Good Ethics, He Says, Is How You Win Bigger Returns | with David Porter, Apposite Capital, BOAC #49

0:00I started as a chemist and a biochemist by training, but I went straight into financial services. Firstly, I'm half American, though I don't sound it, and I'm a son of a GI, and I was raised in Orange County. So I understand what you're talking about, and I have the problem that you probably do of having to pay tax in two jurisdictions, but that's another story. We believe that there is no compromise between making good returns for investors and having high-quality, impactful, ethical business practices. in healthcare. After that, that company completely prospered. It went from being very loss-making to being very profitable quite quickly.

0:37And it was all on the bedrock of impact, quality, giving a good service. In all our companies, what we're trying to do is to disturb the market they're in to the extent that they become to be a problem for their competitors. And then we have a new strategy started with the biggest check that British Business Bank has ever given anyone of 100 million for a growth fund. How the health economics works in the US is definitely different to most of the world. And those sort of things, I think, can lead to a lot of bad decisions because people don't get that drift. So it works in a European and UK context because that's very important.

1:13They then try and take it to the US. Nobody wants it because I don't get reimbursed for this. It doesn't help me. And they don't understand why that happens. And it's because the systems are driven in different ways.

1:32Hey, everyone. We're back for another episode of The Business of a Clinic. Today, we're with David, who's one of the partners at Apposite Capital. David, do you mind maybe just starting with an introduction? Tell us a bit about yourself, a bit about the firm. I think one of the things I find very interesting is that it's a big player in healthcare, and it's also not necessarily a brand that unless you're really in the industry, you don't walk down the high street and see a clinic with your name on the top, right? So I think it'd be great to have a bit of an introduction and just to set context on how you came into this space.

2:01I started as a chemist and a biochemist by training, and that is a reasonably good background for this. But I went straight into financial services, and I've done a lot of different jobs in financial services. To be brief, I've done quite a lot of work in debt. I've managed funds of all types, both short-term and long-term, from pension funds down to stock exchange type stuff. But I've also then went into a career in industry, turning around companies in financial service. I say industry, but I mean in the financial services industry. I've run companies, I've run a bank, for instance, and other things.

2:43I gravitated to private equity via corporate finance. Very late in life, I decided I wanted to do what I originally really wanted to do at the beginning, which was M &A and other corporate finance at a Japanese house. And at that house, we were very lucky because somebody who's caught a name in private equity about three decades ago came to that place and I worked for him. This is Guy Hands and Terra Firma. So I worked on the first of their projects, which were very successful. And then I gravitated to starting a boutique within that organization, within Namura London. And in those days, there was no secondary market.

3:23So I was frightened that if Japan decided to switch off from investing, I would have a problem. And so I moved to another house. And that was the start of Apposite two decades ago. So I've done private equity and healthcare for quite a while. Apposite's DNA is we're only interested in understanding of healthcare services and life sciences and other forms of healthcare. That's all we do. We only can survive by having hundreds of operating partners who allow us to jump from social care to tools to genetics to whatever. And our funds are usually a mixture of subsectors. But there's one theme that goes through all our funds, and that is that all our companies have revenues.

4:10So we don't do biotech. We don't do what I would call eureka devices, i.e. things have to have revenues. And our skill is taking a smaller company, either through a lower mid-market buyer model, or in our new fund, a growth model, and scaling them. And scaling them means professionalizing everything that moves, automating and digitizing everything that moves, improving the governance, and then internationalizing. We are very concerned about the fact that some markets are rather small and if you want to grow very quickly. And I guess the other thing about our DNA is every one of our companies has a value creation plan which allows for inorganic as well as organic growth.

4:54So some of our companies have done quite a lot of acquisitions, if that's the sort of company they are. Others of our companies may do less, but still are always open for growing faster through inorganic growth. Got a helpful background in setting the stage. It's interesting that you said the thread that comes across all of the businesses are revenue, which I guess is not always the case in healthcare, you're suggesting. I think it'd be really interesting. I know that Apposite has a very strong focus on double bottom line, triple bottom line, the sort of values-based commercial leadership. I think that's probably unavoidable when you're working in healthcare, but it's interesting that you've taken the decision to make that very explicit in terms of the fund structure and how you plan the future for the fund.

