Personality Profile: Cressey Takes Specialization To The Next Level

Cressey at the time was sourcing venture capital and growth equity deals for First Chicago Equity Group, an early co-investor with KKR.

Cressey noticed that KKR was consistently passing on opportunities to pursue growth deals in order to concentrate on leveraged buyouts, a then-novel financing technique that would revolutionize deal-making and create a global private equity brand for KKR. “Wow, they’re really focused,” Cressey recalled thinking at the time. “That was a great lesson for me.”

Now Cressey is taking specialization to a whole other realm, having started Cressey & Co., to invest solely in health care services. His firm seeks $500 million for Cressey & Co. Fund IV LP, so named because it will be the fourth fund that several members of the Cressey & Co. team have deployed.

Cressey, 58, has been a health care investor for more than 30 years. He started in 1976 at First Chicago, working under legendary investor Stanley Golder. Carl Thoma and Golder recruited him in 1980 to join Golder Thoma & Co., which in 1984 became Golder Thoma Cressey, and eventually, with the elevation of Bruce Rauner to partner, Golder Thoma Cressey Rauner. In 1998, the partners split, with Cressey and Thoma starting Thoma Cressey Equity Partners, and Golder and Rauner continuing their operations under the name GTCR Golder Rauner. In 2007, Thoma Cressey Equity became Thoma Cressey Bravo to recognize the contribution of Partner Orlando Bravo. Cressey continues to manage eight investments for Thoma Cressey Bravo. Thoma and Bravo, meanwhile, are raising a fund under the name Thoma Bravo, which will pursue investments in software and other industries.

Cressey’s move comes at a time of increased specialization in private equity. The industry has evolved, and simply loading investments up with debt isn’t enough to get consistent returns or draw interest from limited partners. Investors such as Allstate Investments and Mesirow Financial have appetites for funds immersed in particular industries, believing that highly focused teams can wring greater operational and financial improvements out of companies. By focusing on a single sector, fund managers such as Cressey earn domain expertise, cultivate a deep network from which to source deals and management teams, and create a lasting brand, said Lance Cottrill, managing director of funds-of-funds manager Horsley Bridge Partners, a long-time Cressey backer that has committed $50 million to the new fund.

“You can leverage the mistakes you’ve made by not making them again,” Cottrill said.

Micro Niche

To be sure, mid-market sector-specific funds have been around for years, and lately bulge-bracket firms have ramped up the pace of sector-specific fund launches. But few have targeted such a narrow slice of the market as Cressey & Co, which is going after deals not just in one industry but in a niche within that industry.

Targeting such a small niche can be a double-edged sword because you become bound to it no matter what, said former colleague Bruce Rauner, chairman of GTCR Golder Rauner, which invests in health care, financial services, technology, consumer brands, business services and outsourcing. “You can make better investment decisions within that space, but you can’t weigh them against the risk-reward tradeoffs relative to what is happening in other sectors,” said Rauner, although he also lauded Cressey’s investment acumen.

One prospective investor we talked to said he passed on the Cressey & Co. fund, opting instead to commit to another health care fund because it has a larger team and isn’t as concentrated in a single area of health care. This other fund, which focuses on a wide range of targets including psychiatry services and medical products manufacturing, employs 16 investment professionals to Cressey’s 11.

Cressey acknowledges that some prospective investors just aren’t going to warm to a health care services fund. Many have the idea that they’re somehow all at risk of losing government reimbursements. He finds that surprising, given the market’s size and diversity of revenue sources. Health care services accounts for close to $1.5 trillion of revenue and 11 percent of the U.S. gross domestic product, according to the Centers for Medicare & Medicaid Services. Further, there has been at least $50 billion worth of health care services-related LBOs since 1996, according to Thomson Reuters.

Beyond that, Cressey sees several trends that should lead to good opportunities in the months ahead. Rises in life expectancy, for example, drive the need for more health care services, while people tend to spend the same amount on health care services whether the economy is strong or weak, Cressey said, making it recession-resistant. At the same time, buyout firms tend to shy away from health care services because of the regulatory complexities, giving firms like Cressey & Co. freer rein to capture bargains. And, despite the credit crunch, Cressey said that banks remain comfortable lending to firms with demonstrated knowledge of an industry.

