

Investment Trends: Private equity investments had a record year in the industry, with private equity investments making up 34% of deal volumes. PE investments soared beyond 2019 volumes, in which 28% of the deal volume was from PE investments. (1) As private equity investments continue to rise in the general market, it is safe to assume 2021 will see a similar or greater PE deal volume.

Industry Trends: The Media and Telecom industry still has room to grow. We live in a world ruled by technology, so consumers are continuing to change their behavior, which has lead to more at-home streaming and gaming.

The big players in the industry, such as Disney+, are still looking for ways to expand their reach and popularity. This will probably lead to more deals in 2021 as companies acquire more talent and resources to dominate their industry. (3)

The industry will also continue to expand, with 5G technology projects occurring around the country. However, a few sub-sectors such as the movie cinema wing, were hit hard during 2020 due to in-person restrictions. Some of these sub-sectors may not recover as fast as the rest of the industry because of their reliance on in person attendance.

But the other sectors will continue to deliver their services directly into the residences of consumers. Thus, most observers predict a bright and healthy future for the Media and Telecom industry in 2021.

Jackson Casper contributed to this article. 

Sources

1. PricewaterhouseCoopers. (2020). Media and Telecommunications deals insights: 2021 Outlook. Retrieved April 1, 2021, from https://www.pwc.com/us/en/industries/tmt/library/telecom-media-quarterly-deals-insights.html (last visited April 13, 2021).
2. Szalai, George. (December 10, 2020). Media and Telecom Deal Activity Stable Despite Pandemic: Study. Retrieved April 1, 2021 from https://www.hollywoodreporter.com/news/media-and-telecom-deal-activity-stable-despite-pandemic-study
3. Pitchbook. (February 6, 2021). 2020 Annual North American MA Report. Retrieved March 15, 2021 from https://files.pitchbook.com/website/files/pdf/PitchBook_2020_Annual_North_American_MA_Report.pdf

The post 2021 Outlook on Media & Telecom M&A Transactions appeared first on InvestmentBank.com.

As a whole, the industry has displayed a concerted effort to improve operating efficiencies, and made acquisition and consolidation of smaller players the primary driver of growth.

In recent years, the trend of consolidation has increased due in large part to increasing external competition. As companies and individuals grow accustomed to on-demand culture, shipping and logistics firms are facing ever-growing pressure from customers to deliver high-quality goods and better services at lower costs to themselves and the environment.

Though the industry is currently encountering increased competition from new market entrants who use similar business models, the sector has experienced even greater pressure from vertical integration of the very firms that supply its demand: the manufacturing, wholesale, retail, and warehousing segments. It will continue to do so.

Increasingly, many customers are asking suppliers and manufacturers to deliver products only when needed: reducing on-hand inventory and freeing up capital to invest elsewhere. For both 3PL and vertically integrated operations, technological innovation has played a crucial role in developing competitive business strategies.

Recent surges in e-commerce sales have compelled an increase in demand for items that must be warehoused, packed, and delivered efficiently. As such, larger firms within the industry have sought to acquire tech start-ups that increase their technological advantage and cost efficiencies in the marketplace.

Suppliers and manufacturers must create or implement logistics software tools to optimize daily activities and handle the routing and storage of inventory to meet each customer’s delivery requirements.

Risks

According to major shipping and logistics firms, the main industry-specific risks are: general economic conditions, changing commodity prices, the capital-intensive nature of existing business models, increasing competition, changes in relationships with customers, and changes in technology.

General Economic Conditions & Changing Commodity Prices

The industry is particularly susceptible to changes in macro-economic market conditions. Demand for logistics services arises from the confidence and strength of clients’ businesses.

Because of this, shipping and logistics demand tends to wane before market contractions and experiences downward pressure for a short time after market recovery. Fuel prices are a major cost driver for the industry; the slightest changes in commodity prices can adversely affect each firm’s profitability.

Under the Biden administration, oil prices are expected to rise significantly due to structural underinvestment in oil and gas in favor of renewable energy. This will likely cut into companies’ profitability and constrain supply amid rising post-pandemic demand.

The slowing of growth in the Chinese economy, the Biden administration’s trade policy, and growing global pressure from customers and regulators to act on emissions will also affect the expansion and performance of the industry in coming years.

Capital-Intensive Business Models, Increasing Competition & Changing Customer Relationships

Many firms within the industry make significant investments into trailers, rental trucks, cargo ships, etc. These investment decisions are typically made based on short-term forecasts of customer demand.

These long-life investments can expose companies to economic and financial risks beyond their initial projections; an economic downturn or slowdowns can lead to significantly decreased profitability due to excess capacity and idle capital. As other retailers and firms have sought to vertically integrate logistics functions into their operations, traditional logistics firms who rely on a small number of customers might be forced to write down those investments.

Changes in Technology

When a company invests in new technologies, it risks the sinking of substantial resources into poor or immature technologies. Meanwhile, there is also a risk in postponing investments, causing a firm to miss opportunities to position itself advantageously in the market.

Tesla, Toyota, FedEx, and Ryder have all made investments in alternative-energy trucking solutions, and the USPS’s announced transition toward electric vehicles has the potential to change the face of the consumer-facing shipping industry.

Existing players will likely need to acquire or develop similar eco-friendly or cost-saving technologies in the near future in order to remain competitive.

Opportunities

The prime beneficiaries of the digitization and customer-centric trends of recent years are the firms who seek to gain market share through the purchase of smaller businesses, and who increase efficiency through the development or acquisition of tech start-ups.

The transition of companies toward providing vertically integrated logistics services has placed pressure on large industry players such as FedEx and US Xpress. These firms must increasingly expand their logistics offerings, leading to a continuation of expansion via acquisition.

Retailers and manufacturers looking to bring logistics in-house will need to acquire both the infrastructure and the technology to run processes efficiently. Both 3PL and in-house providers who use technology effectively to reduce costs via the automation of processes will succeed in tomorrow’s marketplace.

These firms need access to technological innovation to maintain a competitive edge. Sustainable innovations in technology could help firms manage their daily activities more efficiently, plan routes more effectively, win new customers, and reduce costs.

The shift toward sustainable energy poses a massive opportunity for early adopters to charge a premium, so they can increase their return on investment compared to those who wait.

As computing becomes more ubiquitous, companies will be able to realize economies of scale that result from the direct increase of computing power. Big data within the supply chain will create various opportunities; the gathering of data, analysis of existing information to solve problems, the ability to sense customer demand and respond quickly, developing proprietary IP, etc.

In 2017, market players increasingly turned to the utilization of blockchain to create such efficiencies. At its core, blockchain is a ledger technology that enables efficient and transparent exchange of data.

The early implementers of blockchain will be large companies with vertically integrated logistics operations that have a complex ecosystem to monitor interactions between various people and activities. A transparent ledger such as blockchain would improve an organization’s ability to track and trace shipments and serialize products.

The trends and risks within the shipping and logistics industry will foster a healthy M&A environment moving forward. In addition to traditional bolt-on acquisitions, 3PL and in-house providers need software companies that offer scalable platforms for crowd-sharing, technology routing, and smart warehousing solutions.

Investment banks that position themselves to provide advisory services designed to meet the industry’s need for consolidation and innovation are sure to do well.

Select Transactions

Kaden LeFevre contributed to this article. 

Sources

1. PricewaterhouseCoopers, Transportation & Logistics PwC, https://www.pwc.com/gx/en/industries/transportation-logistics.html (last visited Nov 9, 2017).
2. IBISWorld, Freight Packing & Logistics Services in the US, http://clients1.ibisworld.com/reports/us/industry/default.aspx?entid=1211 (last visited Nov 9, 2017).
3. Duff & Phelps, Freight & Logistics Industry: M&A Landscape, https://www.duffandphelps.com/assets/pdfs/publications/mergers-and-acquisitions/industry-insights/industrials/freight-and-logistics-industry-ma-landscape-june-2017.pdf (last visited Nov 9, 2017).
4. Forbes, “Planes, Trains, Trucks and Ships”, https://www.forbes.com/sites/robinlewis/2016/04/01/planes-trains-trucks-and-ships/#73dd4b226d39 (last visited Nov 9, 2017).

