It can be tempting for companies to overinvest to scale quickly, but that enthusiasm can come back and hurt.
says John Michael Reese, president and director of General Atlantic, a New York City-based private equity firm focused on investing in health care. Reese will share how healthcare companies in particular can scale more responsibly while avoiding common pitfalls.
Prior to joining General Atlantic in 2017, Reese was an associate at GTCR in Chicago, where he focused on investments in the healthcare sector. He began his career as an analyst in the Leveraged Finance Group at Bank of America Merrill Lynch.
How do you support the healthcare companies in your portfolio?
Our Board of Directors is focused on helping our CEO and management team balance organic growth and short-term profitability while minimizing downside risks, including execution risk, macro risk, security and compliance risk, across our portfolio.
The companies we work with often have organic sales growth of 30% or more, and may or may not be profitable, or may be at breakeven free cash flow. As a result, execution risk increases, and our job is to ensure that the company does not collapse under the stress of sustaining, if not accelerating, high growth.
Most recent board discussions have focused on the trade-off between investing in three- to five-year growth opportunities and protecting short-term performance. The answer usually lies in management and board belief in the consistency and scalability of strong unit economics, the cost of customer acquisition and expansion, and the scalability and bandwidth of existing teams.
How do you alleviate some of the toughest challenges for your portfolio companies?
General Atlantic takes a hands-on approach to working with portfolio management teams, even in non-management roles. We have a complete “library” of resources from our Growth Accelerator team, which we make available to our portfolio companies free of charge, spanning key areas of expertise such as human capital, technology, big data/analytics, pricing and go-to-market, and marketing, tailored to the wants and needs of our management teams.
At Marathon Health, this value-added approach helps drive the company's advanced primary care model and distribution efforts to meet growing demand from self-insured employers without compromising clinical quality or financial sustainability.
As for challenges, from 2020 to 2023, employers' healthcare efforts slowed as HR leaders focused on restructuring remote and office policies. For Marathon's in-person primary care model, this trend temporarily stalled its sales and development pipeline.
In response, our management team and board accelerated our investments in virtual care. This has enabled us to serve patients during a period of disruption when emergency access to both COVID-19 and non-COVID-19 services is essential.
The market recovered in the second half of 2023 as employer policies stabilized and there was a return to primarily office culture. Because our core customers operate in areas where face-to-face work is essential, we have maintained high retention rates and built an even stronger case for advanced primary care.
Partnering with a growth-oriented private equity firm like General Atlantic allows us to make these strategic investments with agility. We prioritize long-term growth over short-term returns and focus on revenue and profit goals over a four- to five-year time horizon.
How are your portfolio companies responding to the opportunities and risks of emerging technologies?
When it comes to emerging technologies, there is currently a lot of buzz in the healthcare industry regarding the adoption and use of generative AI. As growth investors, we are fortunate to be exposed to a wide range of players and platforms, with an eye toward both commercial partnerships and direct investment opportunities with our portfolio companies.
As board members, it is important for us to stay abreast of technology developments and inform potential use cases and partners within our company, especially provider-centric healthcare companies. We believe that models of care and technology that focus on prevention, provider support, and proactive care have tremendous untapped power to deliver higher quality, consistent care, and reduced administrative burden.
What are your strategies to ensure the resilience of your portfolio companies?
Resilience comes from balancing growth with sustainable unit economics. GrowthMany companies in the healthcare sector, particularly in areas such as digital health and consumer health, overinvested in growth at a time when capital markets were experiencing wild volatility as interest rates soared and capital became more expensive.
On the other hand, these players may not have proven their right to win long-term without attractive, defensible margins and a path to profitability. To varying degrees, some of these companies have had to make tough decisions and reduce resources. Some companies were forced to completely downsize their operations or undergo “fire sales.”
More resilient companies likely used only moderate, if any, debt financing to finance growth and ensure sufficient cash reserves to weather tougher times.
Our management team closely monitors trends related to our balance sheet and future capital needs and growth, and proactively makes course corrections as necessary to ensure that the Company's capital structure is optimized for opportunities, regardless of changes in the overall economy.