As for track record, executives who have worked with Cressey attest to his skill in spotting trends and managing companies.

Paul McConnell

, the co-founder of Critical Care Systems, said Cressey took a flyer on his company back when most investors were wary of specialty infusion therapy providers. The company, which allows people to receive intravenous therapy at home, had 12 branches and generated $30 million in revenue when Thoma Cressey Equity Partners acquired it for about $30 million in 2000. By the time Thoma Cressey sold it in 2004—for $150 million—the company had about 30 branches and generated $100 million in revenue. “Cressey had the wherewithal to be looking at a down market as perhaps the best time to invest,” McConnell said. Jim Deal, CEO of CLP Healthcare Services Inc., a Nashville-based hospice operator Thoma Cressey Bravo acquired two years ago, said Cressey helped revamp its sales strategy, as well as identify targets to acquire. “Just about every hospice transaction that’s being contemplated, we’re in the loop because of Bryan’s reputation in the market,” he said.

Launching A Fund

Cressey points to three crucial ingredients in starting one’s own fund. Have a successful track record, never burn a bridge, and, perhaps most important, put together the right team of investors.

Assembling that team was relatively easy for Cressey. Thoma Cressey Bravo’s health care team, the core of which has worked together on three funds, has joined Cressey & Co., which employs a total of 11 investment professionals. Peter Ehrich, partner and a 13-year veteran of private equity, earlier worked in a hospital, for an HMO and in a private medical practice. Partner Ralph Davis is a former partner at Waller Lansden Dortch & Davis LLP, a Nashville-based law firm specializing in health care. Davis, who advised Cressey on previous funds, brings legal and regulatory expertise to the firm; he also oversees administrative duties such as coordinating meetings and communications with LPs, freeing up Cressey to concentrate on finding deals and working with management teams.

The most notable addition to the team is former U.S. Senate Majority Leader Bill Frist, a partner who will advise the firm on deals and strategy. Cressey said he didn’t hire the heart surgeon for his connections in government. Rather, Cressey had for years wanted to add a doctor to his team, as well as someone versed in health care legislative issues. In Frist, he found both. Frist “understands doctors and caregivers,” Cressey said. “He also brings a wonderful, thoughtful view of health care from a legislative perspective, and he is concerned with the future of health care.”

Beyond partners Cressey, Ehrich, Davis, and Frist, Cressey & Co. includes Stephen Phenneger, an operating partner who advised Cressey on his previous two funds and is a former director in the Transaction Services Group of KPMG; David Schuppan, principal, who joined Thoma Cressey Equity in 1999; David Rogero, vice president, who joined Thoma Cressey Equity in 2002; Merrick Axel, principal, who joined Thoma Cressey Equity in 2005 but was not part of the health care team; and three associates.

Cressey & Co. also recently created an executive board consisting of Frist, Andrew Agwunobi, MD and CEO of Providence Health Care; Thomas Cigarran, founder of Healthways; Bryan Marsal, co-founder of turnaround consultant Alvarez & Marsal; and Robert Ortenzio, co-founder of Select Medical. With the exception of Frist, the board members play an advisory role.

Returns on funds Cressey has been involved with have been consistently strong since 1980, although Cressey declined to provide numbers. Horsley Bridge’s Cottrill said returns on funds associated with Cressey have been “terrific,” though he also declined to provide specific numbers. According to data from the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, GTCR funds III and IV, both of which are more than 10 years old, generated IRRs of 57.9 percent and 25.0 percent. Newer funds such as Thoma Cressey VI and Thoma Cressey VII, which closed in 1998 and 2000, respectively, generated IRRs of negative 5.82 percent and positive 29.2 percent through March 31, 2007, respectively, according to the pension funds.

Cottrill, for one, said health care services is big enough to warrant the attention of an entire firm. “You’ve got so much breathing room in that particular sector,” he said.

If some LPs are skittish that Cressey is over-specializing, he hopes that track record, and the opportunities in health care services, alleviate their concern. “Capital is looking for people who will succeed, and capital judges whether people succeed by their track record,” he said.