Brian Murphy, General Partner of NewSpring Capital, speaks with GrowthCap CEO, RJ Lumba. Brian leads NewSpring Health Capital, a healthcare focused growth equity fund that focuses on healthcare services and technologies.

RJ: Brian – thank you for taking time out of your day to speak with us. Maybe you could start off by telling us a little bit about your NewSpring and your background.

Brian: Glad to do so. NewSpring Health Capital, our healthcare fund, is one of four investment strategies at NewSpring Capital, a family of funds headquartered in Radnor, Pennsylvania. The other three investment strategies are: NewSpring Growth, focused on growth equity in information technology and business services; NewSpring Mezzanine, a mezzanine debt strategy; and NewSpring Holdings, a lower middle market buyout strategy. So our healthcare growth equity fund fits well within the three other investment strategies, and collectively we have about a billion dollars under management. The healthcare strategy, which I oversee, is a fund where we focus approximately 75% of our capital on growth equity in healthcare services, healthcare technology and tech-enabled services, and the other 25% in specialty pharmaceutical companies.

RJ: Sounds great. That’s an interesting area of focus at this point in the industry. Could you tell us a little about your time with the firm, and how you’ve been adapting to the quickly changing regulatory environment?

Brian: Sure, I’ve been here since 2002. We started then with one fund in one strategy, and it has now grown to eight funds in these four investment strategies I mentioned. I’ve been fortunate to be able to spend the majority of my time really developing our healthcare strategy. I would say that we’ve been extremely fortunate to be a part of investing in a lot of great companies, with the common theme to our healthcare investments being new business models in tried-and-true segments of healthcare.

I think we’re now really settling into the post-Affordable Care Act environment and seeing the true impact that regulatory, reimbursement, and policy changes are having on our healthcare delivery system. It is very clear that we are moving from a pay-per-activity to an outcomes-based mentality of reimbursement and delivery of services. These new business models that we invest in are ones that are being developed and deployed by great management teams that really understand this paradigm shift from paying for the provision of a particular service to getting paid and being reimbursed on the outcome of a set of services. New business models have been emerging to organize care along a different mindset than what has been used historically, when consumers were in a fee-for-service environment.

RJ: Right. It’s definitely critical that new firms recognize that paradigm shift you’re describing. Now is telehealth, for example, an area that you are increasingly seeing as a solution to mitigating the high costs associated with providing care, and are there certain types of telehealth companies that you find attractive?

Brian: Well, telehealth greatly exemplifies the types of new opportunities that we are seeing. It is applying technology and human capital to oversee and evaluate patients; much different than it has been traditionally been done.

We have seen a lot of interesting companies in telehealth, and I think we’re going to continue to see a lot of new opportunities in remote monitoring, whether it is in acute or post-acute settings. So I think we’re going to see telehealth applied to both in-patient, out-patient, and long-term care settings under a variety of different business models. There will be many opportunities for private equity to evaluate how these models will become commercially successful and financeable.

RJ: Could you tell us if you have a geographic focus, as well as your targeted investment size?

Brian: Sure. Target investment size is $5 to $15 million of our capital. Typically, we’re going to syndicate that with other like-minded investors. Syndicates can range from $10 to $50 million. The capital usually goes into traditional growth initiatives: acquiring businesses, expanding, and developing new product lines and augmentations to the business. Typically, companies are at $10 to $60 million of revenues at the time we invest. They have strong management teams, demonstrable customers, are post-revenue, and many have positive EBITDA.

As to our preference geographically, we’d like the company to be headquartered in the East Coast (Boston down to the Carolinas). Many of us, including myself, are former operating executives, and we love to be close to our management teams. We’d like to be a quick drive or train ride, or short airplane flight away from a face-to-face sit-down with management.

RJ: That’s really interesting. It’s not always the case where the private equity partner will have operating experience. Is that a common benefit that’s brought to the table among many of the partners at your firm?

Brian: It is. Many of us have been CEOs or owners of our own companies. As a result, we build strong relationships with the CEOs of companies in our portfolio around this commonality of historical experience. The relationship between the investor and the CEO is on a very compatible footing. We understand the challenges of being a CEO in today’s dynamic healthcare world.

