European Lower Midcap PE Investing in Longevity and Hormones

EMS:
Likewise. So, to kick off the conversation, tell us a little about your firm and how you got to where you are today.

KO:
Well, as you mentioned, PEAL Capital Group specializes in control investments. We tend to buy between 50 and 80% of any of our target companies, and we tend to invest alongside entrepreneurs, founders, etc. In order to do that, we've been working together since 2006, and during that time we've been doing direct investments and then co-investments. And what I learned from co-investments is how to really be very thorough when it comes to due diligence process. So, I'm delighted here to talk to you today just to talk through that. But in terms of the strategy that PEAL has, I mean we basically are focused on longevity and hormones. Hormones is everything from thyroid function to menopause to andropause and to other things that impact women when they're either having children after they've had their children postpartum depression, or else during the 45 to 65 period where they're going through perimenopause and menopause.

And when it comes to men, then we also look at testosterone replacement therapy and different things that they can do in order to sort of evolve through the aging process. And what we really want people is to do is to live longer, live better for longer. And that's essentially what we're doing. And so, the four areas that the PEAL funds focused on is medical training. That's something that's 30% EBITDA margins, very lucrative, very easy asset light, easy to transport, telemedicine, which is called virtual clinics in Europe. And essentially telemedicine allows professional men and women to be able to see a doctor by slipping into a meeting room in their workplace and being able to interact that way and then use third parties around the corner to do blood testing or DNA testing or anything else that they need. And then the online pharmacy is drug delivery. We really believe that putting the right drugs into people's hands, delivering it either to their offices or to their homes is something that works very, very well in Europe and something that we are looking for acquisitions in that space here in the U.S. And then blood tests and DNA testing, that's something that we're also looking at because we believe that people keeping track of what's happening and how drugs are interacting with their DNA, et cetera, and also regular blood testing is crucial to keeping that staying well and better for longer.

EMS:
Karen, the transactions you completed with Derma Medical and GLHMs are quite exciting. I would love for you to walk us through from start to finish the process of how you completed both of those.

KO:
I mean, we tend to look at companies for about 18 months before we actually close a deal, so we're monitoring them for quite some time. So the four deals that we have in our platform so far, they're ones that we started looking at in late 2021, I think, and then some of them sort of building up 2022, 2023. And essentially, they're normally entrepreneur owned. So, in other words, the founder is still involved in the business, built up the business, built up the team, and also various different services associated with that. So that comes with a lot of positives because they know their company very well, but also with some challenges because they haven't had a professional management team in there. They normally don't have a CFO or a financial director. And so, as a result, we kind of come in and try and create some corporate governance whilst we're doing our due diligence process.

EMS:
And as a follow up, Karen, to that question, what were some of the greatest opportunities you saw in the two completed transactions?

KO:
I mean, for us, valuation was a big part. So, when we do our due diligence process, we're looking at the financial due diligence, legal due diligence, commercial due diligence, and then tax, etc. But as we're doing all of that, we're also looking at valuation. And so the way that we've tended to structure our deals is through some sort of earn out. So, we tend to pay one upfront cost, and then we do earn outs as the building, as the business builds over a three-year period. And so, the opportunities there are that we can buy into something sometimes at three to four times EBITDA, and then we can kind of build it up. And as the business evolves and grows, then the founders get paid throughout that process. So, one of the opportunities is that, but also with these entrepreneurs and the founders, they've tended to create a niche for themselves in specific regions.

So, for example, let's say we bought a U.K. firm, Derma Medical. They already had a presence in Australia, in the U.K. to a certain degree in Sweden and in the UAE. And what we were able to do within nine months of doing the transaction was take exactly what they were teaching and bring it to the U.S. And so we launched in Austin, Texas within nine months of doing the transaction, and we were able to use the same doctors with some US doctors helping us, and then also we were able to use the same coursework and we were able to evolve it so that it was in more American training language, medical training language. But it still allowed us to do this quite seamlessly because we had the same model elsewhere. So, the biggest opportunity for our part as partners is to be able to expand using the same footprint into different regions and also into different areas of medical training.

EMS:
Karen, on the other hand, what were some of the greatest challenges you faced when it came to those transactions and how did you overcome those hurdles?