5:37Can you tell us a bit about maybe the DNA? Where did that come from? What was the strategic and or moral basis for saying, okay, this is going to be a part of how we operate. It's going to be one of the things that might be different about us. It's going to pull us towards certain opportunities. It's going to pull us away from other opportunities. Why has that become one of the pillars of operating for you? It's because we believe that there is no compromise between making good returns for investors and having high-quality, impactful, ethical business practices in healthcare. I'm not talking about other sectors, I'm just talking about healthcare.

6:13Because if you want to differentiate yourself from other competitors in the subsector of healthcare or life sciences that you're working in, we think the best way to do that is to have better quality than other people. Because the people who pay for your service or pay for your intervention or pay for your device or pay for your diagnostic, if they think they're getting great quality, are obviously going to be keener to do that. One of the most profitable situations I've been in was a company that we acquired, which was in UK Home Care and Hospital at Home. And the company was not in a good state when we acquired it, to put it politely.

6:56Its scores on the doors from the regulator were not encouraging. And unsurprisingly, commissioners looked at them as the last resort. If I can't accept anywhere else, then I will go to this company. surprise, that's not a good way to grow your business financially. So the first thing we did was turn around the quality. And after that, that company completely prospered. It went from being very loss-making to being very profitable quite quickly. And it was all on the bedrock of impact, quality, giving a good service, et cetera, et cetera. And if you strive for that, I think I don't think there's any problem with being impactful and being profitable.

7:39And so that's why it's got so much in the DNA. Yes, there are some subsectors that we can't do because they aren't impactful. I think that's a small price to pay for having a fundamental ethos that I think improves both the impact and the returns. Makes sense. I think it'd be interesting, obviously, at Coursera, and a huge part of our focus is on healthcare provider operations. So this is retail clinic based care. I know a lot of our audience is very focused on scaling, improving efficiency around creating value in health care provider operations. I know that you have a sort of far reaching, quite broad portfolio inside of health care provider operations and beyond within the broader health care space.

8:22I'm wondering if you can take us slightly down into the rabbit hole of the health care provider operations part of your portfolio. Where do you see opportunity? Where have you decided to be active? How does your sort of healthcare provider operations specific view of the world look versus maybe the fund's broader view of the world? I think it's sort of subset of, and it depends actually, do you include social care in your healthcare provider operations is one question. Because we have quite a lot of social care. I'd ask you back to your head, say, would you include it? Does that have a natural home there?

8:59I think there's similarities and there's differences. The main similarity is that they are multi-site operations where ethos and execution, and it comes back to my thing I said at the beginning, which is, as far as I'm concerned, every company should be digitally and operationally improving and automating everything they do to reduce quality and reduce costs and get that beautiful win-win. And that applies across the piece. The difference between the two is generally in social care, the payer is a government or a local government or a health system. Whereas in some of the healthcare applications, it's the private sector as well, or the private payer as well as often the government.

9:47That's the difference. But in many ways, I think the challenges and the opportunities are very similar. Those businesses lend themselves to what I was saying earlier, which is where you can have an organic and inorganic plan. And the inorganic plan can really accelerate those companies. Because obviously, if you're in an un-market... So I have one question. Am I allowed to talk about outside the UK? Please. Yeah. We've got all over the place. Yeah. Perfect. If we go to Denmark, where we have an asset in social care, that's in a non-consolidated market. And therefore, its ability to grow organically and inorganically quite rapidly, and then reinvest that margin that it gets from growing into more and more systems.

10:37And that company has a very leading edge AI system for monitoring quality that's really quite, this big large language model is quite innovative, to put it mildly. So that's the sort of thing you can contemplate if you're growing a company. So I think the challenge is the same. The thing is, though, if you jump from, we've done radiotherapy clinics, we've done imaging, dentistry, social care, blah, blah, blah. If you jump, there's obviously between each subsector, there are many differences. But the fundamental is the same. You need to give the best quality care to the people you're looking after, be they your dental patients, be they your person with profound autism.

