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Paduda: Another Deal Is Done in Work Comp Services: [2023-12-08]

Private equity firms Lee Equity Partners and Elements Health Investors completed a recap of Carisk Partners last week, marking one of the very few deals to be done over the last many months.

Joe Paduda

Joe Paduda

While this may be an indication that things may be moving, there are several reasons we aren’t likely to see a return to the halcyon days of a decade ago.

First, over the last two years, Carisk is one of the very few companies to actually get a deal done. Several others tried and failed, mostly because:

  • Sellers’ expectations were out of whack with what buyers would pay.
  • Due diligence revealed softness in numbers and/or growth plans and/or management depth.
  • Current debt service costs made a deal too costly.
  • And/or the property is/was too large (more at the mercy of industry trends than smaller entities; very hard to grow share when you are already huge).

Carisk has very experienced and quite effective management, terrific marketing, some of the best salespeople in the industry, a strong culture and a coherent strategy for growth and expansion.

Second, the structural issues inherent in workers’ comp — namely, it is a highly mature, consolidating/consolidated industry with very low to negative growth — make it less attractive than, say, generative AI.

Third, debt — which makes up most of the purchase price of pretty much every sale — is still expensive compared to rates over the last decade or so. Investors will eventually get over mid-to-high single-digit interest rates but haven’t yet.

Finally, the reality is that work comp is just not that interesting. Many execs are highly risk-averse, if not downright lazy; innovation is frowned upon, if not actively avoided; and complacency is rampant, as is chronic underinvestment in IT and human capital.

The few transactions that have closed — HomeCare Connect and now Carisk are the most prominent — and are really solid companies with great management teams, solid track records and a clear path to substantial growth. The ones that didn’t close were not.

That’s not to say some companies won’t test the waters, but don’t get caught up in rumors about this or that company getting sold or preparing for a sale or going to market or talking to investment bankers.

Bankers are ALWAYS talking up potential deals; it is how they gin up business, and the work comp rumor mill loves to help them out.

What does this mean for you?

A great company will always be valuable. 

Disclosure: I have a (very small) financial interest in Carisk.

Joseph Paduda is co-owner of CompPharma, a consulting firm focused on improving pharmacy programs in workers’ compensation. This column is republished with his permission from his Managed Care Matters blog.