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Over 20 Years of Middle Market Investing



In this post, we will discuss Ironwood’s healthcare industry thesis, targeting four specific segments of the $4 trillion industry. Our approach to healthcare looks to marry secular trends with the firm’s expertise to build a portfolio of leading lower middle market healthcare companies. Ironwood invests junior capital to fund growth, changes in control, recaps and refinancing into successful companies with $20MM+ of revenue and $4MM+ of EBITDA. We co-invest in sponsor (both funded and independent) led deals as well as make direct minority investments in companies. For sponsors, Ironwood bridges the gap in a transaction structure, while for business owners our solution provides a less dilutive growth funding option.  

Healthcare within the U.S. is reaching a tipping point. The U.S. already spends more than two times the comparable country average on a per-capita basis1, yet as we’ll discuss below, individual demand is poised to grow. The result of this is significant investment dollars, across the full investment spectrum (VC to PE to public), flowing into the industry. Here at Ironwood, we are looking to be an active investor in reshaping the system to deliver better outcomes at lower costs.  

Let’s begin by outlining some of the industry trends shaping our thesis:

Aging demographics coupled with provider shortages – by 2060 there will be 95MM Americans over 65 years old, nearly doubling the 52MM in 20182. According to the Center for Medicare and Medicaid Services (“CMS”), the 65+ population spends on average three times more than a working adult and five times more than a child on healthcare annually, as they consume more frequent and complex services. However, the rising demand will be met by a continuously growing physician shortage, projected to reach 124,000 doctors by 20343

Shifting care to the optimal setting – historically, healthcare services occurred within a doctor’s office, hospital, nursing home and occasionally in the home. However, that is changing. An increasing number of procedures are occurring within Ambulatory Surgery Centers (“ASCs”) or Office Based Labs (“OBLs”), and patients are seeking the ability to receive greater levels of care in the home for longer, which is driving the demand for home healthcare. These shifts reduce hospital volumes, alter where physicians can practice and at what economics, and change the sales models for many medical devices and equipment.  

Implementation of value-based payment models – payment models are evolving from fee-for-service, where providers charge for each individual exam, procedure, test, etc., to a model that adds an outcomes-based approach to reimbursement, often referred to as value-based care (“VBC”). The result is providers now assume a level of payment risk tied to the patient’s ultimate outcome. CMS is leading the charge on this; however, commercial payers are starting to partner with provider groups to develop solutions, in particular within primary care. VBC models work by reimbursing providers a fixed amount tied to a procedure or disease, with the provider profiting by delivering care for less than their reimbursement. Much like insurance, this approach only works if a provider has a statistically large enough patient population. 

Consumerization of healthcare – on top of the changes cited above, patients’ expectations of their providers are shifting. Patients want online scheduling capabilities, telehealth visits, and the ability to text with their providers. In short, patients are looking for a tech company consumer experience from their doctors. At the same time, given the rise in high deductible plans, patients are paying more out-of-pocket for their care, which is forcing many to become more health conscientious and discerning about what tests / procedures their doctors suggest. These changes are creating demand for healthier lifestyles and altering how providers engage with patients.  

Combining these trends with our deep experience in manufacturing, business services, and environmental services, we are focused on building our portfolio in four major verticals: MedTech, Providers, Services, and Wellness. Below we highlight representative themes within each vertical we see aligning with our healthcare thesis and approach to investing.   


MedTech Sub-Verticals:

  • Outsourced Device Development
  • Medical Devices & Consumables
  • Digital Health
  • Diagnostics

MedTech as a vertical is well positioned to benefit from most of the tailwinds in the industry. First off, there will be greater demand for devices as the population ages and experiences declining health. Second, innovation will enable a continued shift in care location. Finally, novel treatments will enable doctors to deliver better outcomes to their patients.  

Given prior experience and deep manufacturing expertise, one area of MedTech we are actively exploring is the outsourced development and manufacturing of medical devices. Two such examples from our past portfolio are Memry Corporation, which designs, develops, and engineers nitinol components, and Katahdin Industries' subsidiary Precision Coating, a leading provider of Polytetrafluoroethylene (“PTFE”) coating for medical devices. The rise in transcatheter procedures is driving demand for nitinol components, given the versatility of the metal. A specific example is replacement heart values, where the use of nitinol allows for the valve to be compressed to fit through the delivery catheter and then regain its precise size and shape once in-vivo. We see continued opportunity to invest in companies, like Memry, that support the innovators within the MedTech ecosystem.  


