Private_Equity_Overview_Final_Updated.pptx

Private Equity Overview In Medicine

1. Private Equity Overview • Alternative asset class used primarily for investing in publicly or privately held businesses • Generally organized as partnerships - Outside Investors – Limited Partners - Private Equity Firm Management – General Partners • Capital raised from various institutional investors and high net-worth individuals • Acquire / Invest in public or private companies through debt and cash – Leveraged Buyout • Generally hold investments for a 3 – 7 year period before selling / exiting • Can be categorized according to multiple sets of criteria - Investment size, fund size, geography, etc.

2. Navigating the Private Equity Process As an owner or executive, chances are that you have received numerous emails or calls from private-equity investors wanting to talk about your business. Valuations across healthcare and almost all subsectors within are near all-time highs as investors continue to look for quality assets with strong tailwinds and support. It is also likely that some of your friends or colleagues may be involved in a transaction with an investor right now. You may also have second-hand experience with private equity deals or other knowledge of transactions, but no transaction is the same. Today's presentation is designed to answer the following questions: • What is private equity and why do they keep calling and emailing me? • What do investors look for in a company? • How are companies valued by investors? • What are the advantages and disadvantages of partnering with private equity? • How do I maximize the value of my company? • What does an investment or sale process look like, how much work is it? • Who is on my side in a transaction and what can I do if I have questions?

3. Types of Private Equity Funds • Financial Investors - Hedge Funds - Venture Capital Funds - Private Equity Funds - Mutual Funds • Growth Equity • Family Office • Mezzanine Financing • Distressed / Special Situations • Buyout Fund

4. Private Equity Value Proposition Ideal Acquisition Target • Stable, recurring cash flow • Low capital needs (capital expenditures and working capital) • Favorable industry trends • Multiple avenues of growth • Strong management team and opportunity to add value Typical Transaction Strategy • Acquire a company at a fair value using financial leverage (debt), execute growth plan, mitigate risk factors, and sell within 3 to 7 years • Target returns are 20 – 30% depending on the size and risk profile of the investment Example Acquisitions Efficient Capital Structure with No Growth • Assets / Purchase Price: $100M • Debt: $60M • Equity: $40M • Exit in Year 5: 18% IRR Efficient Capital Structure with Growth • Assets / Purchase Price: $150M • Debt: $60M • Equity: $90M • Exit in Year 5: 28% IRR

5. Key Challenges for Healthcare Operators Changes in the healthcare landscape is making it difficult to operate companies, creating a need for owners to consider strategic alternatives. Market Consolidation • While consolidation is occurring at the company level, it is also prominent in other healthcare verticals (payors, health systems, suppliers, etc.) • The increased consolidation has impacted owners by reducing their negotiation power with key counterparts • As consolidation trends continue, owners will look for opportunities to regain negotiating power through scale, while also attracting a larger pool of potential customers Pressure from Vendors / Payors • Owners are seeking opportunities to build scale in order to create leverage during contract negotiations • New, vendor contracts and innovative reimbursement models create additional challenges for owners, including increasing administrative burdens • Bending the healthcare cost curve is a priority for all major payors and vendors, creating profitability pressure across all healthcare sub-sectors Regulatory Changes • Changes in the regulatory environment lead to significant compliance and administrative burdens for independent companies • The more time and attention owners spend dealing with these changes, the less time spent with customers • Independent owners will need to find ways to address these growing costs & burdens, while maintaining a high quality of customer care Capital Needs • Owners need to keep pace with changes in technology and equipment, in order to provide the highest level of service to their customers, with regular capital expenditures • As other industry headwinds continue, capital investments will be required in order to maintain profitability • Private equity investment firms are poised to execute on strategic partnerships & serve as an owner’s capital partner

