DISCLAIMER: The views and opinions expressed are those of the interviewee(s) and are not necessarily those of McKinsey and Company.
Prashanth Reddy: Today I am joined by Matt Holt who is a managing director at New Mountain Capital. He is the head of healthcare investing and is the president of private equity for the firm. Matt, I am delighted to be speaking with you. Given your wealth of knowledge, passion, and investments in the space, we will be talking today about private equity (PE) investments in healthcare and where it goes from here. What attracted you to healthcare investing over the last 18 years? And what has kept you excited?
Matt Holt: I joined New Mountain Capital 18 years ago in 2001, about a year into the founding of the firm. I joined Steve Klinsky and we really began our effort to evaluate sectors for proactive analysis. Healthcare really jumped out at us in the very early days for a number of reasons.
We were interested in the scale of the industry, the regulated nature of the industry, and as a result of that, the corresponding complexity. And further, the dynamic nature of the industry including the ultimate penetration of technology, we felt that it would open up a lot of investment opportunities. And that if we studied the large complexities of the market, that we could develop competitive advantages over time, which we’ve now been working on for 18 years.
Prashanth: And by ”healthcare,” do you define it broadly as services and life sciences with the whole ecosystem, in terms of your investment portfolio?
Matt: From a scope standpoint, we look across provider markets, payer markets, [and] life sciences markets. There’s a lot of convergence across themes. And we’ve invested across all of those categories over our history.
Prashanth: If you look at trends, private equity continues to play an increasing role in the healthcare industry. If you think about investor interest and from an investor point of view, what makes it an interesting market to play in?
Matt: First off, it’s very large. Healthcare has a lot of different pockets. It represents, over 18 percent of US GDP. Two of the major trends in the investment world and in the business world at large are impact investing—being responsible from a social, environmental, and governance standpoint.
In addition to that, technology investing. You know, healthcare really represents a market where both of those major trends are converging and having a very big impact on the industry and its evolution. And it’s creating a lot of opportunity to invest with those two tailwinds really behind our investors.
Prashanth: Those are important tailwinds on a macro basis. Let’s convert this from trends to impact. What do you think has been the tangible impact of just private market investing and PE investment in the space? Are there a few examples you could share to illustrate?
Matt: Two key themes that we’re very focused on relate to really investing in businesses that can deploy technology to reduce inefficiencies and thereby cost. But at the same time, improve quality. The second big trend that we’re very focused on [is] a tectonic shift in the overall ecosystem which we call the “shift to value.”
Alternative payment models—the way that hospitals get paid—are obvious examples of the shift to value. But there's a lot of other ways of playing this shift, including for example in the pharmaceutical industry, we’re seeing pharmaceutical companies trying to over time evolve their own business models to be on the right side of outcomes.
And we have a couple of examples of investments that are really playing at the forefront of this. One would be a business called Cytel, which is a leader in data analytics and in particular data management around optimization of research and development. That’s a business that takes data from its customers, does a lot of number crunching [and] really help[s] to drive productivity of R&D spend for pharmaceutical customers. And there’s a lot of underlying regulatory trends that are opening up that market opportunity for Cytel.
Another example would be our investment in Signify Health which is leveraging technology in and around scheduling in logistics to drive efficiencies as they deploy doctors and clinicians into the homes of members on behalf of health plans and in particular Medicare Advantage.
It’s really an example of taking a technology that we’re all using every day with our iPhones via food delivery apps and transportation apps [and] applying that underlying architecture to the healthcare market but focusing on work flow and bringing those same efficiencies into the enterprise market at scale.
Prashanth: Those are very interesting examples. When you think about the ownership model of private ownership and private markets more broadly is there a tangible impact from this structure and the ownership model? Or is it just more about the strategy and the thesis around the investment? Do you see the model helping?
Matt: The ownership model is an enabling factor with respect to driving results. So, one of the key things that we've been focused on in the healthcare investing effort here is really driving technology and innovation into the work flows [and] into the service offerings of our businesses.
A private ownership structure has allowed us to execute on that playbook faster than the typical public company ownership model, just to pick an alternative. We can make investments on the basis of long-term return on investment characteristics.