11:19Work around to improve the efficiency and the quality of what you're doing. And that is a sort of universal wherever, whatever sub-subsector you're in. So I think you mentioned a few sectors there, radiology, imaging, dentistry. And I appreciate that maybe the posture is the same. How do we deliver high quality care and build efficiency into the provider operations? Thinking about one or two of the examples, take dentistry as an example because I think for most people, you've been to the dentist. So I think you probably have a sense of what that looks and feels like. when you're thinking about dental group efficiency, where do you look?

11:57Where do you start? Where do you start that journey? Are you looking at organic site level revenue uplift? Are you looking at back office consolidation? Are you looking at inorganic growth? Is it very context specific based on the group that you would be looking at? I'm curious. I know that you do some work in dental, but when you were making a decision to acquire or to invest, where are you seeing the alpha in some of those opportunities? Is it specifically in a part of the practice? Is it specifically at the management level, the back office level? Is it change the shape of the prize change each time?

12:28How do you think about that strategically? I'm much happier with a holistic view. So I think, I don't think you can afford to say I'm going to be brilliant at practice level if my central office is completely inefficient. So to me, every part has to be attacked. And when you're talking about digital automation, which I think is very important, as far as I'm concerned, that touches every single part of the business. So it's not just for operations. It's not just for procurement. It's not just for HR. It's not just for finance. It's not just for marketing. It's not just for customer experience. It's not just, you see my point, I don't think you can compete in without improving every aspect of the business.

13:23Now, obviously, the thing that the patient sees is for the local clinic and their local clinician and their local hygienist and their local receptionist. But they all need to be empowered by the same efficiencies. And when you start doing that, if you can then start increasing your margin, you can then invest more in giving a paint job, putting in a new chair, blah, blah, blah, blah. So to me, it has to be holistic and it has to be a constant push to let's be better. It's the old thing that every British should have. We're better today than we were yesterday. It's interesting. Oftentimes when we speak with people on the private equity side of healthcare, particularly private healthcare or healthcare operations, they'll often say, we are an integrations business.

14:12At the end of the day, we acquire, we integrate, we standardize, we repeat. It sounds like from what you're saying, and you nodded, so I'm assuming that you agree there's a big part of your job, which is probably around integration, but it also might be that from what you're saying, a big part of your job is also then the transformation story and going almost step by step through the business, almost through every line of the P &L and saying, hold on, where is there any efficiency here? What can be automated? What can be made more centralized? Is that a team in the group? So inside of the fund, do you have a sort of, I'm sure there's an integration focus.

14:43Is there any transformation focus or is that done at the operating co-level by the leadership there under your management? How does the efficiency start happening once you've made that decision to acquire or to invest? Who is then responsible for executing? Is it at the fund level? Is it at the operating company level? Where does that division of expertise lie? It has to be both. Sorry, I always give a very diplomatic answer. No, but it is true. So obviously, because if you look at our portfolio, you'll see we have quite disparate companies in disparate countries. It's impossible to have a kind of a one-size-fits-all playbook at a lower level.

15:25At a high level, not, but at a low level, it is. So what we have is we have a series of groups which are effectively designed to challenge different companies to achieve on whatever that group is. So it's the HR group. It'll be about things like retention, et cetera, et cetera, and the use again of digital automation in HR. If it's the RPA and AI group, it'll be about the use of all sorts of digital automation. And all the companies can attend and we try to get them to attend. And indeed, we're often keener for that sort of group that the CEOs come because in the end, they're the ones driving it.

16:08But the objective there is just to say another portfolio company's done this and this. Why haven't you? It's just a challenge to think. But in the end, the rubber hits the road at the portfolio company level. And it's a mindset, which is that we want to be better than yesterday. We want to win. We want to have this dual bottom line of winning in an ethical, impactful, good for patience way, because we think that's the best way to properly win. And actually, there's another thing, which is that in all our companies, what we're trying to do is to disturb the market they're in to the extent that they become to be a problem for their competitors.

16:50Because if you look at the history of our exits, there are always two, pretty much always two trade buyers. And that could be a P-back trade buyer or strategic, whatever you want to call them. But it's that because then you can often get a few extra turns of multiple because you're not just solving a commercial problem, you're solving a strategic problem. And the best way to achieve that is to disturb the market you're in. And the best way to achieve that is to be the most efficient, the most impactful operator in your subsector. Interesting. I think there's, at least on the other side of the innovator spectrum, very early stage business building, maybe more on the VC side of the shop.

