On Eve Of Fundraise, Thoma Cressey Buys Health Care Co.

Target: Encompass Home Health Inc.

Price: Undisclosed

Sponsors: Thoma Cressey Bravo, Northwestern Mutual Capital

Seller: Apax Partners

Financial Advisor: Apax: Harris Williams & Co.

Legal Counsel: Thoma Cressey: Waller Lansden Dortch & Davis LLP, Northwestern Mutual Capital, Apax: Greenberg Traurig LLP

Thoma Cressey Bravo has made a bet on proposed changes to the Medicare market as it gears up to raise its ninth fund.

Earlier this month, the Chicago buyout shop acquired Encompass Home Health Inc., a provider of at-home health care services, from Apax Partners. Northwestern Mutual Capital, a limited partner with Thoma Cressey, co-invested in the transaction. Terms were not disclosed, but Thoma Cressey usually invests between $50 million and $100 million in equity per deal. Calls to Apax were not returned. “We’ll focus on organic growth first, then to the extent that it’s cheaper, faster or better to accelerate our growth by acquisition, we will,” said Thoma Cressey Partner Peter Ehrich.

The equity invested in this deal came from Thoma Cressey Fund VIII LP, a $765 million, year-and-a-half old fund that is already “well over half invested,” according to Ehrich. The firm is expected to come to market with Fund IX “sometime in the next couple of quarters,” Ehrich added.

Leverage for the deal was provided by CIT Healthcare, which originally agreed to finance the deal with about $180 million in debt, Ehrich said. That amount, however, was reduced by the time the deal finally closed. Sell-side advice was provided by Harris Williams & Co.

Encompass Home Health, which generates north of $120 million in annual revenue, provides home health services in New Mexico, Oklahoma and Texas. Owned by Apax since 2004, the company sends nurses and other health aids to patient homes to provide services such as the administration of drugs and wound therapy. Medicare-reimbursed nursing services account for about 88 percent of the Dallas-based company’s revenue; the balance comes from providing pediatric care covered by state Medicaid programs and private payors.

Thoma Cressey had been scouting the home nursing sector since late last year, waiting for an opportune moment to buy into the space, Ehrich said. With Congress proposing changes to Medicare reimbursement, the firm decided that now was the time. The proposal, which doesn’t involve spending cuts, would try to better align reimbursements with the costs of care providers, Ehrich said.

Under the proposal, Ehrich said, care providers that treat people with more serious problems stand to be reimbursed more than other care providers. Encompass Home Health, Ehrich said, serves that needier population. “If you have a very well-run home nursing business that has lower costs than its peers, yet delivers superior service, you stand to be in a real solid reimbursement environment,” Ehrich said. “That’s Encompass.”

That the home health market is both fragmented and growing also appealed to Thoma Cressey.

The three states that Encompass Home Health operates in alone represent more than $2 billion in home health care spending, while the national figure, already above $53 billion, is projected to double in the next 10 years, Ehrich said. Moreover, he added, Encompass Home Health’s tri-state area is home to north of 1,500 home health care agencies, representing a healthy percentage of the roughly 8,000 such care providers that operate throughout the United States.

Sources of the market’s growth, according to Ehrich, can be found on both sides of the patient/payor equation. A growing number of old, sick people would rather be treated at their own homes than have to travel to a hospital or clinic. For their part, the payors—including Medicare and private insurance companies—see at-home nursing care as less expensive in the long run. “When you look at the cost of having a nurse, or a home health aid or a clinician, going out to a home to make sure a patient is compliant on their medication, versus the next best alternative, which is the patient not being compliant and ending up in the ER, the result is obvious,” Ehrich said. “Any facility that the patient ends up in is going to charge multiples more than the cost of the home health care.”—A.N.