Provider Specialties:

  • Outsourced Device Development
  • Medical Devices & Consumables
  • Digital Health
  • Diagnostics

The consistency, predictability, and fragmentation of physician practices have made it one of, if not, the most popular healthcare plays by private equity firms for the past couple decades. Anesthesia, dermatology, dentistry have all been at the forefront of PE consolidation. Scale enables providers greater leverage with payer negotiations, efficiencies in the back office, and allows doctors to spend more time practicing medicine. More recently, the establishment of scale is enabling the transition to VBC, as the model requires a critical mass of patients; this is especially true among primary care practices. Finally, as the non-clinical demands of doctors grow and patients’ expectations change, aligning with a group practice allows physicians to return their focus to clinical care.  

Our interest lies in specialties with larger cash pay exposure (e.g., dentistry, medical aesthetics) and practice areas at the infancy of institutional investment. One example is cardiology, which has largely been a hospital-based specialty, with >70% of U.S. cardiologists employed by hospitals4There are several factors influencing this employment dynamic. First, many cardiac procedures previously had to be done in an operating room setting or within a facility with an available operating room in the event of an emergency. Secondly, in the early 2000s, CMS adjusted reimbursement for cardiac procedures, requiring many be performed within a hospital. However, we are beginning to see a reversal in this trend. As minimally invasive procedures become standard of care and CMS looks to reduce cost, ASCs and OBLs are becoming approved procedure locations. This shift is reducing a cardiologist’s dependence on a hospital, enabling them to explore the opportunity presented by partnering with financial sponsors to establish independent practices


Services Sub-Verticals:

  • Outsourced Hospital Solutions
  • DME Distributors
  • Clinical Trial Services
  • Staffing (excluding physicians)

Our broadest sub-vertical is services, which spans everything from outsourcing of hospital functions, to durable medical equipment distributors, to clinical trial service providers and beyond. The segment is poised to benefit as hospitals experience headwinds on many fronts, patients look to age in the home longer, and the volume of clinical trials continues to grow. Hospital challenges will force them to explore avenues for cost reduction, while continuing to maintain necessary staffing levels. Patients electing to age at home will require increasingly sophisticated home medical equipment and further device innovation will result in a larger volume of higher complexity clinical trials that will benefit from specialized knowledge and skills.    

Of those, one area of particular interest is in the hospital outsourcing market. 2022 looks to have been one of the worst financial years on record for hospitals, with KoffmamHall estimating 53% of hospitals will have operated at negative margins last year. The rise in costs (both labor and supplies) will force many hospitals to explore deep cost cutting exercises as reimbursement rates continue to lag wage and inflation trends, and revenues decline due to procedures shifting to ASCs, OBLs, and the home. This should drive a need for third-party providers of both clinical and non-clinical functions, who can deliver services at lower cost.   


Wellness Sub-Verticals:

  • Nutritional Supplements
  • Fitness Centers
  • Natural Products

The final vertical focuses on many of the non-clinical attributes of healthcare, such as healthy living through exercise and the use of natural products. In a 2021 report, McKinsey estimated the global wellness market at $1.5 trillion, growing between 5% - 10% annually, driven by a consumer’s desire to live a healthier lifestyle. This shift is elevating the demand for fitness activities and services, natural / organic food and beauty products, and mental health applications to improve mindfulness.  

Ironwood has current and prior experience in the vertical through investments in Elite One Source Nutritional Services, a contract manufacturer of nutraceutical products, and HealthTrax, a chain of Connecticut based fitness centers. We continue to explore opportunities to support healthier lifestyles, while looking to complement that with our previous direct and translatable areas of expertise.

As the macro environment of 2023 continues to add complexity to the deal landscape, we at Ironwood are eager to partner with sponsors and companies pursuing business models within healthcare that build on the accelerating trends discussed herein and where our flexible junior capital solutions can enable system change while creating economic value.  

To learn more, please visit our website and reach out to one of our healthcare leaders: 

Zach Leach

Senior Associate

Alex Levental



1 Kaiser Family Foundation

2 Population Reference Bureau

3 American Medical Association

4 American College of Cardiology

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