KO:
I think the biggest challenge when you buy a company that's owned by maybe one or two founders is you've got to ensure that firstly, they're going to be incentivized to be around for the three year period that normally it takes to totally transition the company, but also that they have a management team or a group underneath them that are willing to take more responsibility as a business grows. So normally a founder kind of reaches a stage where they've made enough money and they felt that they've put enough work into a business, and then you've got to sort of challenge them to take it to the next level. If they can't take it to the next level, then you've got to see who within the organization can do the same. So, for example, with Derma Medical, we have a CEO who is, whilst the number two within the organization, he was promoted quite quickly. We knew during our due diligence process that he had the right stuff, but he didn't have CEO experience. So, what we did was for about a year, we trained him up so that he was capable of being the CEO, and we gave him various positions within the organization to allow him grow and learn, and then we were able to launch him at that point. And he's done extremely well in the company and has taken a huge amount of the heavy lifting away from the founder.

EMS:
Great. Karen, I know you briefly alluded to the due diligence processes, but I'd love to hear more details about the processes you use to complete the transactions.

KO:
For us, we've always found getting the right accountancy firm is crucial. When you're looking at businesses, small businesses where the check size is between 10 and 15 million, valuation being probably around 20 million, 25 million, you've got to be really careful when it comes to financial due diligence. And the reason why we started talking with EisnerAmper was because we were looking for local presence, for example, within Texas where we're looking at a transaction right now and basically just ensuring that that particular team understands the company well, understands the tax jurisdictions, understands the medical side, medical service arrangements or management service agreements, which are essentially very important for anything related to medical training, et cetera. So, what we do is we bring in someone local who understands it, and then they will do quite a lot of work for us. So, of all of the, if we are to allocate the due diligence cost, financial due diligence would definitely represent 30% of the overall cost.

And legal fees normally come to 2020 5%. And then we'll spend quite a bit of money on commercial due diligence by bringing in other doctors, other clinics who basically understand the way the business works, and they ask the questions rather than us. And that way we're outsourcing the medical requirements and the medical knowledge to people who really understand it. And then finally, on tax and management teams, we do tax, we use Eisner again or PWC in Europe. And then what we do is then on the rest, we'll do a lot of that internally, management analysis performance. My business partner Tara Mandal, really understands performance and managing people, and she does a lot of that due diligence for us.

EMS:
Great. And as a follow-up question, Karen, what are you looking for in the buy-side process to ensure an efficient transaction can be consummated in today's market environment? 

KO:
I think the most important thing is teamwork. And what I mean by that is it's great when we come across a group of tax legal and possibly financial due diligence providers who work together and also understand each other, and that they're willing to get on a call and highlight red flags really, really quickly. So, what we tend to do is find teams that sort of enjoy working together. And so what we found with, we used PWC, and we used another law firm that PWC had worked with before, and that worked very well for us in Europe. And we're planning to do the same thing with them, the U.S. acquisition. So, ask EisnerAmper who they would use on the legal side. So, then we end up having a complimentary team that know exactly how the other works.

EMS:
Karen, we've covered a lot of ground today and wanted to see what your future plans are as far as other transactions you're looking to complete or anything else you'd like to share.

KO:
I think 30% of the fund, one will be invested in the U.S. either through acquisitions that we do in the U.K. and we bring them to the us. So, in other words, with Derma Medical, we started in Texas, we're now in Florida doing medical training. We're also going to Chicago, and we'll be going over to the West Coast as well. So that's where we bring a company that exists in Europe and grow them here in the U.S. We're also interested in doing virtual clinics in menopause, and that's why we're here in New York today. And essentially, we're looking at virtual training and medical training for our e-learning platform. And also then on menopause training, because we believe that menopause right now in the us, 57 million women are impacted by it, and only 27% of those are getting any kind of treatment. And so essentially we think that this is a fast-growing market where legislation is changing, and that's something that we're really chasing here in the U.S. at the moment.

EMS:
Karen, I wanted to thank you so much for sharing your perspective with our listeners.

KO:
No problem whatsoever. It was a pleasure.

EMS:
Thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics. Join us for our next EisnerAmper podcast when we get down to business.

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