We can make significant investments in the P&Ls of our businesses to enable faster digital transformations to execute faster on the underlying opportunities as we see them. And we think the private ownership model has [an] additional advantage. There’s a talent and recruitment advantage that we have. By bringing world-class leadership into the businesses that we’re backing has been really important to drive results. The private model allows us and gives us an advantage when it comes to talent.
Prashanth: What are some markers of success and pre-conditions that you look for during the thesis phase or the diligence phase?
Matt: We’ve made 12 investments in what we call health-tech platforms to date. And all of them really map into one underlying investment framework which I describe as having three pillars. Number one, investing in a model where we can bring technology to bear to reduce administration cost and make the system more efficient.
That’s pillar number one that we always look for.
Pillar number two, we want to make sure that we’re investing in businesses that are enabling the underlying shift to value. We want to be on the right side of the change with respect to the alignment of incentives. That’s a critical pillar number two.
And then number three, as we execute on number one and apply technology and apply digital process in automation, over time, we create a lot of data. And that's really central to investment pillar number three [as] we end up building significant data assets. And those assets can drive exponential value creation at exit if we get it right.
That’s really the framework that we’ve used. And we’ve applied that to payer services, to provider services, [and] to life sciences services, all of which are converging. And that’s generally how we look at the market.
Prashanth: That’s technology on the front, align[ing] against [the] shift to value. And then I presume by data you also mean intellectual property and content that you create beyond just the underlying data sets?
Matt: That’s exactly right. But the data sets themselves have a lot of value, not only to other businesses that we're building but to partners that we can find over time.
Prashanth: Given the expanding role of private equity in the healthcare space, as you said on the payer-provider services, life sciences side, what are the implications and interactions that you have with what we would call strategics—large incumbent players who are in the business? How [do] you see that playing out?
Matt: Well, one of the things that we’re doing at the front lines is driving innovation and building models. I call it the building out the tip of the spear with respect to leveraging technology to drive productivity [to] create new innovation models.
We are very open to partnering with strategics along the way. We can drive a lot of value into the larger strategic platforms which doesn’t need to only happen when we sell a business. Along the way, we’ve been very successful [at not only] securing investments but also strategic commercial partnerships with larger players who can guide us as to our own roadmaps and participate in the value creation as a partner. And that’s been a model we’ve continued to hone as investors. And it’s been paying some early dividends for us.
Prashanth: [Do] you view this more as a partnership and collaboration approach relative to competing?
Matt: Yeah, absolutely. And I’ll give you an example. We’re building a business called CIOX where we work across the ecosystem bringing technology to optimize the movement in medical records around the industry. We work with the largest providers in the country, the largest health plans in the country.
And we were building a lot of data and information that had a great application in the pharmaceutical industry. So, we were approached by a number of pharmaceutical companies, one of which made an investment in our business, who really helped us understand the value of the data and the services in their work flow [and] in their environment.
It allows us to close the loop with respect to building out an innovation pathway that we can execute against. That’s been a successful model that we’re looking to replicate across other investments.
Prashanth: Great. So, what is your view on the impact of analytics and digital beyond technology, on the marketplace?
Matt: I think that it’s a tremendous opportunity. The healthcare industry broadly is wildly inefficient. And if you just look at the embedded administration cost in business processes, very basic business processes like the billing function you have huge, huge costs, a lot of manual labor, [and] a lot of paper-based documentation.
And we’re still really 20 years behind at best. If you look at the way businesses transacted in the space, between providers, across providers, between [payers] and providers as well as all of the medical device and pharmaceutical companies. A lot of what we’re doing is bringing standard basic technology that has been used in for example the financial services end market for 15, 20 years.
We’re bringing that into the healthcare business process. And the beauty of it is we don’t really need to invent bleeding-edge technology. We’re really bringing technology and modern business process from other industries into the healthcare market. And there’s many years to go.
There’s tremendous opportunity if we can take out the inefficiencies. And we’re really still at the stage of basic building blocks in terms of converting manual to digital [and] driving automation. We’re still really in the very early days. And over time we believe the healthcare industry will follow the same roadmap of other industries which means that there are likely decades of opportunity ahead of us.