17:35There's, I think, a similar thesis, which is become so much of a problem that people can't ignore you. And I think it's a similar line of thinking to what you're setting out. I have context, as we've spoken before. You've mentioned some of the exits that you've seen. That's been the playbook. Just for others who may not be as familiar with the fund. Can you maybe paint us the picture of how far is the reach right now? You said you have activity in Denmark, activity obviously in the UK. How big is the fund? Just put us in the context because I think that's going to, in terms of some of the questions I have, I think that's going to help us bridge the gap between we do some stuff in healthcare, which for people who don't know the fund might be what it sounds like right now, and just understanding the scale of the reach that the fund currently operates across.

18:14Can you maybe give us some context around the broader position, be it assets under management, be it reach of impact to patients, so on and so forth? Well, we have two fund strategies. We have our sort of bread and butter fund strategy, which is lower mid-market private equity. That's buyouts, buy-ins, typical private equity, but at lower mid-market. So this is relatively small companies. And that operates on a European basis. so we've had companies or have companies in France, Spain, Italy, Switzerland, Sweden, Denmark, etc. And then we have a new strategy which has just been started with the biggest check that British Business Bank has ever given anyone of 100 million for a growth fund and that will start with a UK footprint and then move to one more normal European footprint and that's going slightly earlier.

19:10So that's for companies. They still have to have revenues, but it's not a buyout model. It's a new capital model. It's for companies that could be bottom line negative, not for long, because we don't really like that for long, but they could be at a slightly earlier stage, basically. And so it's not replacement capital would be in our normal lower mid-market strategy. Size-wise, these are small funds, but we do punch about our weight because we have an insatiable appetite from our LPs for co-investment. And that allows us to have some quite big companies. When you say small companies and big companies, can you put maybe revenue figures against them?

19:51Because I think people probably have different context for when you say earlier in their journey, maybe loss-making at a EBITDA level. What is the earliest side of the journey for you? And then, I guess, similarly, when you say some of the bigger companies, what does that look like at revenue basis? I think it can be single digit revenues when we start, and it can be triple millions of revenues at a later stage. When you get period. Exactly. Particularly when you can be supercharged by extra investment from LPs. So you can then make the checks from our point of view, tens of millions, which for us is quite big.

20:27Makes sense. So I guess then using that as a bridge. So you're in a position right now where you are seeing the healthcare market from probably more vantage points than most, maybe slightly more specialist investors who are looking at one part of the market. You likely are, there's a bit of a nexus effect, which is that you can understand the broader movement and tide in healthcare at a devices level, at a regulatory level, at a care delivery level that I think otherwise might get lost. I'd be quite curious, given the reach geographically and from a subsector perspective, what do you uniquely see Without giving away trade secrets, obviously, but what do you uniquely see that you think other people who are perhaps more thin slice in terms of their outlook on healthcare, what unique perspectives do you see given the vantage point that you think, hey, actually, we only understand this about the market because we can see it from all these different lenses.

21:22We can see it through these different lenses, as opposed to someone who's operating in a single sector, in a single specialty, and they may actually miss the broader movement that's happening in the ocean because they're caught by the reef. Do you feel like you have that broader view that otherwise might go missing? Definitely in one respect, which is that you take any one of our businesses and other subsectors affect that business. So if you take our specialist social care companies, if you look at the drugs that are given or the devices that are used by, and that goes right through the piece.

21:55The dental devices, we can look at the dental device company as well as the dental supplier. And I think that is worthwhile knowledge. And although we don't do, as I said, companies without revenues, therefore we don't do biotech, we do specialty pharma. And we indeed have a specialty pharma company with a product that is really addressing something we're doing in social care. And that's obviously, it just helps in both directions because you really do know about what that product can do for your service. and the key thing that a lot of people forget particularly at the early stage is that the key and it's very sad to say it unfortunately the key in health care is how the reimbursement model works and how the economics work the health economics of businesses are frankly very important and the other thing that a lot of people don't get is that how health economics works in the UK is different to most of the rest of the world.

