On March 28th, Lee Ballew, Co-Founder and Managing Director at Capital Alignment Partners (CAP), visited the Leadership Health Care Private Equity cohort as a guest speaker to provide insight into CAP’s business and strategy behind their investments.
Founded in 2009, CAP is currently investing out of their 4th fund. Focused on investing debt and equity in lower middle market companies throughout the United States, CAP maintains a flexible investor-friendly approach and seeks to partner with businesses that already possess strong and seasoned management teams. As part of an overview of the company, Lee highlighted a few key statistics:
- $590 million in total assets under management (AUM)
- 50%+ in healthcare and mainly healthcare services
- 31 platform investments with 80+ tuck in acquisitions into those platforms
- 33% repeat CEOs in their portfolio
- Exclusively back existing management teams
During the cohort session, Lee attributed CAP’s consolidation success to quality candidates, aligned interests, strategic discipline, and their focus towards adding value to ensure their portfolio companies reach the next tier of capital access. When asked about the primary theme in deals that have gone poorly, Lee alluded to the misalignment of interest between investors and management teams.
Most of the CAPs asset sourcing comes through their proprietary nature such as repeat CEOs, limited partnership introductions, and CEO referrals. In addition, Lee emphasized that finding good assets within the companies they work with is the hardest part, not raising capital.
As a result of CAP’s foremost priority being centered around capital preservation, their initial focus when working with a company is directed towards accounting to truly understand its cash flow and leverage. CAP provides capital markets assistance when partnering with a company and acts as an investment banker for its portfolio companies by helping structure, finance, and close transactions.
As part of their acquisition process, Lee noted that most deals take about six months from meeting with the company to closing (45-60 days from LOI). When evaluating the quality of a company’s management team, CAP looks for three characteristics:
- Being able to partner well.
- The ability to have reasonable conversations pre-investment.
- Can they run the business and do they have the ability to work with outside people who know capital and strategic thinking? As part of wanting to partner with seasoned management teams, Lee notes that they especially look for management teams that are strong operators.
Case Study Highlights
- CareHospice
- Repeat CEO and existing management team in a strategic consolidation of regional hospice operators along east coast.
- Three-year EBITDA growth of nearly 400% before selling to larger PE fund in 2017.
- Founder and initial management team still remains.
- Vital Health Care Group
- Existing management team in a strategic consolidation of a regional home and hospice operators in Louisiana and Texas.
- Two-year EBITDA growth of nearly 400% before selling to larger PE fund in 2021.
- Existing management remains.
- Their reason for success was that they provided great quality of care and knew who they wanted to buy.