How should provider-led health plans evolve?
Prashanth: The term “ecosystems” has been thrown around and discussed quite extensively over the last year or two. What’s your view on the impact of ecosystems in healthcare and the value they can create?
Matt: You know, my view here and this is playing out on our investment strategy, the ecosystem approach is fundamental to really cracking the code on the major business problems in the US healthcare system. We have a system that is immense. It’s hugely complex.
If you look at the ecommerce or the media [or] technology markets, you’ve seen a model of innovation adoption where you’ve effectively had a winner-take-all market play out. Where early stage venture capitalists have funded infinitely scalable IT-enabled models.
You’ve literally had one or two players run the table on everybody else. As we look at the innovation patterns and the industry patterns within healthcare, that’s not what’s happening. The barriers to commercial adoption are significant. And we’re talking about very, very large and complex problems.
These are problems that are best solved through working with each other. And as a result of that that’s how we invest.
There’s a model that Athena Health has put forth which was very successful for many years. They started a program called
More Disruption Please where they invited other innovators to come into their ecosystem and really partner. That’s a model that we think could be replicated at scale. And we’re looking at ways of doing that across the categories of industries that we’re messing in.
Prashanth: [In terms of] the “winner takes all” model that has disrupted other markets—ecommerce, retail, or technology for sure—do you think that it’s a softer version of that where the collaboration is much more intense than that structure?
Matt: Collaboration is the only way that we’re going to solve some of the major issues and we’re going to break the system which is what’s needed here. Payers have to work with providers. You’re going to see convergence.
Pharmaceutical companies need to work with providers and payers. And all of the service providers, technology, and products, as well as service companies, they need to be able to work with each other. It’s such a large segmented market, that collaboration has really been a faster path to growth versus going it alone or maintaining closed systems. From a technology standpoint, open system architecture is a much better model for the US healthcare system versus one company trying to do everything for everybody.
Prashanth: That makes sense. What is your view on platforms in healthcare then? We said we probably won’t have a single platform option [like in] retail or in technology in terms of the scale or for at least single platform for a particular use case. But what’s your view on platforms as they evolve?
Matt: The way we think about platforms, we’re starting with operations-facing technology and working to create a better mousetrap that solves an inefficiency at the operational level. And that’s really the core advantage of any of our given platforms.
It may be data processing and data mining in our Equian business which we apply across claims feeds which can work for health insurance companies or employers or anybody processing a payment. We have a Signify business, which I mentioned earlier, where we’ve taken the scheduling and logistics technology platform delivering last mile services into the home.
And we become more efficient there driving more productivity. That’s a platform that can be applied to the health plan market. But it can equally apply to the provider market. If providers are looking to deploy clinicians in the home, particularly as they take on more risk.
Lastly, that model as a platform could also apply to the pharmaceutical market. The way we think about platforms is the platform gets built at the operations-facing technology layer. But then [it is] our job to map the advantage of that platform [which] brings us into the range of commercial markets as they’re changing. That’s how we think about the concept of a platform.
Prashanth: Basically, these platforms will link together to form part of the ecosystem in terms of building blocks and imports?
Matt: That’s exactly right.
Prashanth: So, another big topic discussion both on the commercial side and on the regulatory and legislative side is interoperability. What is your view [on] both the potential impact on your assets and potential impact on the future?
Matt: Interoperability is a big theme. It’s been a pain point in the healthcare industry since 1985. So, this is an old idea. We’ve been betting on interoperability. And we’ve been investing in businesses that are really trying to enable interoperability.
We have a set of companies that are working in different parts of the market. Ultimately there’s a massive data opportunity in the US healthcare space. We’ve seen the value of data in the consumer markets. We’ve seen the value in data in the large enterprise markets outside of healthcare.
We know it exists. It may be the single largest economic opportunity in the US economy. Interoperability is the skeleton key to unlock that value. So, we have a set of businesses that are working toward this. This is not an easy problem and requires government intervention.
And we have had discussions with the government and tried to give them the private-market perspective, because ultimately the private market will also play a role here. So, it’s something that we’re focused on and we think can represent a significant value unlock across the whole ecosystem.