22:56How the health economics works in the US is definitely different to most of the world. And those sort of things, I think, can lead to a lot of bad decisions because people don't get that drift. I, what I'm really saying is at extreme, there are some models that will only work in the US, won't work elsewhere in the world. There are some models that will work in the UK that won't work at all in the US. So it's that sort of thing. Just you can tell from the accent, I'm from the U.S. originally, and I've now lived in the U.K. for 10 years. And having been part of both systems, I can say at a patient level, that's absolutely the case.

23:29There are some things that I think you get away with in the U.S. you'd never tolerate in the U.K. and vice versa. from where you're sitting. Can you give us an example, either something that's specific to the UK context that doesn't export or something that's specific to the US context that doesn't export just to help us understand at the operational level, what is a thing that might work really well in the UK, perhaps in UK private healthcare provision that simply falls down as soon as you try and take this into parts of Europe, parts of US. If you try and push it outside of geographic boundaries?

24:00Do you have a sense of what that would be in terms of UK-specific context that allows for certain decisions to make sense here? Firstly, I'm half American, though I don't sound it. I'm a son of a GI, and I was raised in Orange County. So I understand what you're talking about. And I have the problem that you probably do of having to pay tax in two jurisdictions, but that's another story. But to your point, I've got loads of examples of that. We started, very unusually for us in our early days. We started a company in radiotherapy and we took a US model and brought it to the UK. And actually that worked with a few adjustments, but that was very unusual.

24:39What often happens, unfortunately, is that people have something that saves money, but doesn't actually help clinicians or hospitals or HMOs in the US. It saves money, so it works in a European and UK context, because that's very important. They then try and take it to the US. Nobody wants it because I don't get reimbursed for this. It doesn't help me. And they don't understand why that happens. And it's because the systems are driven in different ways. Equally, if you have an app, which is really good or something which relates to a payer situation, and they're completely different, this side of the Atlantic to the other side of the Atlantic.

25:23But I think it's very dangerous, particularly in our sort of scale-up area, to not consider very early with the company whether this has applicability in the biggest healthcare market in the world. And if it doesn't, that definitely reduces your ability to scale that company. And then obviously, looking in the other direction, the system in Europe and in the Middle East and in the Far East, also have their nuances and their differences. And again, that's the other thing that's very exciting. Because we jump subsectors, we have lots of companies that are only really working in their own country.

26:00But then we have lots of companies that are global and really do have a global footprint. I'm maybe not fully answering your question, because frankly, this is something to go on for hours about. Yeah, I think it pulls on one of the points you made earlier, which is that you may have a dental supplier and a dental group. And it sounds like in terms of the perspectives that you can maintain, you have almost your own version of vertical integration without vertical integration. You have suppliers and buyers within. So that always helps because now you're very close to customer and you have that type of feedback loop.

26:34That feels very helpful. But I think the same thing probably applies in terms of the geographies that you work across because you're seeing, hey, what are actually the not superficial, but the very real limits on a certain model because you have that operator knowledge in these different parts of the world. And I think a lot of people, I think they probably go in maybe eyes a bit too shut. I know for myself, I used to run multi-site provider operations in the elective care space and dermatology. And the internationalization from London to New York, that was our first site was London flagship. Second one was in New York.

27:02There were a lot of things that carried across very naturally, the brand as an example. And then we came to discover actually, even something like elective care, there's a lot of, hold on a minute, And some of those assumptions just didn't carry out in the same way. So I've seen parts of that firsthand. And I assume that obviously you're talking about something very similar. So it's interesting to hear. One of the questions I always ask, and I'm conscious that your view of this may be very different given the time you spend in the space and the background being initially financial services before healthcare.

27:30If we had this conversation, if we spoke in five years or in 10 years, what is something that you think will not change in terms of your fund strategy? What is an absolute, a concrete? the technology will change, culture will change, tide will change, healthcare will change, but this will always be true of us and or of our strategy. And I guess the same question is then, what is the one thing you're absolutely certain will be very different? What is the one thing that's definitely going to change as opposed to the one thing that will absolutely not change? I'd be quite curious to understand how you see that in terms of planning forward for the fund.

28:01I think what will not change is that quality is absolutely key. I think that is a universal all have healthcare. What I think will change, and I was having an interesting discussion with an ophthalmologist, I have a family of ophthalmologists, about this issue of how quickly are robotics going to revolutionize everything. But we were talking particularly about ophthalmology. And what it comes down to, of course, is the patient accepting that the robot is safe. And And that kind of does everything. At the moment, if you look at AI in healthcare, most of it is human in the loop. My question is, when is it going to be the AI without the human?

