Small Market Deal of the Year: Vesey Street Capital Partners and Quality Metric

When Vesey Street Capital Partners acquired Quality Metric in 2020 from United Healthcare Group, it was a carve-out from the insurance giant’s Optum division. And Optum’s healthcare data business had been in decline ever since its founding CEO retired a decade earlier. But for Vesey Street, it was an opportunity to squeeze out liquidity and reinvest the cashflow into the business development team.

Quality Metric was a vital intermediary business providing patient-record generation services for the pharmaceutical, health provider and government end markets. The company had been around for 25 years and had completed close to 50 million patient-reported outcome surveys.

“Quality Metric was no longer a strategic priority for United Healthcare due to its small size and focus on drug development,” Adam Feinstein, managing partner at Vesey Street, tells affiliate title PE Hub. “It is not uncommon for a smaller division of a large company to have significant value creation opportunities when carved out.”

Small and organic

Vesey Street typically backs founder-owned companies and also seeks corporate carve-outs. “We don’t like to buy the bigger divisions of public companies, we like the small business segments,” says Feinstein.

Vesey saw that the target’s business model and value proposition could be enhanced by realigning the company’s development efforts and expanding its product offering, Feinstein says. And over a three-year holding, the New York-based lower mid-market PE group did just that, through a five-part organic growth strategy.

“When we acquired QualityMetric, the reported growth rate was low; however, the cashflow trends were very robust,” Feinstein says.

When all was said and done, 90 percent of the company’s growth was attributable to organic initiatives while 10 percent was inorganic.

First up, Vesey Street brought in new leadership and executive talent, then branched out its business development team. The PE investor brought back the company’s original CEO and founder, Gus Gardner, who had retired under United Health’s ownership.

“We like the small business segments”

Adam Feinstein
Vesey Street

Marching orders within the first 100 days of ownership included hiring a CFO, CTO and chief commercial officer, hiring more business and marketing talent and expanding the company’s board.

Vesey Street provided the company with corporate development resources and expanded the services that would be more attractive, thus expanding its total addressable market, Feinstein says. Second off, Vesey Street’s corporate carve-outs focus on employee retention rather than reduction. “People are core to the competitive moat around the businesses that we look at,” Feinstein says. “It’s about running the business more efficiently through proper alignment of all the people at the company.”

Thirdly, Vesey Street reduced the days-sales-outstanding (DSO) margin by 30 percent, which at a double-digit factor for a small-cap company had a significant impact on the sponsor’s ability to return cash in what would be a shorter-than-usual holding.

Before positioning the company for an exit, Feinstein says the firm had evaluated 14 add-on acquisition opportunities, but chose just one, HealthActCHQ in March 2023. Instead of other add-ons, the sponsor executed smaller licensing deals, which enhanced revenue and overall profitability.

38%

Quality Metric’s internal rate of return

For HealthActCHQ, Feinstein says the deal added new revenue stream to the company, by getting the company into the pediatrics and adolescent patient surveys market, a new field for the services company.

Citing a non-disclosure agreement, Feinstein was unable to disclose the ultimate buyer or purchase price paid for Quality Metric in August. An independent search of the company by PE Hub reveals the current parent company of Quality Metric is IQVIA, a publicly traded clinical research technology company with a $45 billion market capitalization.

Despite Quality Metric’s intermediary position between customers and pharmaceutical and other healthcare companies, Feinstein says the pandemic did not add revenue to the company’s business. He commends the sponsor and United for closing the acquisition in July 2020, after conducting due diligence on the deal for months by virtual meetings.

Quality Metric’s 2023 sale to IQVIA after the three-year hold generated an IRR of 38 percent, a MOIC multiple of 2.5x, while the target’s EBITDA more than tripled.