Our special guest on this week’s episode of the M&A Masters Podcast is Grant Jackson. Grant is the Managing General Partner of Council Capital, a middle market private equity firm based in Nashville, Tennessee. Their mission is to be the best healthcare private equity firm, with their focus on investing in the right side of healthcare change.
We chat about the underlying goal of improving the healthcare system, as well as:
Patrick Stroth: Hello there. I’m Patrick Stroth, President of Rubicon M&A Insurance Services. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today I’m joined by Grant Jackson, managing general partner of Council Capital. Council Capital is a middle market private equity firm based in Nashville, Tennessee. Their mission is to be the best healthcare private equity firm, with their focus on investing in the right side of healthcare change. Grant, great to have you. Welcome to the podcast.
Grant Jackson: Thank you, Patrick. Great to be here.
Patrick: Now, before we get into Council Capital, on your specialty in focusing on being on the right side of healthcare change, we’ll start with you. How did you get to this point in your career?
Grant: I grew up in in of all places, Africa, under a dictator came here and really started from scratch from scratch. A lot of people helped me along the way and generally without there being anything in it for them. And really think America’s unique in that regard. Started in M&A consulting and post merger integration. But quickly realized that I wanted to be partnering with great entrepreneurs and supporting them in growing really valuable businesses, which meant getting into private equity, I hadn’t had any kind of draw towards healthcare that came later. And so to get the private equity at the time, that really meant you had to get an MBA, that’s not true anymore. But it was back then.
So I went to Northwestern’s Kellogg School, graduated, during of all times the.com bust, and got fortunate that there was at least one company, one firm that was willing to hire me into private equity, but literally one. And so I quickly took that job, and got into private equity. The surprise to me was then how quickly I developed a passion for healthcare. And I knew that I needed to make my career around investing in companies that improve the healthcare system. I’d always felt that advances in science and disease were important. But they always were held up as the most important things. Whereas I felt like we were only capitalizing on 10% of the potential of all of the technological advances we’ve made in healthcare, and that the other 90% really comes from improving the healthcare system.
And that’s really what I’m passionate about supporting and doing. So, my career has been about following that dream, which has ultimately led me to, to Nashville and to Council Capital, which at the time was a very small fund. But one that had what I felt was a really strong approach. That I felt I could scale as, as the firm’s leader. And I have been at Council for 12 years now, we’ve just launched our fourth fund, with an investment that we closed just a month ago.
Patrick: Well, going into Council Capital specifically, and I like to ask this of my guests, because we get a feel for the culture of an organization when you drill down and figure out unlike law firms and insurance firms that essentially name their companies after the founders’ last name. Tell me about Council Capital by beginning with how did you come up with the name, and then give me a quick profile of your organization, and we’ll get into strategies and so forth after.
Grant: Yes, happy to. So the name I get no credit for the name, the name was, was created by the founders of Council Capital, who had a vision for improving healthcare, by investing in companies and they felt that the best way to do that was to find real experts, get them to invest their own money into our fund have real skin in the game, and where their money goes, then you will have their hearts. And so we put together the original CEO Council, which was a council of people who had been there done that in house in in healthcare. And that formed the CEO Council, hence the name Council Capital.
Patrick: Then with your focus, because you’re not focusing on upper middle market or middle market, you’re looking at the lower middle market. And I kind of think about with health care, a lot of people that aren’t familiar with health care think they think of it just on these institutions, side. Hospitals and large physician groups have large health plans. That’s not it. There’s a universe of smaller organizations within within the business of healthcare. Talk about your direction because you’re focused on the lower middle market.
Grant: Yes, what we do is we make buyout investments of healthcare companies. We can grow fast, we don’t use that much leverage. And we’re able to achieve those fast growth rates partially because of our council model. But also, because we’ve used our CEO counsel, that group of 34 people who’ve really built really valuable healthcare companies, to help us figure out where healthcare is going, and thus, where growth will be the highest. And so that has led us to focus focus on important or in today’s world, essential services, that are usually providing access to vulnerable populations or under managed high cost populations, and at the lowest cost point of care.