6. The Benefits of a Private Equity Roll Up Private equity investors are seeking investments that can generate value accretion over time through a combination of both organic and acquisitive growth. • Expand Service Offerings Private equity investors will seek to add additional ancillary services to the company, creating new revenue streams for owners • Generate Operational Synergies As new investments are made, integrations are completed and best practices are shared across groups in order to create operational synergies across the portfolio • Make Additional Acquisitions Once a platform is in place, private equity groups will provide capital and expertise in order to complete add-on investments, adding size and scale to the portfolio • Make a Platform Investment Private equity groups look to make entry into a market through a platform acquisition; the ideal target is one of size, but also one with a base of best practices & sophisticated operations

7. Valuation Framework Income Statement • Revenue Less: Cost of Goods Sold • Gross Profit Less: Operating Expenses • EBIT Add: Depreciation & Amortization Add: Adjustments • EBITDA Quantitative Value Drivers • Margin Profile • Growth • Overall Size & Scale • Customer Concentration • Cash Conversion • Leverage, Liquidity & Solvency • Cost of Financing EBITDA (Serves as a proxy for annual potential cash flows without the constraints of the company’s current capital structure or cycle of CAPEX) Multiple (Determined as a function of buyer expectations of risk-adjusted future cash flows) Enterprise Value

8. Additional Qualitative Value Drivers Key Value Drivers • Market - Large Market - Growing Market - Niche Market - High Barriers to Entry • Team - Strong Management Team - Clear Vision, Mission & Values - Quality Employees - High Employee Retention • Performance - Stable & Predictable Cash Flow - Sizable & Growing Market Share - High Margins Relative to Industry - High ROIC • Controls - Documented Strategic Plan - Key Performance Indicators - Strong Financial Controls - Documented Operational Procedures • Risk Management - Sustainable Competitive Advantages - Customer Diversification - Proprietary Technology - Exit Strategy

9. Key Points to Consider in a Private Equity Process Internal & External Considerations Internal Considerations • Owner Energy • Business Performance • Business Lifecycle • Personal Needs of Shareholder External Considerations • Market Maturation • Industry Outlook • Capital Markets • Legislative Impact What is the 'correct' EBITDA for Valuation • Typically, privately-held companies distribute excess earnings to shareholders either at year-end or on an interim basis - Going forward post-transaction, shareholders will most likely be converted to a base salary plus bonus compensation package • Determining actual post-shareholder compensation EBITDA that a buyer would calculate versus the EBITDA a seller derives is challenging - There is a skill in calculating the difference, so everyone is on the same page before moving forward with a transaction Potential Adjustments to EBITDA • One-time or non-recurring items • Personal expenses running through the income statement • Pro forma events such as new hires or departures, new locations opening or closings, etc. • Correctly accounting for ancillary operations that will not continue with the company post-transaction • Accrual basis versus cash-based accounting systems adjustments • Potential payor and vendor mix adjustments

10. What We Are Watching – M&A 1. Omicron Variant • Uncertainty is beginning to rise across the economy, following the recent surge in coronavirus cases and reimposed restrictions across the world • Continued staffing issues remain among many small and middle market businesses • Despite Omicron variant concerns, record highs in households’ savings, low unemployment, and low interest rates should promote individuals to spend at steady rates 2. Financing Mix • Stock financing has been critical for many large transactions in 2021 • Many strategic acquirors have used stock to fund larger deals, preserving debt capacity for smaller, bolt-on acquisitions • As the number of newly public companies rise, we anticipate seeing additional M&A activity financed with equity or a mix of stock and cash • While red hot early in the year, SPACs seem to be cooling as a financing vehicle 3. Valuations • With high levels of dry powder and corporate cash levels, early data points to EV / EBITDA multiples increasing by around one turn in 2021 for corporate and strategic deals • If the economic recovery continues, the median multiple may climb back to 10x or higher by year-end 4. Taxes • In addition to proposing an increase in the top income tax rate from 37.0% to 39.6%, the Biden Administration is proposing to increase the long-term capital gains rate from 20.0% to 28.8% • Many business owners evaluated sale opportunities in an effort to lock-in the current 20.0% capital gains tax rate • If final rates settle as expected there will continue to be ongoing interest in M&A across classes