1. The Wall Street Journal, “Private Equity firms have a beef with tax bill but things could be worse”, https://www.wsj.com/articles/private-equity-firms-have-a-beef-with-tax-billbut-things-could-be-worse-1509701403 (last visited Nov 9, 2017).

1. SEC, UPS 10k, https://www.sec.gov/Archives/edgar/data/1090727/000109072717000011/ups-12312016x10k.htm (last visited Nov 9, 2017).

1. SEC, Ryder 10K, https://www.sec.gov/Archives/edgar/data/1166003/000162828017001912/xpo201610-k.htm#sBA91B005231052C28ECB886E809ED00E (last visited Nov 9, 2017).
2. Bloomberg, “Amazon is Building Global Delivery Business to Take on Alibaba”, https://www.bloomberg.com/news/articles/2016-02-09/amazon-is-building-global-delivery-business-to-take-on-alibaba-ikfhpyes (last visited Nov 9, 2017).

The post Shipping & Logistics 2021 – General Industry Overview appeared first on InvestmentBank.com.

The Overall Space

Similar to other spaces across the globe, the initial state of emergency regarding Covid-19 in the United States brought heavy concerns for those in venture capital. Jonathan Simnett from corporate law firm Hampleton Partners was reported saying, “[t]he brakes have been slammed on funding until investors are able to create maps to navigate uncharted territory” [4]. Larry Bohn from VC firm General Catalyst was referenced by MIT acknowledging “the mood is pretty gloomy” [13]. Among other sources it was also clear that, although VC investors generally sought optimism, there was concern and a fairly consensual expectation of contraction [2]. With time, decline is precisely what was observed. According to analysis from PwC and CB Insights, Q2 2020 showed a 9.6% YoY decline in the total monetary value of VC investments compared to Q2 2019 and an 18.0% YoY decline in total deal numbers [12]. However, similar to the sentiment from Jonathan Simnett, this trend began to reverse in Q3 2020, with numbers up 22.5% YoY in total value compared to 2019 and down only 11.3% in number of deals.

As we moved from Q3 to Q4 2020, this strength only continued. First, VC investors remained confident in their previous investments. In September 2020, the National Bureau of Economic Research released a working paper including an industry survey citing 900+ VC firms; this paper revealed a consensus that many portfolio companies were performing quite well in the face of Covid-19 and less than 10% were performing at levels that would raise significant concerns [3] [10]. Second, the IPO market, a key exit avenue for VC investments, proved increasingly strong and resilient throughout the year. WiMi Hologram Cloud (NASDAQ: WIMI) was the first IPO after the S&P 500, NASDAQ, NYSE and Dow Jones Industrial Average reached their respective 52-week lows on March 20, 2020, but this proved only the beginning of IPOs in the Covid-era portion of 2020 [14]. Many watched most recently as DoorDash (NYSE: DASH) and Airbnb (NASDAQ: ABNB) made their public debuts on December 9th and December 10th respectively. These were just a few of many strong IPOs seen this year. As of December 23rd, 2020, US stock markets saw 477 IPOs, more than doubling the 233 IPOs from 2019, at least 120 of which were venture-backed [14] [11]. Those VC-backed IPOs held a combined $259.8 billion in pre-valuation at the time of their IPO, a new record [11]. Finally, total VC deal value continued to show promise. As of December 14th, 2020, US VC deal activity was at $147.9 billion, up 7.5% from 2019 [11]. This did occur amidst a 15% lower deal count than 2019, but it showed that investors were still willing to invest their money, even if they were being more selective.

The “Pandemic-Friendly” Divide

There were some specific aspects of Covid-19 that allowed Venture Capitalists as a group to show resilience. Unlike the early 2000s which saw a “loss of confidence in the very idea of digitizing the economy” coupled by a 50% fall in VC investments, part of the reason VC adjusted so favorably to the pandemic-controlled environment was because the majority of VC investments had long revolved around pandemic-friendly spaces [3] [10]. “Pandemic-friendly” here is referring to spaces that could either help stop the pandemic (i.e. healthcare) or help life go on in spite of a pandemic (i.e. software, communication, etc.). Looking at data published by PitchBook on July 24, 2019, software has been ~40% of VC deals in the United States with healthcare close by at ~20% for the past 7+ years [6]. As we saw in the S&P 500, where the index et large regained pre-Covid highs by August thanks largely to just a handful of tech giants, it has definitely been possible for these pandemic-friendly companies to skew overall data [5]. Comparatively, the fact that pandemic-friendly companies have been a majority of VC investments for some time now has made their growth much less of an outlier and much more indicative of the overall VC environment. Nonetheless, it is still important to ask the question: what about the VC funds that historically centered themselves around non-pandemic-friendly industries?

To answer, it’s been hard. Although much of VC saw better than average trends in the face of Covid-19, this corner saw things become much worse. TripActions, Inc., an Andreessen-Horowitz backed corporate travel management startup, was one that had to lay off hundreds of employees almost immediately in the early months of the Covid-19 pandemic [1]. According to PitchBook, JetBlue Technology Ventures, an airline-owned VC group, made only 1 investment between March and December 2020. This sole investment was a follow-on round for i6 Group, a fuel management company which they first supported pre-Covid in January of 2020 [7]. Unlike other airline associated venture capital groups such as Lufthansa Group’s Lufthansa Innovation Hub, which make VC investments somewhat rarely, JetBlue Technology Ventures made 6 VC investments between March and December of 2019, making their decline this year all the more pronounced [8]. According to Crunchbase in June 2020, the number of VC-backed seed to Series B travel deals in the US dropped from 15 deals in Q2 2019 to 3 deals in Q2 2020, and the average check size for series A travel tech investments declined from $14.68 million to $2.3 million [9]. This drastic decrease in deal volume came without any increase in deal size to make up for it, opposing trends observed in the overall VC market. Similar trends were seen in the restaurant and hospitality sectors. Rosser Capital Partners, Enlightened Hospitality Investments, and Kitchen Fund were some examples of restaurant/hospitality-focused investment funds that, despite regularly making past investments, did not place an investment in Covid-era 2020 (with the exception of the Kitchen Fund participating in the buyout of the Sustainable Restaurant Group). In addition, KarpReilly was a fund that continued to make investments however even they did not invest in any new restaurant chains in 2020 (something they had done in 6 of the last 7 years, with groups including Cafe Zupas, Pitfire Pizza Company, and Picnik Austin). This is not intended to be an exhaustive list of VC groups that faced changes and difficulties in the face of Covid-19, but rather these examples simply illustrate broader trends witnessed throughout travel, restaurant/hospitality, and non-”pandemic friendly” VC groups and companies overall.

Conclusions

Ultimately, it seems that the unique aptitude Venture Capital has possessed for tech-facing investments for some time now largely positioned them well in the wake of Covid-19. While other groups and industries were still facing losses, Venture Capital managed to pull off one of its most successful years yet. This doesn’t mean that every VC firm or VC-backed company has faced glowing success over the last 12 months (or been immune to intense struggle), nor does it mean that Venture Capital will always be so resilient in the wake of a recession. However, it does mean that Covid-19 appears to have brought perhaps the exact opposite of the long-lasting software-innovation-stifling era we witnessed following the dot-com burst in the early 2000s.