And so these are naturally, companies that move care away from high cost settings, often with people don’t want to be particularly in COVID, in places such as hospitals, inpatient behavioral health units, and toward caring for people where they live. And that’s why we have, for example, investments supporting medically fragile kids, which is one of our ideals, autism, those with intellectual developmental disabilities. And so, you know, think of us as investing in any company that improves the healthcare system, we can do that by investing in a company that actually provides care itself. Or it could be a to a services provider or a technology provider to those care providers, or it could be anywhere else in the support ecosystem around healthcare. So there are just a tremendous amount of different ways you can support the growth of building great healthcare companies.
Patrick: Well, I think what’s great about what where your focus is, with the lower middle market is, you know, my belief is that there are so many of these lower middle market companies under under 30 million under $50 million in transaction value that they don’t know where to go, when they reach some inflection point, and they’re too, too small to be big, but too big to be small. Where do they go next. And if they don’t know about organizations like Council Capital, then they will default and look to a financial institution. Or even worse, they could just surrender and capitulate to a strategic that doesn’t necessarily have their best interests in mind.
And so the more people can understand and learn about Council Capital, and all the resources you bring to bear for that specific class of business, I think is is fantastic. The issue though, when we look into health care, which is different from any other business, because you’re dealing with people’s lives, people’s health, okay, and so there’s a different standard that they have. And you’ve mentioned it a couple times already, but talk about the paradox out there of, you know, making an investment in healthcare that is efficient and profitable, without sacrificing quality of care. How do you balance that?
Grant: I don’t look at it as necessarily a balance, the way we look at it, is that we start by saying, where is healthcare going in 10 years? We then back away from that and say, what does that mean about the best starting place for us today? What kind of company should we be investing in. And then we look for companies with several attributes, it starts with, they have to be if they’re a care provider, they have to be providing great care if they’re a service provider, they need to be providing great support services. And if they’re a technology provider, they have to provide great technology. Once we understand that they are doing what they are meant to be doing great, then we look at the unit economic model and their ability to scale. And it’s an end rather than an or it has to be that they have both.
Once we have that, we look at it and we say what the entrepreneur printer has done is the most difficult part we believe, and that is to start something up and create something with great quality, a good unit economic model and limited compliance risk. And then the way we’ve built Council Capital is to be able to support them in scaling it from there, which oftentimes because they’ve built their capabilities around that first part of building a company, what we’ve done is we’ve said, what do we need to do to one identify those kinds of companies and then support them in their growth. And so the way that we’ve built the council model has been to specifically help support those companies, wherever they need it within growing from there up to a company with more scale, and so that includes several elements. One part of that is the CEO Council.
Which, just going into that a little bit more deeply, we’ve got 34 of them. These are people who have generally built very large successful valuable healthcare companies, billion dollar healthcare companies, the who’s who of their respective industries. In in healthcare, a lot of people have said, well, you’ve got the LeBron James and the Michael Jordan’s of, and then they named their individual sub specialty. And what we do with them is they have invested more than $140 million of their personal capital into counsel into our funds. So they are directly investing into, you know, the entrepreneurs business. So if you think about that, relative to having an advisory board or something, you know, where somebody doesn’t really have skin in the game, the CEO councilmembers have real skin in the game. And then they’re motivated to help that entrepreneur that company to scale.
So there are a variety of ways in which they help us with that, whether it be strategy on the board, helping with connections, relationships, basically helping the company punch above their weight class, so that you can take something with great capabilities, but enable them to behave as if they were a billion dollar business get the credibility of as if they were a much larger business. So we’ve done that with the CEO Council. And then, you know, we are we’re always evolving our business. And so what we said is, what else can we do, as it relates to building capabilities to help support these these businesses in their growth. So we built a value creation function that, in addition to the CEO Council, also builds brings a whole lot of other capabilities. So it, it helps people scale their human resource function, their finance function, their technology function, etc.
And we have a lot of very simple case studies to be able to demonstrate to people the kind of value that that has, in terms of helping a company really grow and scale in the right way. So, you know, a lot of times, small companies, as they scale, they lose their quality, quality of care, etc. And what I find when I speak to entrepreneurs, is they’re often worried about partnering with somebody, because they don’t want to see a dilution of the quality. Whereas what I think we can demonstrate to them is that we will help them to solidify that quality, and ensure they don’t lose it as they scale. And that, to me is the beauty of building a great, valuable, scalable company is that you want to hang on to what was special, when the company was small, great clinical quality, great service quality, great technology quality, and figure out how you scale that which is, is different than what you do when the company is small.
