New York-based Palladium Equity Partners LLC is venturing into the health-care industry and this month formed a strategic alliance with the Aethena Group LLC, a private management company founded by Vernon Loucks, Jr. and David B. Loucks. Palladium Equity and Aethena Group will jointly pursue private equity investment opportunities in the health-care industry.
Palladium Equity’s health-care initiative is similar to its food initiative when the firm partnered with Robert Hall, an ex-Nabisco executive, and Keith Lyon, an ex-Duracell executive, of Ardale Enterprises, to focus on acquisitions in the food industry. The partnership ultimately resulted in a $96 million commitment to Wise Holdings Inc., the salty snacks manufacturer, last year (Buyouts Sept. 25, 2000, p. 9).
“When we try to get into a specific industry that we think is going to be a good place to be in the future, and we don’t have a partner at the firm who has operating experience in that area, we will seek an alliance with experienced operating talent in that industry,” said Tim Mayhew, co-founder of Palladium Equity. “We always like to have a balanced team in every investment and, by balance, I mean people with financial and operating backgrounds.”
The partnership stems from a 20-year relationship between Palladium’s co-founder Robert Lanigan and Vernon Loucks Jr. Prior to founding Aethena, Vernon Loucks Jr. served as chairman and chief executive officer of Baxter International Inc., which is a manufacturer and distributor of a diversified line of products, systems and services used primarily in the health-care field, from 1980 to 1998. David Loucks previously founded Physician Dynamics, Inc., a provider of services to health-care organizations worldwide.
Both firms have committed $40 million to their new partnership, with Palladium putting up the lion’s share, Mayhew said. “We’ve initially committed $40 million to this effort. This is our first brush, and we’ll see how it goes. We may want to raise a dedicated fund or commit more capital, but let’s first get some numbers up on the board,” he added.
The firms will look to take advantage of consolidation in the industry, at making control investments in both public and private medical equipment and distribution health-care companies with cash flow between $15 million to $100 million and over-levered balance sheets.
“There is a polarization where a lot of the venture stage money that’s been put in has matured and companies have gotten to a certain scale where they can’t platform themselves to the next level,” said Loucks. “A lot of companies get to a certain point where they’re public and have taken on a lot of debt and because of the imperfection in their organization or execution plan, they’re just not able to get to that next level.”
In addition, Mayhew added that for reasons of wanting to diversify its portfolio and also take advantage of the “unforgiving” capital markets, Palladium thought it was a good time to start developing the health-care initiative. “There were a lot of companies that accessed the capital markets in 1995 through 1998 and some of them have run into financial difficulties,” said Mayhew. “They may need a little bit of strategic direction or capital injection, but they’re finding the marketplace relatively unforgiving. We have been finding a lot of such opportunities and think that we might present a credible option for them where we can give them capital and additional industry contacts or operating expertise.”
Mayhew also said the partnership is “earnestly looking for deals,” but he failed to give a timetable for its first close. “When you start these initiatives, it can take a week or a year before you find something that really fits your criteria,” he said.
Whenever the partnership does sink its teeth into its first deal, it could possibly hit a stone wall in the form of senior lenders. However, Mayhew said that the firm’s initial discussions with lenders have yielded good feedback from the banks. “We’ve been talking to our banks and they like our approach and expressed interest in financing our transactions, but there’s no guarantee in the current lending environment” he said.