28:45There is no doubt that the robot, when it's perfected, won't make any mistakes, won't have been pissed the night before, etc. It just does. But that is the thing I think that will change. I think, though, it's probably not five years. I accept the judgment of the ophthalmologists I was talking to, which is probably more like 10 to 15. Interesting. So that is going to change. So, I mean, it's everyone's two favorite letters right now, AI and or robotics and healthcare provision. So your finger in the air is that it's midterm, not near term in terms of what maybe the technology is ready near term.

29:21But in terms of patient acceptance, public acceptance around this and the infrastructure to support it, the insurance, the risk, the management, et cetera, et cetera. We're probably midterm, not near term. Do you think we do get there? You think there is a version of the future where a patient goes in to see ophthalmologist and end-to-end procedure is undertaken by robot rather than by person? Is that a dental, same thing, right? Is that a version of the future that you think the question is when, not if? I'm a Star Trek fan. And I think that it has to be the future. But it has to be because all these procedures have become so commoditized in a way.

30:05That's the wrong word, but so commoditized that everyone says, oh, I'm just going to have my IOL fitted or I'm just going to have my tooth fixed or whatever. It'll be just something that everyone does every day and you're just used to it. But that's why it's going to take time. I think the, but I think the human in the loop still is much more efficient than no AI and no robotics. Final question for you, and I want to appreciate the time you shared already. The human in the loop, it's interesting, and on a personal level, it's interesting because at Coherent, we're very much building in that direction of travel, whereby we think that the problem of patient operations, the inefficiency of managing the non-clinical elements of a patient's journey, booking support engagement so on and so forth we very much maintain the belief that human and technology for as far out as we can see into the future is the only way to solve that problem without creating what is inevitably a verification tax for the human if you go only if you go only ai or if you go only technology there's always the great graph of work vertically they check it horizontally and so you end up with this you know this overflow and so how do you balance those I'm curious across the portfolio that you manage and also, I guess, in industry, is your feeling that the general mood in the room is, yes, we want the dark juice of AI, but we also want tight governance around it, be it human in the loop or however else you would govern and monitor and ensure safety and reliability, or is it a bit more reckless than that?

31:35Is the adoption, we'll take it as it comes, we know there's going to be downside. How many people are early adopting, mid-stage adopting hands-off let's wait and see what happens and then make a decision what's the sort of cultural backdrop across the portfolio or ecosystem more generally in your view i think it's definitely a mix okay there are some people who who see the commercial and other benefits of robotics ar rpas blah blah and maybe are not thinking about making sure that they have the right guardrails, etc, etc. Or that they have the right ROI. Actually, I'm very keen that although I'm, as you can see, a huge believer in automation of every form, I'm a great believer in guardrails.

32:24And I'm a great believer in because and also, yeah, just moving at a pace that's sensible, basically. The problem is that if you're in a London street, and you see all these cars going around, in theory, driving themselves. And it's all great. And I feel very comfortable with that. And I'd be happy to get into one of those. But I sure as know, the first time one of those makes a mistake, it'll be written all over the press, and it'll put the thing back years. So we've got to get it right. We've got to have the right guardrails, the right governance. We've got to move at a pace that is sensible, because a mistake will put the whole thing back, which will be very depressing, because there is no doubt there's a lot of issues, but there's a lot of benefits that will come from the use of a right everywhere.

33:11I very much agree. And I think we always say internally, the implementation here, the adoption here needs to make sure the headline is right. Because exactly as you're saying, even though there are mistakes every day, there are car accidents every day enabled by humans, we seem to be much more accepting of that, that it would be of a self-driving car. And I think the same is probably true in healthcare, that it goes wrong once and then suddenly everyone resets and you have to build back into the adoption cycle. So I think that makes sense. David, thank you so much. It's been really interesting.

33:40And I think that for folks who are interested in learning more about the fund or who think that they may be a good partner for the fund and or LP for the fund and or acquisition target for the fund, I'm sure David would love to hear from you. We really appreciate your time. Thank you so much for joining. Thank you. Absolute pleasure. Take care.