Private Equity Goes Public

One of the simplest metrics we have to measure interest in a company or industry is just how jammed the rooms are at the JP Morgan conference. It's there people can literally vote with their feet...and their elbows and shoulders and briefcases and pepper spray (well, not yet) to find a few square feet to take in a company presentation.

So if an SRO presentation reflects strong interest, then this year will be a big one for private equity and health care. (The entire discussion is available here, btw.)

Last week's Private Equity Panel discussion literally could not have been more crowded with every seat, storage container, alcove and appropriate patch of carpet filled by people eager to hear what four sages from the Private Equity World had to say about their own industry and health care.

The conversation was lively and informative, and since no one left early to hit the cocktail parties (the session started at 5 p.m.) we’re guessing those many in attendance found it useful.

Unfortunately, the conversation seemed more focused on the services sectors. This isn’t a knock on the collective wisdom of Madison Dearborn Partners (represented by Tim Sullivan), CCMP Capital (Steve Murray), Welsh, Carson, Anderson & Stowe (Paul Queally) and Bain Capital (John Connaughton). All are well-heeled firms led by brilliant folks. But the firm we really would have liked to hear from was Warburg Pincus.

WP’s sweet spot seems firmly in line with our own: biopharma, devices and everything in between. Of course what moved us to write this is this week’s announcement that Warburg Pincus would spend $239 million to acquire Lifecore Biomedical Inc. The announcement came just after last week’s panelists suggested the criteria for “take private” would be much higher than last year, resulting in a slow down of such deals. “I think the vast majority of the deals done in the last 18 months will have very disappointing returns,” says Queally. “Risk was mispriced throughout the system. So I think it was a great time for public equity investors but not so good for private investors.”

But the panelists drew an important distinction. Murray says transactions aimed at taking a company private “because there was the availability of cheap financing and the other parts we’ll figure out later” will be scarce. But those firms with a plan to turn around or advance companies that have a strategic fit will still happen.

Warburg Pincus generally falls in the latter category. Last year, the firm paid $4.5 billion for Bausch & Lomb and invested $75 million in publicly traded Inspire Pharmaceuticals Inc. In 2006, Warburg Pincus secured a deal with French Orthopedics company Tornier.

IN VIVO Blog expected big things from the private equity industry in 2007 following the Biomet acquisition in 2006. (See our look at the new Biomet here.)


At first, the results were disappointing. Overall private equity dollars being used to acquire device companies dropped from 2006-2007. But the drop seemed far less significant when you realized that 2006 consisted mainly of the Biomet deal while 2007 figures were made of up of several smaller deals, including the Bausch & Lomb acquisition.

What’s going to happen in 2008? The panelists predicted a slow recovery as the private equity industry tries to digest all the companies consumed during the all-you-can-eat-affair of 2007. But we’re a little more bullish on the life sciences front. Warburg Pincus will still find deals. Meanwhile, firms like Avista Capital are identifying spin out opportunities from larger firms like Bristol-Myers Squibb and Boston Scientific. In fact, 2008 is starting with more than $1 billion in private equity acquisitions since Avista’s two deals didn’t close until this month.

Life sciences companies will probably draw much attention from the folks on the panel. “We will not take drug discovery risk,” says Connaughton. “But we love to build companies that help biotech and small and large pharma develop their drugs. But we do not want to take drug discovery risk, we're not smart enough.”

But then again. “We’ve done diagnostics, device and pharma,” says Queally. “It’s almost the nature of the company as opposed to the specific sector. In other words, is a company is going through dislocation? Is it maturing? The device industry over the past few years has matured to the point where they are trying to optimize a portfolio. Pharma is trying to figure out how to focus. All those things are things we bring to the table. If we can get those companies at appropriate valuations we can bring some value and generate some good returns.

“There was a time 10 years ago where every single device or pharma company was trading at 15 times,” he continued. “It’s very difficult given that leverage is a piece of our capital structure to garner that kind of return. But now they have come down and are going through dislocation. I would see a lot of opportunities in upcoming years.”

Well, this would explain why the room was so crowded.