1) RoundTable recently closed its third private equity fund and its second sub-debt fund, for a combined total of $800 million. What was your biggest challenge raising two funds at once?LK: We are fortunate to have a very loyal investor base. I’d say 90 percent of them have been with us for the full nine years we’ve been in business. We also continue to be the largest investor in the private equity fund, and our investors appreciate us having a lot of skin in the game. We don’t like to spend a lot of time fundraising, so I’d say the only challenge was making sure we got it done quickly and efficiently. We just called our limited partners and asked them how much they’d like to invest. Then we made some allocations and got the documents out. We were able to do it in about five or six weeks. It really worked very smoothly, and there weren’t a lot of issues.
2) Why raise a captive mezzanine fund rather than borrow from third-party lenders?
LK: We decided to do this about five years ago. RoundTable was successful with its early exits, and the warrants attached to that early mezz money borrowed from third parties paid off very significantly. So we said to ourselves, ‘There must be a better way to do this where we aren’t diluting our equity.’ We went to our advisory board and our investors and asked what they would think about a captive mezzanine fund that invests only in RoundTable deals and has a fixed-income component without any equity. There was a lot of positive response to that. The real strategic advantage is that we now control the equity and the sub-debt going into every deal, and we can offer a seller much more certainly of getting a deal done quickly.
3) RoundTable has announced six deals–including an exit–since May. What’s behind this level of activity?JD: The increase in activity is really not a function of us doing anything different. But the business tends to be a little lumpy. We weren’t particularly active on platform investments in 2008, for example. We did a number of tuck-unders in 2009. And this year, a lot of the things we’d been working on for an extended period of time just happened to come to fruition at a similar timeframe. It wasn’t planned and, frankly, we probably wish it had been more staggered. But the opportunities come when the opportunities come.
4) Among the subsectors RoundTable focuses on are medical devices and outsourced services. Are any of these markets especially helped or hindered by the passage of health care legislation?JD: Not to be overly critical, but the ramifications of health care reform haven’t really been articulated at this point. It’s safe to say that hospitals will continue to need help focusing on their patients, focusing on cost containment and focusing on safety. That’s never changed, and it may be more intensified as we go forward. Certain segments may become more attractive. Take ophthalmic medicine as an example. Looking at demographic trends, those in the non-reimbursement-sensitive segments of ophthalmic are probably going to do very well. But the success of companies more focused on some of the reimbursement-sensitive segments is going to depend on what the government decides the appropriate reimbursement rate will be—which at this point is an absolute unknown.
5) Industry watchers expect a deal boom in the second half of 2010. What do you see in store for health care private equity?LK: We’re not quite as bullish. There is still a lot of uncertainty out there in the economy. It’s not likely that we’ll see deal activity like we saw three or four years ago. On the flip side, one thing we do see driving deals right now is the capital gains tax changes that could occur next year. We have talked to some owner-founders who are looking at selling their businesses before year-end, specifically because those capital gains rates will change.
Edited for clarity