Sources

[1] Chernova, Y. (2020, March 25). TripActions Lays Off Hundreds of Employees Amid Coronavirus. Retrieved January 3, 2021, from https://www.wsj.com/articles/tripactions-lays-off-hundreds-of-employees-amid-coronavirus-11585084870?mod=article_inline

[2] Cook, J. (2020, May 6). U.S. venture capital activity nosedives in April, but Washington state’s numbers aren’t too bad, yet. Retrieved January 3, 2021 from https://www.geekwire.com/2020/u-s-venture-capital-activity-nosedives-april-washington-states-numbers-werent-bad/

[3] Gompers, P., Gornall, W., Kaplan, S. N., & Strebulaev, I. A. (2020, September). Venture Capitalists and Covid-19. Retrieved January 3, 2021, from https://www.nber.org/system/files/working_papers/w27824/w27824.pdf?utm_campaign=PANTHEON_STRIPPED&amp%3Butm_medium=PANTHEON_STRIPPED&amp%3Butm_source=PANTHEON_STRIPPED

[4] Loten, A. (2020, March 25). Startup Funding Dwindles Due to Coronavirus Slowdown. Retrieved January 3, 2021, from https://www.wsj.com/articles/startup-funding-dwindles-due-to-coronavirus-slowdown-11585175702

[5] Lynch, D. J. (2020, August 20). Rising stock market would be in the red without a handful of familiar names. Retrieved January 3, 2021, from https://www.washingtonpost.com/business/2020/08/19/tech-stocks-markets/

[6] Mathur, P. (2019, July 24). 21 charts showing current trends in US venture capital. Retrieved January 3, 2021, from https://pitchbook.com/news/articles/21-charts-showing-current-trends-in-us-venture-capital

[7] PitchBook. (2020, December 22). JetBlue Technology Ventures. Investors Profile. Retrieved from PitchBook database.

[8] PitchBook. (2020, November 12). Lufthansa Group. Investors Profile. Retrieved from PitchBook database.

[9] Sagie, I. (2020, June 23). How COVID-19 Changed The VC Investment Landscape In The US. Retrieved January 3, 2021, from https://news.crunchbase.com/news/how-covid-19-changed-the-vc-investment-landscape-in-the-us/

[10] Simmons, L. (2020, September 22). VCs and COVID-19: We’re Doing Fine, Thanks. Retrieved January 3, 2021, from https://www.gsb.stanford.edu/insights/vcs-covid-19-were-doing-fine-thanks

[11] Thorne, J., & Mathur, P. (2020, December 21). The year in charts: VC defies 2020 expectations despite the pandemic. Retrieved January 3, 2021, from https://pitchbook.com/news/articles/2020-vc-in-charts

[12] Venture Capital Funding Report Q3 2020 (2020). Retrieved January 3, 2021, from https://www.cbinsights.com/research/report/venture-capital-q3-2020/

[13] Vereckey, B. (2020, April 22). 5 trends in venture capital (beyond the pandemic). Retrieved January 3, 2021, from https://mitsloan.mit.edu/ideas-made-to-matter/5-trends-venture-capital-beyond-pandemic

[14] 2020 IPOs (2020). Retrieved January 3, 2021 from https://stockanalysis.com/ipos/2020-list/

Charlee Wambolt contributed to this report. 

The post Covid-19 and US Venture Capital in 2020 appeared first on InvestmentBank.com.

Q2 2020

M&A Beat is a quarterly update for CEO’s, CFO’s, Owner, Founders of lower middle-market ($10M-$100M Rev) companies, offering relevant details on mergers and acquisitions deal value, volume, valuation multiples and trends in their respective industry and vertical.

The Healthcare Services newsletter covers all subsectors (Behavioral Care, Rehabilitation, Managed Care, Labs/MRI, Home Health, Hospitals, Physician Groups, Long-Term Care, Other Services) of the industry with the latest transaction statistics and pertinent industry trends, to keep you informed.

US Health Services Deals Decline but Still Show Promise

Source: (PwC, Donkar; Chesnut)

The COVID-19 pandemic has brought unprecedented challenges to the Health Services Sector. Q2 2020 deal volume took a big hit, dropping below 200 deals for the first time in 12 quarters. H1 2020 deal value was significantly lower year over year, but excluding mega deal values, Q2 2020 deal value increased by approximately 8%.

TTM Industry-wide deal multiples (EV/EBITDA) saw a slight increase of 0.6x due to large 7.7x increase in the Home Health and Hospice sector. Q2 2020 marked the thirteenth quarter in a row where multiples were greater than 13.0x1.

Q2 2020 deal value had a 64.7% decrease from Q1 due to a large $11.5 billion deal that took place in Q1. Excluding the Q1 megadeal (transactions exceeding $5 billion), deal value actually increased 20% from Q1. Deal volume decreased from Q1 by 31.7%. When compared to 2019 amounts, Q2 2020 saw a 60% decrease YoY in value and 42.4% decrease in volume YoY. The largest megadeal in Q2 was $1.2 billion: TPG Capital – LifeStance Health, Inc. acquisition.

Deal Volume

Source: (PwC, Donkar; Chesnut, PHP, Aprill; Goodson, ILA, Phillips)

US Health Services deal volume in H1 2020 saw a total of 483 transactions. When compared to H1 2019 the deal mix is very similar. Total deal volume was led by Long-Term Care that made up 33% of deals, followed by; Other Services (23%), and Physician Groups (14%).

Of the nine different sub sectors, six of those sub sectors saw a decrease in deal volume while Hospitals, Managed Care, and Other Services stayed relatively at the same level. Total deal volume declined by 42.3% YoY and dropped below the 2014-2018 quarterly average of 252 deals.

Source: (PwC, Donkar; Chesnut, PHP, Aprill; Goodson, ILA, Phillips)

Deal Value

US Health Services deal value in Q2 2020 totaled $6 billion in transactions. Although this was significantly low quarter compared to Q2 2019, two sub-sectors had increases in deal value. Both these increases were the result of a large deal. Managed Care saw a 516% increase after the Molina Healthcare Inc.-Magellan Complete Care transaction, and the Invitae Corporation – ArcherDX deal increased Labs, MRI & Dialysis deal value by 58%1.

Following Q1 2020 there were three Health Services sectors that had increases in deal value. Physician Medical Groups saw an increase of 6%, Hospitals increased by 11%, and Behavioral Care had a substantial 900% increase in deal value due to the $1.2 billion LifeStance Health Inc. acquisition.

Valuation Multiples

Source: (PwC, Donkar; Chesnut, PHP, Aprill; Goodson, ILA, Phillips)

Industry-wide, Health Services H1 2020 average enterprise valuation multiples (EV/EBITDA) saw a slight increase for the second quarter in a row of 0.6x to reach 14.6x on a TTM basis. The Health Services industry has seen these multiples exceed 13.0x for thirteen consecutive quarters.

One sub-sector that saw a substantial increase was Home Health and Hospice which had a 29.4x Q2 2020 multiple1. SNFs/ALFs/ LTACHs were hit the hardest with their multiples declining more than all of the other sectors.

Four of the remaining five sectors (Labs/ Imaging/ Pharmacy, Ambulatory Care/ Rehab/ Dental, Managed Care, and Acute Care had very little fluctuation in their multiples.

Outlook

Investment Trends:

Due to all the volatility and uncertainty in the market today, there were fewer deals going through but that does not mean that overall interest in deals is tanking. Both Q1 and Q2 of 2020 had a deal larger than $1 billion. The COVID pandemic has brought down sector-wide average deal size, but not to an unprecedented extent. H1 2020 average deal size was $145 million, which is still higher than the $141 million average deal size of H1 2016.

Industry Trends:

“Health Services companies, long accustomed to a complex operating environment, now face particularly challenging circumstances”1. There are a lot of unknowns going forward as the economy fights to come back from shut-downs and the world awaits the COVID-19 vaccine. Companies will continue to make hard decisions between enacting cost containment measures and taking advantage of opportunities to grow.

Even after a successful vaccine is made available to the general public, the health services landscape may never return back to what it was. Due to shutdowns and a push for social distancing, tele-health or virtual health became the chosen method of receiving care. Health services companies will likely push to acquire those assets that will allow them meet that demand.

Jonas Kurihara contributed to this report.

Sources

1. PricewaterhouseCoopers, Donkar, N., & Chesnut, K. (2019, July 24). US Health Services deals insights: Q2 2020. Retrieved from https://www.pwc.com/us/en/industries/health-industries/library/health-services-quarterly-deals-insights.html.

2. Aprill, R., Grassa, S., & Provident Healthcare Partners. (n.d.). Q2-2020 Behavioral Health Update. Retrieved from https://www.providenthp.com/q2-2020-behavioral-health-update/.

3. Goodson, E., Shekar, A. J., & Bolding, B. (n.d.). Q2-2020 Laboratory Services Update. Retrieved from https://www.providenthp.com/q2-2020-laboratory-services-update/.