RJ: Do you find yourself getting very involved in the strategic planning for the company? What is your level of involvement with CEOs? I’m sure it varies from company to company.

Brian: It does. The good news of being in this business for a long period of time is that you gain the experience of how to be a really good investor, and a really good board member. It’s a delicate balance between understanding where you can add value in assisting the company directly, versus where you can afford your management teams the creativity, accountability, and responsibility to own the decisions that they make. We tend to be very involved with strategy by helping companies with growth initiatives and the variables inside of their business plan that we think really unlock the equity value of the company. That tends to be around new business development, new product lines, and expansion of their core businesses. We help the company propel itself to new revenue levels, new operating performance levels, and new product expansion levels. The ultimate goal, through our tenure with the company, is to fully unleash the company’s equity value over the investment cycle.

RJ: Are there any investments you’ve made in particular where you’d like to highlight the value that NewSpring brought to the company?

Brian: One good example was a company called Precyse, which is in our current portfolio. It is a healthcare services and technology company that started as a traditional services company providing medical transcription and staffing services to the health information departments of hospitals. By growing the staffing business profitably, we were able to allocate the free cash flow generated to develop proprietary technologies to help health information departments deal with the challenges of the last few years. These challenges being increased regulation, changes in reimbursement, and the critical importance of handling healthcare documentation differently today than we did five or ten years ago. We develop a series of technologies around computer assisted coding and clinical documentation that now get deployed inside of the service offerings that we continue to provide. The company is now a tech-enabled services company that currently helps 2,000 hospitals manage the continuing challenges of how to collect, organize, and now utilize, unstructured data in a structured format.

RJ: That’s great. Over the next 12 to 18 months or so, do you have a general target for how much capital you’d like to put to work, or the general number of investments you’d like to make?

Brian: So far this year we closed one investment and we have two more under letter of intent. We’ll probably do four to five for the year into early 2015 as we invest the balance of this fund. We think it is an exciting time to be investing in healthcare. As we move further into the rollout of the Affordable Care Act, the introduction of new reimbursement and pay per performance mechanisms enacted by government and private payers puts stress on the system, creating interesting new investment opportunities. So we’re excited about getting a fair amount of capital out over 2014 through early 2015 and we’ll probably find ourselves back into the market for additional capital come 2015.

RJ: Maybe we can close out by talking about what you’d like to highlight to CEOs. The fact that you have a lot of partners with operating experience is a great differentiator. Are there other aspects that you’d like to highlight to CEOs about the benefits of working with NewSpring?

Brian: I think the operating view of the investing partners is one of the key differentiators for us in the case of the healthcare fund. I’ve spent my entire professional career in healthcare, as both an owner of a buy-side M&A advisory firm, as CEO of companies in the healthcare services and payer world, and initially, starting my career in healthcare general management and sales and marketing. Having experience in the industry as an operator, which many of our partners have at NewSpring, is a real differentiator in the eyes of the entrepreneurial CEO in terms of the value NewSpring can offer.

The network that we can bring, the additional resources we can add, and the assistance that we can bring to the capital side of the balance sheet given our relationships with other sources of capital (debt, equity, and corporate) are really important.

The lines between corporate business development and traditional institutional private equity investing are intersecting much differently today. For example, to have corporate partners as limited partners in your fund is more common. We’re fortunate to have some corporations as LP investors. Likewise, corporations are now looking to act like private equity funds in joining syndicates alongside traditional private equity funds. So having relationships that spawn both the corporate and the institutional investing world becomes really important these days, because the investing lines between private equity and corporations are intersecting more than in the past.

RJ: That’s really helpful. So it sounds like there are corporate development groups co-investing alongside private equity firms.

Brian: Yes, as syndicate partners. And obviously, they can become extremely valuable, especially if they can be a customer, a vendor, or a trade partner to the portfolio company. That can add significant strategic value, alongside the private equity firm, which adds value around strategy, financing, and ultimately, thinking about how a liquidity event may take place.

RJ: This has been very informative. Thank you for your time Brian. I think our CEO and investor subscribers will take a lot from our conversation.

Brian: Thank you for having me RJ. It’s been a pleasure.