11. The Proliferation of Private Equity Private Equity Deal Activity Has Accelerated Over the Last 25 Years • Graphs showing deal count and percentage of sponsor backed deals over time Active Global Private Equity Fund Count Over Time • Graph showing the increase in the number of active global private equity funds Private Equity AUM Continues to Grow • Graph showing the growth in assets under management (AUM) for private equity

12. Process Timeline and Timing Considerations PE Process Timeline • Preparation • Initial Marketing • Secondary Marketing • Due Diligence Company-Level and Personal Timing Considerations • Market demographics are positive • Private equity dry powder is at an all-time high - There is ~$1 trillion in private equity capital raised and undeployed • Growing interest in healthcare companies - Acquisition multiples are near all-time highs - Multiples typically follow a cycle based on broader economic conditions • Evaluate whether selling now with lower EBITDA and a higher multiple could offset selling later with higher EBITDA and lower multiple - Current liquidity allows seller to take some future risk off the table • Retirement timing considerations - Most buyers will want the owners to enter into multi-year employment agreements Partnering with the right group will provide access to capital and increase future growth potential so their equity could be worth more in the future • Opportunity for multiple exits • Additional capital to grow the business organically and via acquisitions – larger businesses typically sell at higher multiples - Buyer could enhance back-office operations thereby allowing owners to focus more on the business rather than administrative functions • Greater size leads to more purchasing power with suppliers and hopefully, better marketing to attract more customers - Don’t want to be the 'last group standing' – as a defensive maneuver, want to avoid having the competition grow significantly and infuse significant marketing dollars into the local market while you are flat or growing at a slower pace

13. Considerations in Picking a Private Equity Partner Selling a company is a process. Choosing the right partner is an art. Key Considerations • Understand the Firm’s Investment Style - The private equity universe can be segmented into three broad investment styles: - Asset Managers – passive investors who take a hands-off approach - Advisory – active at the strategic level, sitting on the board, introducing to customers and vendors, but not involved in day-to-day management - Active Management – involved in day-to-day management, willing to bring in their own management team to supplement the current team • Shared Vision on the Strategy for the Business Going Forward - Is the PE firm growth, value or preservation of capital oriented? Is the firm prepared to invest additional capital to support strategic initiatives? • Realization - What is the strategy and timing of an exit? What has been their average hold period over the last 10 years? Is their fund incented by return on invested capital or IRR? • View on Financial Risk - Leverage can be a powerful tool in driving returns, but it can also be the downfall of a solid company. What is the firm’s view on the appropriate amount of leverage for the business? • Track Record in Similar Investments - Can the firm demonstrate through case studies the success, and yes, the failure of certain investments. What factors led to each? • Management Incentives - PE firms typically set aside a management incentive pool of 10 – 15% of the equity in the company. What is the view of the PE firm with respect to a management incentive pool? • Personal Chemistry - Are these people that you will want to work with? References are critical

14. The Vast Majority of M&A Activity is Middle-Market The multi billion-dollar transactions grab the headlines, yet deals of $500 million and below represents 94% of deal volume over the past decade. • Graph showing M&A activity by size from 2010 to 2021

15. Valuation Framework Income Statement • Revenue Less: Cost of Goods Sold • Gross Profit Less: Operating Expenses • EBIT Add: Depreciation & Amortization Add: Adjustments • EBITDA Quantitative Value Drivers • Margin Profile • Growth • Overall Size & Scale • Customer Concentration • Cash Conversion • Leverage, Liquidity & Solvency • Cost of Financing EBITDA (Serves as a proxy for annual potential cash flows without the constraints of the company’s current capital structure or cycle of CAPEX) Multiple (Determined as a function of buyer expectations of risk-adjusted future cash flows) Enterprise Value