The post US Health Services: Investment Banking & M&A Trends appeared first on InvestmentBank.com.

Price is what you pay, value is what you get.

One of the biggest struggles with selling in the middle to lower middle market is business valuation expectations. Sellers almost always feel their business is worth far more than what the market will bear. Here are some reasons why this has been the case:

• The owner is valuing assets and not cash-flows. Investors don’t care what you paid for your PP&E even if it has been depreciated in a reasonable matter. In most cases, a buyer is only willing to buy the business based on the cash the company is kicking out month-over-month and quarter-over-quarter. The true value–especially in today’s businesses–is not typically in the hard assets, but said assets are able to produce in a cash-on-cash return for investors.
• One of the biggest problems with valuations is what I might call the Instagram, Whatsapp, OculusVR skew. Just because Facebook paid a multiple outside the range of anything reasonable in the real world, doesn’t mean your company is also worth 100X Revenues or $40/user. In fact, unless the business has some form of intellectual property combined with the ability to scale in a network-based format, forget about it. You’re a traditional business.
• Valuation multiples don’t increase if your bottom-line increases. Sure, the business will be worth more if you put more cash flow to the bottom line, it doesn’t mean your multiple moves from 4x to 6x.
• The owner/operator is reverse-engineering a valuation based on wants/needs, not on fair market value. As I’ve advocated before, there are many instances when selling a business is not the right move at all. If you’re <50 years old, the business is kicking-off cash and you’re looking to retire, but realize you’ll need a 7X or more multiple to get there, forget it. Keep operating the company for a few more years.

There could be a host of other reasons, but these are the most common incident to the clients with whom we’ve recently worked. There are certainly ways to help boost the valuation multiple of the business of up to 40%  above the FMV (that’s what our process helps to do), but the exception to the fair value should not be considered the rule. It is tough for sellers and buyers to walk in one another’s shoes. Unfortunately for the seller, the buyer is also usually right about what the value of the business truly is. Because buyers typically acquire businesses many times and sellers only sell maybe once or twice, it usually means the buyer is much more sophisticated and knows more about what the market will bear in terms of price. Hence, as an advisor, it’s always frustrating when sellers fail to listen to both retained advisory and acquiring firms when they tell them their business isn’t worth 12x EBITDA.

Invariably, entrepreneurs almost always have a bloated sense of what their companies are worth. This mentality often gets many business owners into trouble, especially those who think they should hold when the time is right to sell. Nowhere was this more prevalent than in 2007 and 2008. With general cash-flows high and multiples flying solidly, many company owners and managers were convinced they could grow their businesses and sell in a couple more years. For those who chose to wait, this proved fool-hearty and in some cases fatal.

A Real World Example 

In 2007 and 2008 we were working with several different electrical contractors on selling their businesses. Five of eight decided to sell for what at the time were reasonable multiples and great “retirement packages” while the remaining three chose to wait. They did so for several justifications. First, most felt their businesses were worth more than the market would have paid for them, even in the best of circumstances. Believe me, nothing gets better than 2007. The second reason many chose to wait was because they felt they could grow the businesses more and perhaps get more money out of them at some point in the future. Again, not much gets better than 2007, but hindsight is certainly 20/20.

With bad timing one of the three owners are now out of business while the remaining have weathered the market trough, but came limping out the other side. Without the market’s proverbial crystal ball, it is impossible to know what the market will ultimately do in the next month and especially over the coming years. However, there are a few things we’ve found helpful in playing the true advisor to clients:

1. Help them understand market fundamentals. Some entrepreneurs are more sophisticated than others. Understanding cash flow, industry-specific multiples and general market business valuations on their companies will be helpful in getting some owners to make better decisions.
2. Paint a picture on what the market will bear. With the market fundamentals, we help to paint a picture on what the market will bear in best and worst-case scenarios. This means working to showcase the most recent deals which track in similar size and in the same industry.
3. Manage general expectations. Part of our jobs as M&A advisors is to help our clients manage their expectations. Some business owners have visited “sell your business” conferences where a slick presenter has told them their business is worth two to three times what it’s actually worth and what the market will fully bear. We work as true advisors. If we think a business is undervalued according to what we’ve seen in the market, we’ll be the first to inform of the good news, but most often we’re the bearers of harsh reality and must work to un-train those who were expecting to get more in the sale of their business.

Here we sit, four years after one of the biggest market crashes and bubbles in a generation now with much more street-savvy education behind us thanks to recent experience. Our job as investment banking consultants is to help business-owners manage expectations by understanding and owning the true value of their companies. We always hope for a home-run and strategic buyout where multiples are higher-than-average, but generally the market plays to fundamentals.

A Note on Earnouts

Some owners are diabolically opposed to earnouts as part of the deal structure. Earnouts can increase the risk of not getting paid what is expected and can ultimately be a source of frustration, but in some instances they work really well. In the case when an owner has an unrealistic valuation expectation on the business an earnout may be just the thing to keep expectations in check and provide the right incentives to maintain, manage and grow the business post-acquisition. Earnouts of up to 30% of the total deal value are often applied in situations where the seller wants more and is confident the coming 12, 18 to 24 months will see a boost in the bottom-line.

When it comes time for owners to prepare to sell, the company will certainly sell much faster if management has keen and realistic expectations on what the company is worth. From our experience, the larger the deal gets, the less this particular problem becomes an issue. That’s a topic for another day.

We work in Seattle mergers and acquisitions. For more information on selling your business, please contact us.

The post Unrealistic Business Valuation Expectations appeared first on InvestmentBank.com.

This is not a new phenomenon as during the 1990s competition to consolidate physician practices reached a feverish pitch with the emergence of Health Maintenance Organizations (HMOs), and the resulting joint ventures formed to integrate and operate acquisitions while adhering to federal and state regulations [8]. It is widely regarded that these earlier attempts at consolidation ultimately failed; however, important lessons were learned by hospitals and private equity evident in how present-day physician practice transactions are structured [10] [26].

The healthcare industry has changed since the 90s as new regulatory frameworks and financial incentives now drive the consolidation we see from hospitals and private equity, which continue to pursue physician practice acquisitions, albeit taking distinctly different approaches and for uniquely specific objectives which this article will attempt to shed some light on in a three part series [21].

Part 1: Hospital Consolidation of Physician Practices

Hospitals are responsible for many of the physician practice buy-outs we see today. Some recent acquisitions include United Hospital District acquiring Smart Clinic in Minnesota, Morris Hospital’s acquisition of John Bolden MS & Raja Saleem MD in Illinois, and Jonestown Family Medicine being acquired by Premier Health in Ohio [18]. California has also been a hotbed of consolidation as the number of physicians in practices owned by hospitals has increased from 25% in 2010 to more than 40% in 2016 [24]. According to a study by Avalere Health and the Physician Advocacy Institute, hospital acquisition of physician practices in the U.S. toped 5,000 from 2015 to 2016 alone [22], with the total number of hospital owned physician practices increasing to 80,000 by 2018 [15].

Several factors are attributed to the most recent surge in physician practice acquisitions by hospitals. In 2009 healthcare costs consumed 17.3% of GDP or $2.5 trillion according to the Center for Medicare and Medicaid Services (CMS), and since then healthcare spending has increased to $3.5 trillion accounting for 17.9% of GDP. Knowing this trend is unsustainable, Government has made healthcare reform a top priority with the passage of the Affordable Care Act (ACA) in 2010. This has resulted in hospitals pursuing physician practice acquisitions to better coordinate patient care and to transition from a volume-based system to one that is focused on providing value while operating more efficiently to decrease expenses, improve outcomes, and increase patient satisfaction [25].

Other reasons besides alignment for the consolidation of physician practices include the strengthening of referral networks and the prospect of new patient streams to a hospital’s ancillary services. According to Richard Scheffler, professor at UC Berkley, hospitals can also benefit from higher reimbursements for performing the same outpatient clinical services as independent physician practices, which can help offset the cost of acquiring them [11]. With larger physician networks and access to specialist’s hospitals also gain negotiating leverage with insurers and can participate in alternative payment models, such as capitated and bundled payments, through vertical integration.

