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How Revival Healthcare turned belief in a brand new niche into a $500m sophomore fund

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The already intensely heated pharmaceutical and medical investment market has grown even more competitive over the past year thanks to rising interest amid the Covid-19 pandemic. Consolidation within the market has also seen the bar for entry for investors rise considerably, with even the biggest private equity firms having to fight for deals at the right size and price. Amid this febrile environment, specialist investor Revival Healthcare’s president and chairman explained to AltAssets how finding their own gap in the market led to a booming second fund close.

It’s rare to find a private equity firm embarking on a truly differentiated strategy these days. Sure, all firms have their own USP and niche in the market, but being presented with a completely unique strategy is a sure way to turn LP heads in an increasingly competitive market. Revival Healthcare Capital’s focus on medical devices and healthcare diagnostics puts them in a particularly busy segment of the buyout investment market – but crucially the firm believes it has found a niche offering premium growth in offering access to capital for smaller companies.

That belief is borne out by the firm’s $500m sophomore fund close in May – no mean feat in the current market, and one underscored by a unique investment structure within the sector.

“We designed this fund based on what is going on in the world. We have small companies struggling with access to funding, which is a strange connection that this is the golden era for medical devices and diagnostics,” firm chairman and managing partner Rick Anderson, pictured, told AltAssets. For Anderson, huge consolidation within the industry is the reason behind the discrepancy, with companies drawing their lines of investment higher and higher and seeking ever-larger acquisitions to support their growth. He said that many smaller companies have begun to fall below the bar, making it difficult for them to pick up much-needed investments or buyouts from larger industry players.

Made to order

Spotting this issue within the market as a potential opportunity, Revival took the proactive approach of designing an innovative fund structure aimed at growing small companies according to a specific buyer’s strategic needs. By taking on board a corporate partner on the outset, the firm makes sure it grows its portfolio businesses in a way that ensures a future buyer, removing much of the guessing game and risk associated with traditional dealmaking.

Anderson said the new structure allows smaller company CEOs to spend all of their time on execution, knowing that a buyer will be interested in them in the end, instead of spending time on fundraising, which can typically take up 40% to 50% of their time according to Revival’s data. And it provides major benefits for the larger businesses too.

“When a big company buys a small company in the traditional way, you need to spend a couple of years for the so-called integration period,” Anderson said. “But in our investment structure, integration starts right when we put our money in. It’s more capital efficient way to ensure the maximum value of the option that the bigger company can take with the smaller companies.”

Another Way

Revival currently operates under three different kinds of investment strategies in the medtech space. It has teams to work on commercial scale deals, in which the firm provides $10m to $75m capital for commercial scale companies in which they aim to take minority interest equity positions with at least 20% ownership.

It also invests in special opportunities including carve-outs and invitations only deals which would take $50m to $250m of capital per transaction.

With the traditional deal space crowded with private equity interest, Revival said RVLHC II provides a new way for the firm to navigate the market, especially when investors have moved to later stage investments due to longer FDA timeline and more complex regulations.

“This is just another option for how we partner with the companies. Outside this strategy Revival only partners with commercial stage companies because we don’t want to take the risks of an early-stage company,” firm president and managing partner Lauren Forshey said.  “This strategy lets us become more stage-agnostic.”

Anderson added, “This is not competitive to what other private equity firms are doing. They can still do M&As, exits etc. The value-add is that we can build it and then the strategic partners can buy it.”

Covid impact

Investment firms, businesses and people alike have learned myriad lessons over the last year – but it’s fair to say innovation and resilience are likely near the top of most lists. The same applies to the medtech industry and Revival itself.

“The industry took the big hit just like everybody else because people cannot go to hospitals,” Anderson said. “However, now that we are able to look at it retrospectively, the best companies either foundd their ways to get their clinical data approval or refined their stories and got prepared, while the weaker ones didn’t make it because they couldn’t afford it.”

Forshey added that the pandemic has forced the healthcare sector, which traditionally lagged in technology adoption, to introduce new technology. She said it is definitely positive to the industry that it is doing things that they otherwise might not do, such as using AR/VR technology so practitioners do not have to be in the same locations as the patients.

The firm itself has also been doing something that would not have been imaginable two years ago. The last time they met face-to-face with UBS, their partner for RVLHC II fundraise, was March 2020 before the whole world shut down. Since then, all facilitation was on Zoom through to closing. Forshey describes the market response to the fund as “overwhelmingly positive” although some new connections were established totally virtually.

“If you would have told me two years ago that you raised $500m all virtually, I would laugh,” Anderson reflected. “But it shows exactly that smart capital always finds a way.”

Staying focused

Anderson says demand remained stable for medical devices throughout the pandemic, and procedural volume has come roaring back since May with the pent-up demand across markets, including the emerging ones.

The huge comeback perfectly illustrates what Forshey describes as an “attractive, fast-growing but also defensive” sub-sector. Anderson said this is the more predictable sector – without high-highs or low-lows, which can be “a bit boring” while crucially providing steady growth.

The pair said they are very disciplined in their approach to healthcare investing, and would only focus on medical devices and diagnostics. The firm specifically says on its website that pharmaceuticals, biotech, drug development and discovery and healthcare services are outside of its core investment focus.

“There are a lot of shiny objects out there but we are very disciplined not to touch it if we don’t have the right capabilities on the table to make sure we can value-add to the accelerate the growth of the company,” Forshey concluded.

Copyright © 2021 AltAssets

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