Patrick: I think one of the things that you cannot understate the value of what your bringing with with that counsel model is that and again, we’re dealing in healthcare, as you’re growing, you’re dealing with institutions out there as prospective clients or opportunities or whatever, who better to get access to those institutions, than members of your council who they’ve got credibility, because they put their own money behind these ventures, they’re not just speaking it up. And that eliminates a lot of obstacles. So if anyone out there listening today is considering, you know, making a move, I’ll tell you that a resource that Council Capital brings to the table that is literally unmatched out there. And I think that’s just terrific.
Grant: Patrick, to that point. Healthcare is an enormous industry, but in some ways, it’s quite small. And so just to help people understand what that CEO council really represents, those 34 CEO council members plus our strategic investors, so all of those are investors in our funds. They directly represent over 60% of the managed care lives in America. And over 60% of the for profit hospital beds in America, similar statistics in behavioral health, a range of other sub sectors within healthcare.
But what that really means is that if there’s a relationship that the company needs, we are going to be able to access them directly through our investor network. And our investor network is really leaning on our credibility. They’re looking at us to be the stamp of approval for the company we invest in because their reputations on the line, and because we haven’t violated that trust that we have with them are investors, it means that that credibility goes a long way, when they stick their neck out their own reputations on the line to go to bat for a small company.
Patrick: Let’s underline one other thing about this. And this is just an undeniable fact. Let’s talk about the importance of Nashville, Tennessee, in the healthcare world.
Grant: Yes, Nashville really is the biggest healthcare market in the United States. I always thought that it was big when I lived elsewhere. And then I came to Nashville, and I realized that was much bigger than I’ve previously understood. It’s also well organized, which means that you have a path to navigate the system. So what we found is that we can invest in companies around the United States, and then give them access into Nashville and what that gives you access to is not only the biggest market within healthcare in the United States, but Nashville companies often have the benefit of working with each other, which means that you can avoid mistakes, figure out what the right approaches to doing things are often. And so you really get access to a lot of that, you know, that thought capital
Patrick: Well then, tell us Grant, give me a profile of your ideal target. What are you looking for?
Grant: Well, we really want a business that is great at what it does. So whether that’s great clinically great service, great technology, that they have a good unit economic model, they have to be going in the direction that we believe healthcare is going. So I often look at people ask me, what’s the difference between venture capital and private equity, for example, and the what what I respond with is, oftentimes venture capital is looking at the right side of change in healthcare, but they are looking for things that might work in 10 years. And not all of those things are going to work now. So the success rates going to be be lower, which is fine, because that’s part of their business model, the way we look at it, in terms of what does right side of change, mean for a private equity fund investing in the lower end of the the middle market in healthcare is that we want to invest in things that represent the future of healthcare, but they have to have business models that actually work today.
And therefore, you’ve got a company that has products that they’re selling today, solutions that they’re selling today. And they can be profitable, and they can grow it today. But as the winds of change pick up, then they’re just going to have more and more wind at their back. And so it’s going to accelerate their growth over time. But it’s a very important distinction, in terms of what we look at, relative to what a lot of other great healthcare funds might be looking at, it’s just a different focus. While markets, clinical quality, etc, are important and table stakes. What really enables us to be successful with these businesses, is having great leadership that we trust. So the quality of the management team is really important.
We’re not looking at people through necessarily a traditional resume based approach, we’re really looking at them as what capabilities do they have to take this company from, where they are now, going forward, and we need to be able to trust them with that. And so increasingly, what we found is that we can back people up, they may not have been there, done that on every single element of what we need them to do in the future. But as long as we feel that they are really capable individuals, then we can support them in a lot of the ways that they want support going forward. You know, we never want to run companies, but we can create that a toolbox that we give them access to. So that they can help themselves to the toolbox to really help them scale their own business. So, you know, great leadership and having a great relationship with that leadership is critically important for us in a deal.
Patrick: When you’re looking at investments and acquisitions in in healthcare, you know, everything can fit everything can look right. But you know, these deals don’t happen in a vacuum. And so there’s always risk involved. And a lot of the, your counterparties are probably first timers in the M&A world. And so they get the experience very new experience of learning about that risk and how it applies to them personally, they can’t hide behind the corporate veil. They are financially at risk to a prospective buyer. In the event something blows up post closing that even the best diligence just didn’t pick up. And you’ll have your seller target, arguing, hey, I can’t tell you something or be held responsible for something I don’t know, I told you all I know.