Christopher Majdi, Director of Valuation & FMV Services at Premier, Inc. (NASDAQ: PINC) explained that “developing scale and infrastructure to address value-based contracting and reimbursement restructuring” is one of the main motivators behind hospitals acquiring physician practices. He believes that alignment is necessary between these two groups to integrate a true quality-based system among healthcare delivery services. Also, integration can create economies of scale to help lower costs and create efficiencies.

While hospitals can profit from alignment with physician practices, some argue that physician practices also benefit from this relationship given the greater resources and income generating opportunities available to them [17]. In this digital age and need to access and share patient information, implementation of an Electronic Health Record (EHR) system is expensive and complex for a physician practice to undertake. By partnering with a hospital, physician practices gain access to robust EHR systems along with the possibility of increased revenues through gainsharing, bundled payments, service line co-management, and other financial arrangements.

As a cautionary note, while improved quality of care and lower costs are a strong argument in favor of physician/hospital integration, recent studies have pushed back on this idea raising legal concerns on the impact of highly consolidated markets [9]. Rice University’s Baker Institute for Public Policy revealed that the effect on care-quality from vertical alignment is almost non-existent when comparing performance measures across hospitals with loosely affiliated independent practices to those that have been integrated [16]. According to another study [13], between 2012 and 2015 Medicare costs on four specialty services actually increased by $3.1 billion due to the growing number of hospital employed physicians shifting office-based procedures to more costly hospital facilities [22].

Aside from cost of healthcare services increasing, insurance premiums have also been affected by the merging of physician practices with hospitals in states like California. From 2013 to 2016, ACA premiums in CA increased by 12% given the pervasiveness of vertical integration between these two groups [27]. Since most physician practice transactions are small and thus fly under the radar of the Federal Trade Commission, CA legislators are pursuing new rules (2016) that would require all mergers and acquisitions between hospitals and risk bearing organizations be approved in order to stem the trend of rising healthcare expenses.

The types of physician practices being acquired by hospitals are those that have “proven success in managing professional risk” according to Majdi. Hospitals are betting on the acquisition of physician practices like primary care to help maintain census as they hedge against the unknowns of population health management [12]. Unlike the 90s when primary care practices were being consolidated the trend today includes specialists that command higher fees for their services. Hospital-employed physicians in specialties like cardiovascular surgery and orthopedics can generate upwards of $3.3M a year from admissions, tests, treatments, prescriptions, and procedures resulting in a profitable return on investment from acquiring these practices [6].

Deal structures surrounding physician practice acquisitions by hospitals are complex and difficult to navigate. Careful considerations must be given to: (1) regulatory limitations; (2) practice valuation; (3) physician compensation; and (4) culture integration to insure a successful transaction. Chief among these are Stark Law and Anti-Kickback Statue which require a hospital apply a Fair Market Value (FMV) standard when valuing physician practices and establishing physician compensation [20]. Typical deals see hospitals acquire 100% of the physician practice assets and negotiate employment agreements to retain the physician(s) post transaction. Certain aspects may influence what a hospital might pay for a physician practice such as specialty, location of the practice, age of providers, and ancillary revenues, while accounts receivable are usually not included in the deal and thus bare no weight on value.

Historically there have been concerns with how hospitals structure physician compensation without the appearance of paying for future referrals that could run afoul of Stark Law and Anti-Kickback Statue [5]. This has become more of an issue as hospitals integrate physician practices in order to participate in outcome-based reimbursement programs; however, legislative changes to accommodate for this are being considered. For example, in 2018 CMS issued a request for information to determine how to loosen legal barriers that will help promote coordinated care arrangements between physicians and hospitals while allowing for innovative payment models [7].

More recent legislation could change the landscape of acquisitions by disincentivizing hospitals from acquiring physician practices. A new site-neutral payment rule was enacted by CMS reversing an exemption that allowed hospitals to receive higher Medicare payments for services provided in an off-campus hospital department [14]. The Hospital Outpatient Prospective Payment System (OPPS) now requires CMS to pay hospital owned practices a Physician Fee Schedule (PFS) that is equivalent to the rate for independent physician clinics. Hospitals are litigating this rule claiming that the higher reimbursement are justified as they require more resources to provide them, and if not reversed could force cutbacks to other services given the loss in revenues [23]. While the courts are still to decide on the fate of OPPS, its implementation in the short run may slow down the rate of physician practice acquisitions by hospitals.

A recent survey of hospital CEOs revealed insights into their appetite for continued acquisitions of physician practices [2]. Down from 25.8% in 2018 to 12.5% in 2019, hospital executives are starting to see mergers and acquisitions as less of a focus in terms of their growth strategy, with more integration work required to achieve the efficiencies and cost savings of past deals. However, experts still believe that continued alignment between hospitals and physician practices will be necessary to extract the full benefits of value-based medicine, and while we may see a softening of activity in the short-run data on the longer-term outlook of healthcare M&A remains strong for years to come [3].

Sources

[1] Bannow, T. (2018, December 18). Dealmaking stayed hot in 2018, with a focus on physician practices. Retrieved May 20, 2019, from https://www.modernhealthcare.com/article/20181226/NEWS/181219908/dealmaking-stayed-hot-in-2018-with-a-focus-on-physician-practices

[2] Bannow, T. (2019, February 21). CEO Power Panel: M&A no longer health systems’ top growth strategy. Retrieved May 20, 2019, from https://www.modernhealthcare.com/article/20190223/NEWS/190229970/ceo-power-panel-m-a-no-longer-health-systems-top-growth-strategy

[3] Bees, J. (2019, May 2). Is Healthcare’s M&A Trend Softening? Retrieved May 20, 2019, from https://www.healthleadersmedia.com/strategy/healthcares-ma-trend-softening

[4] California Legislative Information. (2016, April 16). Retrieved May 20, 2019, from https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201520160SB932

[5] Chatfield, P., & T. (2014, March 25). The lurking risks of hospital-employed physicians: Stark, Anti-Kickback and False Claims Act compliance. Retrieved from https://www.healthcarefinancenews.com/blog/lurking-risks-hospital-employed-physicians-stark-anti-kickback-and-false-claims-act-compliance

[6] Commins, J. (2019, February 19). Docs Generate an Average $2.4M a Year per Hospital. Retrieved May 20, 2019, from https://www.healthleadersmedia.com/welcome-ad?toURL=/finance/docs-generate-average-24m-year-hospital

[7] Dickson, V. (2018, June 20). CMS seeks information to reduce Stark law burden. Retrieved May 20, 2019, from https://www.modernhealthcare.com/article/20180620/NEWS/180629992/cms-seeks-information-to-reduce-stark-law-burden

[8] Gottleib, S., & Pilch, P. (2014, September 12). The urge to merge in health care: This time, will it be different? Retrieved May 20, 2019, from http://www.aei.org/publication/the-urge-to-merge-in-health-care-this-time-will-it-be-different/

[9] Hancock, J. (2017, September 6). Study: Hospitals on doctor-buying spree and raises legal questions. Retrieved May 20, 2019, from https://www.healthcarefinancenews.com/news/study-hospitals-doctor-buying-spree-and-raises-legal-questions

[10] Hospitals Acquiring Physician Practices: 4 Key Lessons From the ’90s. Hospitals looking for ways to secure market share are increasingly finding the answer in acquiring physician practices in their communities or employing physicians. While this business practices failed miserably for most hospitals in the 1990s, hospitals acquiring practices today are taking lessons. (2010, July 15). Retrieved May 20, 2019, from https://www.beckershospitalreview.com/hospital-physician-relationships/hospitals-acquiring-physician-practices-4-key-lessons-from-the-90s.html

[11] Kacik, A. (2018, September 04). Health systems driving prices higher with physician group purchases. Retrieved May 20, 2019, from https://www.modernhealthcare.com/article/20180904/NEWS/180909986/health-systems-driving-prices-higher-with-physician-group-purchases

[12] Kutscher, B. (2008, November 21). Making physicians pay off. Retrieved May 20, 2019, from https://www.modernhealthcare.com/article/20140222/MAGAZINE/302229986/making-physicians-pay-off

[13] LaPointe, J. (2017, November 22). Medicare Spends $3.1B More on Hospital-Employed Physicians. Retrieved May 20, 2019, from https://revcycleintelligence.com/news/medicare-spends-3.1b-more-on-hospital-employed-physicians

[14] LaPointe, J. (2018, November 02). Site-Neutral Payments for Hospital Clinic Visits Starting in 2019. Retrieved May 20, 2019, from https://revcycleintelligence.com/news/site-neutral-payments-for-hospital-clinic-visits-starting-in-2019

[15] LaPointe, J. (2019, February 21). Hospital Acquisitions of Physician Practices Rose 128% Since 2012. Retrieved May 20, 2019, from https://revcycleintelligence.com/news/hospital-acquisitions-of-physician-practices-rose-128-since-2012

[16] LaPointe, J. (2019, February 14). Vertical Integration in Healthcare Doesn’t Boost Care Quality. Retrieved May 20, 2019, from https://revcycleintelligence.com/news/vertical-integration-in-healthcare-doesnt-boost-care-quality

[17] Miller, J. (2018, September). The Way Forward? Southern California Physician, 27-31.

