The Anatomy of a Deal: How Medical Guardian Got Comfortable with Private Equity and Picked Water Street
“Our best days are ahead of us.” - Geoff Gross, CEO, Medical Guardian
In early 2020 it looked like Geoff Gross could take a pause. Having just closed a credit refinancing deal, he could take a breather before using the fresh capital to lead his PERS company Medical Guardian, which he founded in 2005, to new heights. Little did he know that the breather would be short-lived.
Exactly one year later, Medical Guardian announced it obtained a growth investment from Water Street, a Chicago-based private equity firm focused exclusively on the healthcare industry.
It’s a big deal by any standard, but what makes the timing even more remarkable is that it was done in the shadow of a global pandemic and the resulting economic disarray.
So how exactly did this deal come together, what did each company see in the other to take on the partnership, and what opportunities are they exploring as the PERS industry finds itself on the cusp of a new age?
Let’s go back to early 2020, shortly after Medical Guardian refinanced its existing debt facility, to find Gross and his top advisors strategizing on next steps. John Mack, the Imperial Capital banker who had led the debt refinancing deal, challenged Gross and the Medical Guardian team. He proposed entertaining the idea of private equity. It was something Gross was certainly aware of, but had not seriously considered during the prior 15 years while he was building his business. Additionally, Gross had no interest in giving up control of his business.
“I love guys with good entrepreneurial spirit,” said Mack. “Not long into 2020 I said, ‘Hey, it’s probably time to think about bringing in some institutional equity support to the business.’" Mack continued, “Yes, you’re going to have to sell some amount of equity in your business, but you’re going to create a much bigger business as a benefit of the bargain. And you’re going to bring in some partners who can help you achieve your objectives.”
Gross contemplated the move, and ultimately became comfortable with the concept if it was with the right partner. “I’ve been in business for 15 years and we've never had any institutional equity in the business. For many years, a large credit facility was instrumental in supporting our growth. But as we focus on penetrating the healthcare segment of the market, adding additional services, and just looking at overall acquisitions in the marketplace, we felt it was the right time to do it,” said Gross.
When considering private equity investment, a more traditional path is for a private equity firm to take on a controlling interest in a company. A move that could involve adjusting the leadership structure, modifying goals, and sweeping changes. It was not a path Gross was particularly interested in.
“It won’t surprise you that Geoff wanted to keep control of his business,” said Mack. “We were targeting minority investment. It’s a subset of the private equity world – we had a very healthy process which resulted in a number of people putting forward term sheets, so we had the ability to look at the different terms and conditions and the nature of each particular bid.”
Along with catching the PERS market in a massive growth trend because of aging baby-boomers and COVID, Mack also knew Gross’ vision for the future of Medical Guardian would make him an attractive partner to future investors.
Why Water Street?
Soon the strategic healthcare investor Water Street, also founded in 2005, emerged as the ideal partner for Medical Guardian and Gross.
“Water Street’s one of the top healthcare-focused, private equities in the country, with an incredible track record around different healthcare services and healthcare businesses. From a strategic perspective, out of all the groups we were considering, it was clear that they would add the most value from a team perspective, a planning perspective, a capital commitment, and overall knowledge base around growing our healthcare division,” said Gross.
It turns out, the PERS industry caught the attention of Water Street investors as far back as 2010, but it was going to take the right company, and the right leader, for the laser-focused firm to invest.
“We had been very interested in this particular space and had been doing quite a bit of research and meeting with a lot of different organizations,” said Water Street executive Kelly Zitlow. “When we met Medical Guardian, we were most impressed with the company’s growth trajectory, which is a result of its innovative product and service capabilities, as well as its strong management team.”
She went on to say, “We’re excited about partnering with Medical Guardian around three key initiatives. First, to continue expanding in the company’s core markets where seniors and their family caregivers choose their own PERS; second, expanding into healthcare markets where PERS can be bundled with other health services by the health plan, home health or other health provider; and third, developing new technologies and integrations for PERS in the rapidly expanding and connected health ecosystem. We will work together to pursue strategic acquisitions, partnerships and additional growth initiatives to achieve this.”
Looking to combine Medical Guardian’s subject matter expertise in the PERS market, with Water Street’s deep bench of professionals from the healthcare sector, the partners quickly aligned.
“Water Street likes to be the market leader in any industry they go into,” said Gross. “And that was very appealing to me. It aligns with my goals. It was clear to me that their approach is very thoughtful, they’re very smart, their values aligned with mine and the organization’s.”
“I hit it off with their group. I feel they do business the right way,” said Gross.
Water Street agreed that the collaboration also felt right from the start.
“From the beginning there was a really great, robust exchange of ideas and excitement about pursuing acquisitions to grow the company and discussing some organic initiatives that we can help invest in. It’s a really strong collaboration from day one,” said Zitlow.
Looking at the opportunities ahead of them, neither Gross, Zitlow or Mack could deny the indisputable fact that the industry was shifting, progressing, and evolving on the back of a pandemic.
COVID As An Accelerant
“COVID has been a catalyst unlike anything this industry could have ever experienced,” said Mack. “Everybody’s been forced to embrace what technology can do, anything from Zoom calls to medical alert technology.”
“That change in mindset is not temporary. That’s permanent and that’s a catalyst that might’ve taken this industry 10 years to come by if it just gradually evolved its way into it,” said Mack.
He continued, “All of the players in the industry have, by and large, seen an increase in business. You’ve got these very nice attributes coming together for this sector that I think we’re at the very beginning of a significant focus from the investment community on this sector.”
Gross echoed, “It’s a very important inflection point in the future of the PERS industry. COVID has only enhanced the opportunity available to protect more seniors in this country, who all have the goal of aging in place longer.”
He continued, “And with so many affected by human-to-human care services, such as senior living, and home care, we believe that technology needs to step in and play a role in keeping aging Americans safe and protected at home. So we think it’s the right time to achieve even greater growth than we already have, and having the capital to do that, through both organic and acquisition growth initiatives, couldn’t come at a better time.”
The Process Makes You Stronger
While it was an organized process from start to finish, there were still unexpected moments Gross encountered over the past year while closing the deal.
“Geoff will tell you, but they were scrutinized at a level he never could have anticipated, well beyond anything he’d been through in previous debt financing, due to diligence efforts. Every part of your business is subject to scrutiny,” said Mack.
Looking at the company spotlight with a glass-half-full perspective, Gross said, “I was surprised at how much the process to bring on an equity partner improved our business in a short period of time. A comprehensive diligence process makes your team look at the business harder, come up with a better plan, and it ultimately positions us to execute faster and more efficiently than we would have otherwise.”
Partnered with the ideal collaborators, an influx of investment, and armed with a laundry list of potential opportunities, Gross is looking to the future.
“I’m very encouraged by it. I’m more energized about our business than I’ve ever been. 15 years ago when I started the business I really felt like I was at the right place at the right time, and I feel even more so today.”
He goes on to reflect on the opportunities ahead for both Medical Guardian and the PERS industry at-large, “We’re still a very under-penetrated category. The only reason is because of the continued negative perception of our service, and the products and services have not evolved at the speed that customers have desired.
Now in recent years we’ve made up a lot of ground. As a brand our focus has been on resonating with customers on a deeper emotional level, and creating products and services that are innovative, that have additional features, that add a lot more value for the customer. So it’s a pretty exciting time to be here.
Our best days are ahead of us.”