And contrary, buyers gonna look and say yes, but we’re investing 10s of millions of dollars, that you have a perfect memory. And so, you know, there is going to be indemnification agreements, there are going to be these tools out there to transfer risk, and so forth. And that can introduce a bit of stress and tension between the parties where it didn’t exist before. Because of that, and it’s just the the issue of fear of you know, those types of losses. I’m very proud that the insurance industry has come in with a product to transfer that risk away from the parties. And it’s called rep and warranty insurance, where the insurance company essentially looks at the seller reps, compares the seller reps with the buyers diligence of those reps for accuracy, and then makes a decision says, hey, for a couple bucks, I’ll tell you what, we will take that risk that indemnification obligation away from the seller.
And we will take it so that if something does explode post closing buyer, you have peace of mind that you will recover, we will pay the pay the loss for you seller, you get a clean exit, it’s been a rapidly moving product that has now come down to the lower middle market transactions, which is very welcome news. I’m curious grant because this only became available for sub hundred million deals in the last 16 to 18 months. Good better and different. What experience have you and Council Capital had with rep and warranty insurance?
Grant: We’re not as experienced as a lot of our much bigger private equity brethren, with respect to rep and warranty insurance, but that’s really because it was serving a much larger market. We’ve since been paying attention to it because we’ve realized that it is suitable to the small you know, the smaller end of the market, which is where we play. And so we we look at it as as something to consider on whatever deal we are looking at. And it really is just going to depend on the facts and circumstances of the deal. But it does give you the ability to be able to both close on the deal in the manner that we need to and give the seller the ability to take more money off the table up front. And without us really giving up much in the process. So I think it can be can be a great way to navigate a potentially significant issue between a buyer and a seller.
Patrick: Yeah, I think it’s a case by case it’s maybe not a fit for every single deal out there. The one thing is welcome news is healthcare was one of the sectors that the rep and warranty industry did not like to deal with. It’s heavily regulated. And there were a lot of other exposures that the underwriters just didn’t know what I’d get their hands around. And I think that over time with great experience and a little bit more understanding, particularly getting the right brokering to negotiate with the underwriters and show them that there are exposures that aren’t really relevant to every healthcare company.
There are ways that your solutions can be found. And this is, you know, consistent with one of the things that you came up with where you don’t have the dilemma of, you know, profitability versus quality of care, you can have both. And I think that’s one thing that’s encouraging about this sector with with insurances. things continue to develop in favor of the policyholders out there. So we’re very, very, very happy about that. Grant, as we’re getting into, you know, the first half of 2021, now times flying, I think it’s safe to say we’re looking at the beginning of the end of the pandemic. Give us give us perspective, from what you see, what trends do you see in M&A either for Council, Capital, healthcare, the economy at all. What do you see out there for the rest of the year?
Grant: Well the market, in healthcare for deals that really are in these sectors that we view as right side of change in healthcare is very hot. So there, I think what the pandemic did was it highlighted the vulnerabilities in healthcare, you know, what kinds of companies could have issues and people focused on you the areas that that had strength. A lot of those are markets that we’ve already been invested in, and will continue to be invested in. So it just means there are more funds out there looking for investments in those markets, which leads to more competition. I think the key for us, is making sure that we find ways to adequately communicate what we are like as a partner, you know what we bring to bear and let the entrepreneur then, you know, determine how they would compare us against any other alternatives which we which we welcome.
Patrick: Grant, how can our audience members find you and Council Capital?
Grant: Best way is through the website and really through our leader of business development, Jon L’Heureux, who’s also his contact information is is on the web on the website. And we’d love to meet entrepreneurs who are growing great healthcare businesses.
Patrick: Yeah. And I’d say you’re yours is one of the better websites out there. I just looked at websites from private equity firms from five, six years ago where it was, it was almost password protected, and they had so little information on there. Now your organization is easy to find easy to navigate, easy to reach out. So I think that’s user friendly is good because you do not want to be the best kept secret in private equity, particularly for healthcare. Grant Jackson, been an absolute pleasure. Thanks again for joining me today. You have a great day.
Grant: Thank you, Patrick. Thoroughly enjoyed it. Have a great day, too.