[18] Moriarty, A. (2018, July 30). Why Are Hospitals Buying Physician Groups? Retrieved May 20, 2019, from https://blog.definitivehc.com/why-are-hospitals-buying-physician-groups

[19] National Health Expenditure Accounts Data. (2018, December 11). Retrieved from https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/nationalhealthaccountshistorical.html

[20] Physician practice valuations: 14 things for health system leaders to know. Hospitals and health systems nationwide embarked on a significant buying spree of physician practices over the last few years. (2017, September 18). Retrieved May 20, 2019, from https://www.beckershospitalreview.com/hospital-transactions-and-valuation/physician-practice-valuations-14-things-for-health-system-leaders-to-know.html

[21] Pope, C. (2014, August 1). How the Affordable Care Act Fuels Health Care Market Consolidation. Retrieved from https://www.heritage.org/health-care-reform/report/how-the-affordable-care-act-fuels-health-care-market-consolidation

[22] Rosenberg, J. (2018, March 1). Hospital Acquisition of Independent Physician Practices Continues to Increase. Retrieved May 20, 2019, from https://www.ajmc.com/focus-of-the-week/hospital-acquisition-of-independent-physician-practices-continues-to-increase

[23] Sanborn, B. (2019, January 24). 38 hospitals sue HHS over site-neutral payment rule. Retrieved May 20, 2019, from https://www.healthcarefinancenews.com/news/38-hospitals-sue-hhs-over-site-neutral-payment-rule

[24] Scheffler, R. M., Arnold, D. R., & Whaley, C. M. (2018). Consolidation Trends In California’s Health Care System: Impacts On ACA Premiums And Outpatient Visit Prices. Health Affairs,37(9), 1409-1416. doi:10.1377/hlthaff.2018.0472

[25] Singer, L. (2018). Considering the ACA’s Impact on Hospital and Physician Consolidation. The Journal of Law, Medicine, and Ethics,46(4), 913-917. doi:https://doi.org/10.1177/1073110518821989

[26] Sokol, J. (2018, April 17). Riding the PPM Wave of the 90s: Learning from the Crash to Prepare for the Future. Retrieved May 20, 2019, from https://www.healthlifesciencesnews.com/2018/04/riding-ppm-wave-90s-learning-crash-prepare-future/

[27] Terhune, C. (2018, September 07). As California Hospitals Sweep Up Physician Practices, Patients See Higher Bills. Retrieved May 20, 2019, from https://californiahealthline.org/news/as-california-hospitals-sweep-up-physician-practices-patients-see-higher-bills/

By David Lopez

With contributions from Katie Allen and Ana Ward

The post Physician Practice Acquisitions: A Primer on Hospital & Private Equity Consolidation appeared first on InvestmentBank.com.

Simplicity, transparency, and trust fuel the growth of the nutritional supplement industry. Up from 65% in 2009 the percentage of adult Americans has increased to 76% in 2018[1] with a projected market CAGR of 7.8% until 2025[2]. The demographic with the largest disposable income, those aged 55+, is the most using demographic at 78%. Other than overall wellness the main reasons for use in this demographic are: filling nutrient gaps, bone health, heart health, healthy aging, and joint health[1]. In this demographic, 46% use Vitamin D supplements with only 34 percent of supplement users aged 35–54 using it. With a total United States population growth of about 6.31% since 2010[3] and an absolute user population increase from 65% to 76% over that time, those using supplements have increased their usage and/or tried other products.

Those who use nutritional supplements generally tend to have healthier lifestyles and habits. Users are more likely to exercise and visit a doctor regularly, try to eat a balanced diet, get adequate sleep, maintain a healthy body weight, and not use tobacco[1]. Those who use nutritional supplements tend to pay more attention to their health and lifestyle. These are the responsible people that read the nutrition facts before making purchases.

Common products include both organic and otherwise in pill, tablet, and powder forms. Organic plant-based proteins and conventional non-organic powders are a huge part of the industry. They account for $3.67 billion in sales annually in the U.S[4]. Other common products are turmeric, collagen supplements, organic broth powders, and every vitamin one can imagine. Turmeric and curcumin sales have been a burgeoning and extremely researched market over the last 5 years[5][6].

Those making online, direct-to-consumer (DTC), nutritional supplement purchases—not through Amazon which is ~29%—only accounts for about 3% of all nutritional supplement sales[7]. This figure includes all non-Amazon DTC sites. That small user percentage represents approximately $1.27 billion of annual sales revenue[8]. This subgroup places a premium on simplicity, transparency, and quality. It is safe to assume that this 3% has a higher rate of maintaining healthy habits as compared to the rest of the supplement user group. This group has found niche sites with something unique to offer the community. In short, those who use these sites are convinced that the brand is superior to others in the field. DTC products are “premiumized” and require research to back claims.

Major Players in the M&A Scene

Amazon’s acquisition of PillPack is the largest acquisition of a DTC nutraceutical company on record with a $753 million price tag in 2018. Also in 2018, Clorox acquired Nutranext, a research-backed vertically-integrated DTC nutraceutical company that perfectly fits into the industry. With shopping moving away from traditional in-store sales, the DTC market is expected to start heating up even more as conglomerates look to penetrate the market as evidenced by Nestle acquiring Personanutrition in August.

The suitors on the buy-side seem to include the largest companies in the world with names like Walmart and Amazon already having gone toe to toe over acquiring PillPack in 2018. Other companies that may jump into the buy-side scene are household nutriceutical names like GNC. 

Names like GNC could horizontally integrate to include some of the niche DTC brands to give them a greater audience in the DTC market. Those already engaged in DTC nutraceuticals are all players in the M&A scene.

Amazon’s strategic acquisition of PillPack shows its determination to diversify into the drug-delivery market. Chatter about the shipping giant talking to PillPack for acquisition came to fruition less than 6 months later. Now Amazon truly does have more than a foot in the door to the pharmaceutical market.

Another pill delivery company, Personanutrition, looks like a fledgling PillPack. Founded in July of 2016, Personanutrition, is at a similar stage in development as PillPack was just two years before its acquisition. With similar business models, it would not be unexpected for a Walmart or GNC to follow Amazon’s lead to expand their shipping platforms to go more patient-centric. Walmart already has a pharmacy in every “Supercenter” location. It is logical to think that Walmart will start making DTC pharmaceuticals a part of its push away from shopping in brick and mortar to have pick-up stations and home delivery. Walmart already lost PillPack to Amazon, Personanutrition might be the next target.*

Valuations and Deal Multiples

PillPack was valued at $361 Million in 2016 and Amazon acquired it for more than double that valuation two years later. A pigeon, if left by itself to eat from an endless supply of feed, will eat 100% of its stomach capacity. If there are two or more pigeons eating the same feed, each pigeon will eat 300% of its stomach capacity.

As we have seen in the PillPack acquisition, this primal survival instinct can be applied to the DTC nutraceutical M&A scene. When Amazon and Wal-Mart were both trying to take their fill of PillPack, Amazon paid more than twice the original 2016 evaluation of the pill shipping company–shelling out $753 million[9][10]. Amazon paid a hefty premium to secure the pill-packaging company not only because Amazon saw great potential, but because Amazon also felt the pressure from Wal-Mart.

