In order to beef up its presence in the healthcare technology sector, private equity firm Welsh, Carson, Anderson & Stowe (WCAS; New York) recently appointed Dan Pelak as a senior operating executive focused on healthcare investments.
Prior to joining the firm, Pelak most recently was CEO at privately held InnerPulse (Research Triangle Park, North Carolina), a company developing a new kind of defibrillator. Prior to that, he was CEO of public company Closure Medical (Raleigh, North Carolina) and led that company to a successful exit with its $370 million acquisition by Johnson & Johnson (New Brunswick, New Jersey) in 2005 (Medical Device Daily, March 7, 2005).
Pelak said WCAS was an attractive opportunity for him and he sees it as a logical fit for his expertise both as an officer in public and private companies.
The firm, he told Medical Device Daily, offers the ability to be able to enter investments with troubled public or private companies and help turn them around. "The years I have spent within the industry clearly gives me the opportunity to help Welsh Carson with some of their portfolio companies."
Pelak said that traditionally, Welsh Carson has been more focused on the services side of the healthcare industry. "In recent years, and with my addition, we're going to expand our investments in the technology side." He called this recent focus on healthcare technology "a pretty interesting story" for the venerable firm and the market it seeks to serve.
Given the current challenging economic times, one might think that a firm such as Welsh Carson might alter its investment strategy, but Pelak noted that the fundamentals that the firm looks for in providing capital for struggling companies are still the same. "We're interested in investing in businesses that have solid product lines [and] solid growth opportunities and for whatever reason need a large new investor or new ownership. Our strategy hasn't been any different recently than it has been in the past, even though the times are not the greatest right now."
Another aspect of WCAS that Pelak said attracted him to the firm was its willingness to assume the role of long-term investors, unlike many venture firms today, with an eye toward increasing value rather than heading for the exits at the first chance.
"They're long-term investors, interested in growing companies and making companies better," he said, adding that "exit strategies can be either the public market, if, in fact, that makes some sense, or taking advantage of a strategic buyer that may be interested in the business when it's healthier and doing better."
He noted that valuation is still important to look at for the firm, and an enhancement in that area "is just an added benefit for the times we're in now."
Aside from the obvious monetary benefits that WCAS can bring to a company in need, Pelak noted the "managerial skills, breadth and experience," that he and others at the firm bring to the investment. "We're going to bring something more to the table than just the cash."
Paul Queally, co-president of the firm, seconded Pelak's assertions that Welsh Carson is willing to assume the role of a long-term investor. "We're not reliant on leverage for our returns," he told MDD.
"What we're good at is growing the operating income of our companies, he said, adding that "the vast majority of our returns over the last 15 years have come from growth, it has not come from leverage."
Queally said that many of the perspective portfolio companies are comforted by the different perspectives that team members like Pelak and former Centers for Medicare & Medicaid Services administrator Tom Scully bring to the operation. "Anything that a company does, we have someone in our resource group, which is about 20 people today, who can handle and understand and have been through that. The 'been there done that' theory really applies in this business."
Historically, Queally said that the firm has not been able to consistently buy device companies because they typically go public "at values we're obviously not going to compete with, or they're acquired by large public companies." Today, he said the company has been offered a "very interesting window" into the sector due to a shortage of capital in the marketplace.
"Bringing Dan on right now is the perfect time because Dan can walk into any of these companies and say 'Hey, I know what you're going through and we have some resources that can help you and ... we're probably the only game in town for you'" right now. He said if things return to normal, this window into the medical device sector will probably close for the firm in three to four years.
Queally asserted that because of the economy and political uncertainty, financing in the healthcare industry will probably be one of the last areas to make a comeback, a not-so-undesirable position for Welsh Carson to find itself in.
"We can step in and provide capital for the companies that still want to grow," he said, noting that "the great companies tend to become stronger in down times because their competitors lack the liquidity and the resources to invest in their business."
The firm has plenty of capital to provide needy companies, and Queally noted that it is in the process of raising its 11th funding round, which he characterized as "substantial." While the firm declined to disclose the amount of the new fund, industry sources have estimated that it will be in excess of $4 billion.
While it's clear that firms such as Welsh Carson have money to lend to more established companies that can tide them over to better times, what of the smaller innovators that don't have an established track record yet?
With the lean times of the recession, Pelak said that there is "no doubt" in his mind that "innovation will falter ... over the next couple of years," since the dollars just simply aren't there for early stage ideas like they used to be.
Pelak echoed Queally's sentiments that innovation and the funding for it in the healthcare sector will come back slower than in some other sectors. "I think that's one of the fallouts of the economic conditions we're in," he said.