On Tuesday, April 18th, Gilmartin hosted its inaugural Private Company Showcase, highlighting innovative private companies across various healthcare verticals. To kick off the day of presentations and fireside chats, Gilmartin Group Managing Director, Vivian Cervantes, moderated a panel focused on navigating today’s liquidity environment. The panel featured insights from notable thought leaders in the space with contributions from Greg Garfield, Senior Managing Director at KCK group, Bruno Stembaum, Managing Director at Bank of America, and Hutch Corbett, Managing Partner at Armentum Partners.
Moderator: Vivian Cervantes, Managing Director, Gilmartin Group
Guest Speakers:
- Greg Garfield, Senior Managing Director, KCK Group
- Bruno Stembaum, Managing Director, Healthcare, Bank of America
- Hutch Corbett, Managing Partner, Armentum Partners
Key Takeaways:
The market for deal-making remains open, yet macro uncertainties and sentiment continue to dampen activities, with a shift to selectivity in investments
Compared to the height of deal activity in 2021, investors have become increasingly selective on new investment ideas. Investors today are slower and more considerate when making an investment decision. In general, funds continue to focus on their current portfolio companies needs, how they deliver on milestones and efficiently scale the business. Despite current selectivity, the deal-making market remains open, with companies encouraged to be more proactive and prepare for financing activities with 12-18 months of cash runway vs previous 6-9 months.
“Marking Milestones” mindset replaces “Growth at all Costs”
Investors mindset has shifted to sustainable or quality growth, as they evaluate investment opportunities that well-manage the typical tension between investments to be made to drive to a target milestone, with a focus on capital efficiency. Prudently managing the cash burn while executing on key initiatives and milestones will help a company stand out as an attractive investment opportunity. If a company needs to spend, it is important to prioritize what will be most impactful.
Cash burn, execution and keeping an eye on profitability targets
Given the heightened focus on fundamentals and financial discipline, the line of sight towards cashflow breakeven has become even more important. For management teams, it is vital that they understand and clearly communicate how they plan to get to that inflection point of their business, in addition to other catalysts. Investors generally want to see the capital they invest fuel the commercial activities geared towards growing the business organically. If the company effectively uses the invested capital by showing a track record of execution upon their communicated plans for growing the business, their credibility increases among investors.
Flexible evaluation of financing structures and valuation
In the current environment, there may be opportunities for both debt and equity structures. Prior to the IPO slowdown, MedTech companies were going public with an average of $30 million to $50 million of debt on their balance sheet (approximately 1x revenue). Given the preference for new equity capital to be deployed into the business vs repay existing debt, evaluate opportunities for debt refinancing. In terms of valuation, IPO valuations of 8x to 10x 2-year forward revenue may revert to historical averages of 4x to 6x 1-year forward revenue. While such multiple compression may be difficult, a potential silver lining to a down round is the completion of a financing that realistically gives the company resources to step-up to upcoming value milestones.
Be ready
It is hard to predict when the market will turn, but when it does, it is expected to turn quickly. Therefore, be ready. There were many healthcare IPOs that were put on hold beginning late 2021, with a goal of going public when the window reopens. Management teams in this position must be prepared further in advance and be able to clearly communicate their financing needs and goals.
In conclusion, companies should proactively manage their financing needs, evaluating opportunities for both debt and equity, with a focus on capital efficiency. Given ongoing multiple compression and expectations for a return to historic average multiples, valuations may continue to face pressure, and companies should plan accordingly for a more efficient capital allocation. Ultimately, there is a lot of capital waiting on the sidelines, ready to be deployed.
To register to watch a replay of the webinar, please visit the Gilmartin Group Private Company Showcase website here.
Gilmartin Group has deep experience working with both private and public companies across the healthcare space. For more information about how we strategically partner with our clients, please contact our team today.
Co-Authored by: Jack Droogan, Associate, Gilmartin Group and Steve Yeung, Associate Vice President Gilmartin Group