Prashanth: This could look like financial services and how they manage data and infrastructure and platforms [etc.], information services types of businesses and how they’ve improved effectiveness, [and] efficiency. Do you think it could look like that in ten, 20 years?
Matt: I think that the financial services market and the way that data is used and managed is a great example. I would also point out the media and marketing industry or the retail industry. There’s tremendous amount of data that we’re all generating in what we call the digital trail. But what’s not included in the data that’s mapped into all of us as US consumers is our health data, which may actually be the most valuable data of all.
Prashanth: Do you think it could get even more valuable or better than the other segments just given the centrality of this?
Matt: It could ultimately enable a bigger market opportunity.
Prashanth: How do you see the evolving role of big tech?
Matt: I think that big tech has been a really interesting market to watch. We’ve been tracking the large US technology companies for over a decade. Now recently, we’ve seen activity from major players—Apple, Amazon, Google, Microsoft all have significant efforts now. And each of them [is] pursuing the market in a very different way.
We’re starting to see a real change in the openness of the traditional players to deploy technology under their environments. One of the main reasons in my view that this is playing out is that if we look at the gap of the consumer experience via technology outside of healthcare and you look at the experience of consumers being able to tap their financial information with the click of a button on their telephone. Versus today, entering the US healthcare system, there’s no information. It’s a less than ideal consumer experience. I think the consumers are tired of it. And the new external players are seeing this as a business opportunity.
I think they’re here to stay this time. I think the traction will take longer than a lot of people expect. But it will ultimately come. And I think it’s a good thing ultimately for the system.
Prashanth: I think it goes without saying, but ecosystems, platforms, and interoperability are massive tailwinds for multi-sector players to enter. Because they know how to do those three things really well.
Matt: The rules are different in the healthcare market. I believe that each of these large tech players will need to partner with each other and with the players in the system to really crack the code.
My strong view is that of the large US tech players, the ones that approach the market as an ecosystem, that they’re willing to participate in, [be] an enabler of, will ultimately be successful. The ones that take a closed-system approach and try to do everything and bully the traditional players around will be shut out of the system and will achieve little to no traction.
Prashanth: In the event of an economic downturn, can you talk about some of the traits that you’d look for in new investments?
Matt: As a general matter, we’re looking for investments whose performance is really independent of the business industrial cycle. That said, there are discrete cycles in the markets that we’re looking for and watching.
The economy does impact the healthcare industry with respect to who the payer is, what can companies or individuals afford, [and] what can the government afford. So, we’re watching that very carefully. As a general matter, we’re looking for businesses that can take cost out of the system and make the system more efficient which should be a successful model in all economic cycles.
But the other thing I’d point out is there’s another cycle that we need to be aware of which is the regulatory cycle. You know, there are industries that grow. And then we see a pattern of the regulations catching up. And that’s something that we watch.
Regulation can be a good thing. And it is a good thing in the US healthcare system. But there’s also areas where industry—when there’s big changes playing out—can get ahead of itself. And then there tends to be a period of catch up. And we’re all constantly watching those regulatory cycles as well as economic cycles.
Prashanth: How do you see the interplay between the various actors, payers, providers, services, from PBMs [pharmacy benefit managers] and life sciences? How do you see that playing out?
Matt: I think we’re seeing a massive convergence of a lot of these categories. Providers are becoming payers by taking on risk. Payers are becoming providers by taking on clinicians and taking on the enablement of direct care.
So, you’re seeing unparalleled convergence across categories. The other market that is really converging is the pharmaceutical market. I happen to think that convergence is a big theme that we’re looking for. It’s a big investment opportunity.
We’re building, for example, businesses that serve and build infrastructure for the health plans. A lot of that same infrastructure generates data and information that’s valuable in the pharmaceutical ecosystem. And as a private equity investor, as a private company owner, we can enable that convergence by bringing on corporate partners [and] strategic partners with this ecosystem approach. So ultimately the convergence presents investment opportunities.
Prashanth: Thank you so much for your time today, Matt. We really appreciate you taking the time with us today.
Matt: Thank you, Prashanth.