Big-name health systems like Intermountain Healthcare, Trinity Health and Memorial Hermann are behind a Nashville-based private equity firm’s latest $300 million fund.
Heritage Group just closed its third fund—almost $100 million larger than its last one—and says it will invest the money in healthcare companies tackling the industry’s most pressing challenges.
Roughly 70% of the $300 million that’s been committed comes from health systems and insurers, including Horizon Blue Cross and Blue Shield of New Jersey. Heritage Partner Paul Wallace said that ratio is on par with the firm’s prior two funds.
“Being in Nashville, we have significant and longstanding relationships with a number of senior executives that we have grown up with professionally, if you will,” he said.
The pandemic has dampened health systems’ operating margins by inflating their expenses and simultaneously drying up volumes. That’s driving not-for-profit health systems to lean more on their non-operating income, especially from investments and philanthropy, said Paul Keckley, a consultant and managing editor of the Keckley Report.
“That’s why I think the Heritage model is working: It’s getting another mechanism in place so they can make money below the line,” he said.
Making money is certainly part of it, but the bigger hope for health systems and insurers is that the companies Heritage invests in will improve their operations, Wallace said. A major focus area for Heritage is innovative Medicare Advantage models that accept risk in different forms.
“We think adoption of value-based models will be accelerating, so it is a priority of ours,” he said.
Not-for-profit Spectrum Health, a 15-hospital health system based in Grand Rapids, Mich., is another Heritage investor. Scott McLean, executive director of Spectrum Health Ventures, said just as important as getting a financial return is expanding the health system’s investment footprint and lowering its costs internally through the companies Heritage funds.
That said, Spectrum saw a significant return last year with Chicago-based 7wireVentures when its portfolio company, Livongo, merged with Teladoc in a deal valued at $18.5 billion.
“In 2020 we had a phenomenal year, and it did help,” McLean said.
Other investors in Heritage’s third fund include Advocate Aurora Health, Banner Health, Community Health Systems, Henry Ford Health System, Northwestern Memorial Healthcare and UnityPoint Health. The average commitment is between $10 million and $20 million over five years, Wallace said.
Heritage has managed to attract a lot of investments from not-for-profit and for-profit health systems and has been particularly adept at managing those relationships over the years, Keckley said.
“They do a good job of making sure there aren’t a lot of surprises,” he said.
Heritage spent the first two decades of its 30-year history as a holding company that built healthcare companies like ambulatory surgery centers and outpatient imaging centers in partnership with health systems, Wallace said.
Then just after the Affordable Care Act was passed, the company raised its first fund, said Jesse Bland, another Heritage partner. Initially, investors were mostly health systems. Over time, that expanded to insurers, he said.
“We don’t get this myopic view of one part of the healthcare ecosystem,” Bland said. “We’re getting a really holistic view of health plans, health systems and solution providers like Cerner and Cardinal Health.”