PillPack has since been increasing annual revenue at a near parabolic level, projecting 2020 revenue to top $1 billion dollars. That $753 million dollars now seems to be a bargain. What was the premium above the 2016 valuation? That figure is non-disclosed as the 2018 valuation was not disclosed. Hypothetically, if PillPack increased its valuation 50% from the 2016 figure to the 2018 deal, then Amazon still paid about a 28% premium above the hypothetical 2018 pre-acquisition valuation. 

The Clorox and Nutranext acquisition was sold at a 3.5x EBITDA multiple. Nutranext fits perfectly into the DTC nutraceutical market and may serve as a reliable measuring stick for future deals.

The more competition looking at a target, the greater the premium one of them is likely to pay for the acquisition.

*Edit 9/7/19: The Swiss giant, Nestle, has acquired Persona for an undisclosed amount as of August 2019.

Ryan Atchley contributed to this report.

Sources

[1] The Council for Responsible Nutrition. (2018). 2018 CRN Consumer Survey on Dietary Supplements. Retrieved from https://www.crnusa.org/CRNConsumerSurvey

[2] Grand View Research, Inc. (2019, May). Dietary Supplements Market Worth $194.63 Billion By 2025: CAGR 7.8%. Retrieved from https://www.grandviewresearch.com/press-release/global-dietary-supplements-market

[3] US Census Bureau. (2019, February 1). Census Bureau Projects U.S. and World Populations on New Year’s Day. Retrieved from https://www.census.gov/newsroom/press-releases/2019/new-years-population.html

[4] Mordor Intelligence. (n.d.). Plant Protein Market (2019- 2024): Size: Share: Forecasts. Retrieved from https://www.mordorintelligence.com/industry-reports/plant-protein-market

[5] https://www.nutraingredients-usa.com/Article/2016/09/22/Turmeric-leads-the-charge-as-herbal-sales-continue-to-bloom

[6] Krawiec, S. (2019, February 8). 2019 Ingredient trends to watch for food, drinks, and dietary supplements: Turmeric. Retrieved from http://www.nutritionaloutlook.com/herbs-botanicals/2019-ingredient-trends-watch-food-drinks-and-dietary-supplements-turmeric

[7] Evans, A. (2018, March 29). Assessing the Health of the Nutrition Retail Sector: L.E.K. Consulting. Retrieved from https://www.lek.com/insights/ei/assessing-health-nutrition-retail-sector

[8] Data, R. and. (2019, March 25). Dietary Supplements Market To Reach USD 210.3 Billion By 2026: Reports And Data. Retrieved from https://www.globenewswire.com/news-release/2019/03/25/1760423/0/en/Dietary-Supplements-Market-To-Reach-USD-210-3-Billion-By-2026-Reports-And-Data.html

[9] LaRock, Z. (2019, May 14). A look inside Amazon’s PillPack acquisition almost a year later. Retrieved from https://www.businessinsider.com/inside-amazon-pillpack-acquisition-2019-5

[10] Lunden, I. (2018, June 28). Amazon buys PillPack, an online pharmacy, for just under $1B. Retrieved from https://techcrunch.com/2018/06/28/amazon-buys-pillpack-an-online-pharmacy-that-was-rumored-to-be-talking-to-walmart/

The post Overview of the Direct to Consumer Health Food Supplement Industry appeared first on InvestmentBank.com.

Education technology (EdTech) is a term used to describe the industry that combines education and technological advances, revolutionizing the conventional landscape of education. EdTech not only allows educational institutions to serve a larger and more diverse audience, but also enables educational participants, both teachers and students, to foster relationships in an interactive fashion. Students (K-12) participating in schools with technological integration efforts achieved an increase of 94 points on average in SAT I performance[1]. With computers and software-assisted tools, students in a Pittsburgh tutoring program outperformed the comparison classes by 15%[2]. Students in the National Assessment of Educational Progress (NAEP) also demonstrated an enhancement in higher-order thinking and the ability to solve mathematical problems, regardless of the classroom size[3]. EdTech not only affects student learning but also teacher administration. For instance, there was an increase in the teaching of online courses from 30% in 2016 to 42% in 2017. In addition, online collaboration has shown an overall reduction by 20% in disciplinary actions and dropout rates[4]. Nearly one-third of the faculty in the research agreed that online courses can achieve learning outcomes, compared to traditional classroom teaching[5]. It is evident that technology has unlocked the power of education beyond imagination. With the recent high pace of advancement in technology EdTech it starting to discover its potential and will continue to rapidly develop in the near future. According to Holon IQ, the global education market has reached a value of over $6 trillion with only $150 billion of market capitalization. Even though digitization only occupies 2.6% of the total educational expenditures as of 2018, indicating $152 billion of EdTech expenditures, digital spend is expected to increase to a $342 billion scale, taking 4.4% of total educational expenditures by 2025[6]. There are a few major segments within the EdTech realm, including early childhood, K-12, higher education and lifelong learning. The K-12 software platform and tools market is the dominant segment within the EdTech industry. This portion of the K-12 market had a market value of $1.71 billion in 2018 in the U.S., and is expected to be worth more than $1.83 billion by 2020[7]. Compared to other segments within the U.S., K-12 has occupied 46% of the EdTech market while higher education and lifelong learning together occupy the other 54%. Even though K-12 is the dominant force, the percentage of market share is expected to remain steady for the next three years[8]. A discussion on technological advances wouldn’t be complete without a discussion of virtual reality. It is significant that virtual reality (VR) has become more noticeable and accessible to consumers, benefiting visual learners and promoting interactive teaching methods. VR breaks through the traditional physical constraints, accessing information through visual representations, audio, and virtual interactions. Google has developed an app, Google Expeditions, where participants are able to explore many parts of our Earth, making geological field studies more cost-efficient and flexible. They also have developed Daydream Labs where employees can be trained visually and interactively, resulting in a faster learning process[9]. The benefits of VR are not limited to language immersion, architecture, interior design, space expedition, biology, chemistry or pharmaceutical practices. Any traditional interactions with textbooks and humans can be visualized and customized into VR[10]. The combination of education and technology has truly altered the space of teaching, developing knowledge and gaining expertise. A bright future of EdTech awaits.

Industry Overview

Education is communication and EdTech enables communication to reach deeper and wider audiences. EdTech has enriched education, reaching various industrial categories such as coding, language, Science, Technology, Engineering, Math (STEM), social-emotional learning, early childhood education and learning management tools. The emergence of Virtual Reality (VR) has also enhanced educational activities, enabling them to become more interactive. There are a few major players in each market category highlighted in the following table. The main consumers in EdTech include K-12 and other students who participate in the educational programs, as well as higher educational institutions and corporations that develop EdTech products.

The future of EdTech is promising within the U.S. The education technology market size has been expanding at rates ranging from 8.3% to 9.28%. Some projections place the market at nearly $43 billion by the end of 2019 compared to $39.33 billion in 2018. The educational service industry has also been catching up with the global pace[11]. There was $18.1 billion of revenue in the fourth quarter of 2018 in the educational support segment, indicating a 0.9% increase from the last quarter and more than 7% increase compared to the same period last year[12]. Furthermore, funding seems promising on a global scale. With 813 new EdTech companies funded in 2017, the market projects 17% growth in the EdTech industry reaching $250 billion of market investment by 2020[13]. Geographically, 58% of funds were sourced from the United States with $5.5 billion of investments, 18.6% from China with $1.7 billion, followed by India with $397 million and mostly European countries contributing the balance. A sustainable business model and profit results are major factors in investment decisions. In general, the basic models can be summarized as business-to-business (B2B), business-to-consumer (B2C) and direct product or service-based business models. B2B includes the most diverse business models in the EdTech realm. This includes offering products to schools (a B2B2C model) and offering bundles to distribution channels. An example of these models is TeachBoost, a solution that utilizes the B2B2C model to offer free services or premium services with extra charge to schools. Clever and LearnSprout are also good examples of being the middlemen between schools and start-up EdTech companies, offering development easement while collecting valuable data from educational institutions. B2C, however, includes some variability, such as “freemium” models for teachers, direct services to students, or even offering the product directly to parents. MasteryConnect offers a freemium model to teachers with additional fees for premium services. ABCya! offers free educational video game services in order to promote their own website and other paid iOS applications. Finally, third-party offerings provide various kinds of solutions, mostly suitable for one or a few EdTech entities since they are individually crafted. One general example would be Panorama Education. They offer comprehensive products and administrative services directly to districts[14]. Other business models found in the EdTech space include Business Model Canvas (BMC), Cost-revenue Model[15] and Sensavis’ Value Network that focuses on value adding[16].

