Venture capitalists explain their recent health care pickiness

The past 18 months have been most challenging for health care companies trying to attract venture capital. The institutional investment crowd has adopted a much more cautious, opportunistic approach to investing, according to panelists at a funding presentation here Thursday.

The topic drew some 300 people to the Nashville Health Care Council’s industry forecast luncheon at Loews Vanderbilt Plaza.

Four private equity investors -- David Mayer of Thoma Cressey Equity Partners, Rob Coppedge of Capitol Health Partners, Scott Steele of Parthenon Capital and Richard Berger of GE Capital Healthcare Financial Services -- put forth their opinions and strategies before a packed room of health care executives, many of whom are seeking funding.

“Our approach to health care in the future will be much more situation-specific,” said Thoma Cressey’s Mayer. Thoma Cressey is the lead investor in Hud Connery’s hospital company, Nashville-based Essent Healthcare. While the Chicago-based firm plans to put a lot of money into the industry, Mayer said placements in the health care services sector -- the bread and butter of Nashville’s health care industry -- will be “a little bit fewer and more sporadic.”

Even though the implementation of DRGs created room for niche businesses in the past, reimbursements have continued to shrink since then, he said. The organic growth spurred by many venture-backed companies at the time eventually made for a fragmented industry, said Mayer, who conceded that players like Thoma Cressey and Welsh Carson had reaped the benefits of consolidating the industry. Mayer noted his interest in medical products and devices, and diagnostic and therapeutic niches.

Parthenon Capital’s Steele says his firm will target investments between $15 million - $75 million. Parthenon, which recently bought former Nashville company Total eMed from Oregon-based MedicaLogic/Medscape, will focus on transactions that leverage the firm’s experience, such as outsourcing and business services. It will strive not to repeat “sins of the past,” such as investments with a high-degree of reimbursement risks, consolidation plays, or roll-ups. The firm’s $750 million fund will look to macro trends such as medical management, long-term care and pharma-related opportunities.

Capitol Health’s Coppedge noted the Washington, DC-based firm’s interest in European ventures. Capitol, which counts among its holdings investments in AmSurg, Gordian Health Solutions, Caregivers and Home Healthcare Laboratory of America, is looking at investments between $500,000 and $10 million in the United States.

Unlike Steele, GE Capital’s Berger said reimbursement issues were par for the course and “something you just have to deal with.” Berger represented the largest firm, with $9 billion in assets. GE’s areas of focus include medical technology/diagnostics, life sciences, healthcare services, healthcare IT and healthcare equity funds.