[17] Additionally, there are 55 categories of future education, illustrated in an open-source taxonomy.

[18] Xucong “Rex” Liang contributed to this report. Sources [1] Bain, A., & Ross, K. (1999). School reengineering and SAT-I performance: A case study. International Journal of Education Reform, 9(2), 148–153. http://educ116eff11.pbworks.com/w/file/fetch/44935610/Article.StudentLearning.pdf. P47 [2] Koedinger, K., Anderson, J., Hadley, W., & Mark, M. (1999). Intelligent tutoring goes to school in the big city. [Online]. Pittsburgh, PA: Carnegie Mellon University. Available: http:// act.psy.cmu.edu/awpt/AlgebraPacket/kenPaper/paper.html. P1 [3] Valdez, G., McNabb, M., Foertsch, M., Anderson, M., Hawkes, M., & Raack, L. (1999). Computer-based technology and learning: Evolving uses and expectations. Oak Brook, IL: North Central Regional Educational Laboratory. http://educ116eff11.pbworks.com/w/file/fetch/44935610/Article.StudentLearning.pdf. P48 [4] https://www.k12blueprint.com/toolkits/personalized-learning [5] https://www.educationdive.com/news/survey-more-faculty-gradually-warm-to-online-courses/508505/ [6] https://www.holoniq.com/edtech/10-charts-that-explain-the-global-education-technology-market/ [7] https://marketbrief.edweek.org/marketplace-k-12/k-12-ed-tech-platform-tools-market-value-increase-1-83-billion-2020-report-says/ [8] EdTech US Market Snapshot, Australia Unlimited. https://www.austrade.gov.au/ArticleDocuments/5085/Edtech-US-market-snapshot.pdf.aspx/ [9] https://www.opencolleges.edu.au/informed/edtech-integration/10-ways-virtual-reality-already-used-education/ [10] https://theblog.adobe.com/virtual-reality-will-change-learn-teach/ [11] EdTech US Market Snapshot, Australia Unlimited. https://www.austrade.gov.au/ArticleDocuments/5085/Edtech-US-market-snapshot.pdf.aspx/ [12] https://www.census.gov/services/qss/qss-current.pdf [13] https://www.prnewswire.com/news-releases/global-report-predicts-edtech-spend-to-reach-252bn-by-2020-580765301.html [14] https://edtechhandbook.com/business-models/overview-of-edtech-business-models/ [15] https://www.academia.edu/37460238/Defining_Optimized_Business_Models_of_Online_Education_Platforms_in_the_EdTech_Market_Eng_ [16] https://www.researchgate.net/publication/322291404_Business_Model_Innovation_in_Edtech_-_An_exploratory_study_of_business_model_innovation_in_a_complex_market_environment [17] http://www.blended.blog/eight-buckets-of-edtech/ [18] https://globallearninglandscape.org/  

EdTech Investment Trends

The funding trends have turned in an unexpected way in 2018 within the U.S. market. In 2013 only $36.4 billion was funded in the industry with 5,176 funding rounds closed. The amount funded increased more than a fold to $78.1 billion and the number of rounds closed increased by 17.8% to 6,078 in 2015. Regardless of the overall increase in funding of 27.4% to $99.5 billion between 2013 and 2015, there had been decreases in round closings, from 6,098 to 5,536 in 2018.[1]

It indicates that, regardless of the new emergence of the EdTech industry in the early years, there has been a trend of fewer funding events but with larger amount per event. In addition, the U.S. EdTech funding environment has gravitated towards larger dollar amounts. Throughout most of the quarters in the past 2 years, the number of U.S. funding rounds for funding over $100M had surpassed Asia by 5 to 8. Also, surprisingly, the mega U.S. funding rounds (over $1B) had surpassed the Asian market by 13 rounds.[1]

To take a deeper look at the funding landscape in 2018, Series C and lower grades had occupied more than 39% of the funding market at $537.2M while Angel & Seed occupied more than 40% of the funding deals at 45 rounds.[2]

In 2018, post-secondary and higher education were enjoying over 35% of the funding raised by U.S. EdTech companies, with about a fold in percentage increase. The reason for such surprising growth is the need to close the gap between college and employment. With high levels of student loan debt, this demand has become more urgent. Thus, companies like Trilogy Education that raised $50 million offers short-term workforce training to validate students’ skills before being employed.

Companies like Handshake that raised $40 million provides an online platform that connects students with employers. Guild Education supports the business with affordable employee development and educational programs by offering connections with universities. Other corporations such as Chipotle and Walmart who support front-line employees to get college degrees are also supported by Guild Education, which raised $40 million in 2018. Overall, post-secondary and higher education are becoming more popular among both the employment market and the EdTech industry.

K-12 is facing a challenge, however, that with strong and successful market penetration, the product licenses purchased by school districts might not be actually used by students.[3] According to research conducted by LearnTrials, 65% of the licenses purchased were rarely used by students.[4] With such information available to investors, there could be a slight drop in the number of investors in the K-12 sector.

To take a deeper look, there are a few major investment participants in the EdTech industry that has raised a noticeable amount in their history. For instance, HotChalk, a company that supports universities in consulting work and promotes degrees online, has raised $235 million. Coursera, a well-known company that offers Massive Open Online Courses to 20 million students and partners with 140 universities, has raised $235 million. Udacity provides self-study learning materials and has raised over $160 million. Not to mention the famous Age of Learning, General Assembly and Duolingo, that present textbook examples of success in the EdTech space.[5]

On the other hand, fast-growing industries usually phase into clusters as they mature, and EdTech is not an exception. As an example, San Francisco has become the state with the largest technology, over $6 billion [6], and a great amount of EdTech funding deals, 463 within 5 years since 2011 [7]. Some major firms located in the Bay Area or Silicon Valley include Udemy, Udacity, and HotChalk. New York and Washington both have an abundant amount of K-12 schools and higher educational institutions. Some EdTech firms that represent these states include McGraw Hill Education, General Assembly, 2U and BlackBoard. Even not as established, EdTech has also been clustering in states of Chicago, Texas, and Utah due to their educational resources or technological incentives.[5]

Where we can help

Edtech is the representation of both innovation and growth, but it is also a realm of expertise. With our knowledge and experience, we will be able to help clients and you collaborate in your EdTech expertise, pinpoint any potential problems and seek for data-driven, research-validated solutions. We fully acknowledge your interest in the EdTech realm. For further information, please contact our licensed bankers.

Xucong “Rex” Liang contributed to this report.

Sources

[1] https://www.cbinsights.com/research/report/venture-capital-q4-2018/ [2] https://www.edsurge.com/news/2019-01-15-us-edtech-investments-peak-again-with-1-45-billion-raised-in-2018 [3] https://www.edsurge.com/news/2018-11-08-why-aren-t-schools-using-the-apps-they-pay-for [4] http://www.educationaldatamining.org/EDM2016/posters/poster-203.pdf [5] EdTech US Market Snapshot, Australia Unlimited. https://www.austrade.gov.au/ArticleDocuments/5085/Edtech-US-market-snapshot.pdf.aspx/ [6] San Francisco Center for Economic Development, Venture Capital Research Report Q1 2017, viewed June 2019, <http://sfced.org/wp-content/uploads/2017/06/VC-Report-Q1-2017-Final-6.22.2017.pdf>. [7] CB Insights, Ed Tech Goes Global: India Sees Deals Explode While China Takes One-Fifth Of Funding, April 2016, viewed June 2019, <https://www.cbinsights.com/research/edtech-dealsgeographic-trends-2016/#head3>.

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