“LifeHealthcare sells medical devices that have an impact on clinical outcomes for patients and our representatives have an in-depth knowledge of how the device performs and behaves.”
Medical device distributor LifeHealthcare became an Australian success story thanks to the input of an ambitious CEO and his private-equity backers.
LifeHealthcare Group’s $76.6 million IPO at the end of last year was a milestone in the transformation of a series of small local suppliers into a publicly listed distributor of high-end medical devices.
Backed by private-equity firm Crescent Capital Partners, LifeHealthcare CEO Daren McKennay founded the business in 2006 by acquiring six medical device distributors. He now hopes to take annual revenue to $200 million in the next five years and diversify the company’s offerings.
Daren was once the regional director of Sydney Metro Hospitals, he then worked as the COO of listed radiology provider MIA Group and helped lead the company through a transformation that would ultimately result in DCA Group acquiring it in October 2004. Upon the completion of that deal, he put his mind toward a bigger challenge.
“For the first time in my 20-year career, I stepped back and said, ‘Why don’t I create something for myself?’” Daren recalls.
He had come to know the medical device market from previous roles and realised that while it was fragmented and polarised, it also had potential.
“I saw it as a fairly attractive space,” Daren says. “There were large branches of multinationals here that were well-funded and built to scale. And there were fragments of lots of smaller players and distributors. And nothing in between.”
Notably, the smaller players were nimble and had innovative, competitive technology, but in Daren’s view, they weren’t broadly leveraging their advantage.
“I thought that was an opportunity. Scale isn’t so hard to create, competitive advantage is what’s hard to create,” he says.
He formed a team and they developed a plan to build scale quickly by founding some businesses and acquiring others. He then began searching for private-equity backers to enable more acquisitions and fast-track growth.
Daren says he and the team were “babes in the woods” when it came to private equity. One of the reasons they chose to work with Crescent Capital Partners was that its managing partner, Michael Alscher, was the most generous with his time in explaining how the relationship would work.
“It wasn’t just about money and legal structure,” Daren says of his early conversations with Crescent. “They really wanted to understand the strategy and how they could add value.”
Crescent was operating a $100 million fund at the time— backed largely by local pension funds. The LifeHealthcare deal took place in 2006 and Crescent brought in Macquarie as a co-investor.
Crescent partner Tim Martin says the firm has a large investment team from backgrounds in operations or strategic consulting, and sees its strength in the strategic advice and hands-on support it provides to portfolio companies.
“They really wanted to understand the strategy and how they could add value.”
For Daren, Crescent was particularly helpful with new strategic projects, such as expanding into new sectors, analysing geographical opportunities or reviewing pricing. It was also there to assist in developing financial structures for the business, as well as leveraging its relationships with commercial banks to secure debt financing.
“I never felt they were encroaching on the day-to-day operations of the business, but they were there for us with bigger issues and alongside us all the way,” Daren says.
Of course, the financial backing helped too, allowing the team to focus on strategy, systems and building company infrastructure without worrying too much about short-term results in the first two years.
“We knew we could make long-term decisions about the growth of the business without having to worry about being financially supported,” Daren says. “So there was a safety net there—we could take long-term decisions.”
So, backed with money and expertise, Daren started shopping. He bought six businesses in nine months, and eventually folded 9 businesses from 14 vendors into the operation that became LifeHealthcare. It was a stressful time and there was much to do, such as building the finance systems, organising the national warehouse infrastructure, and setting up offices and sales teams in various states and territories.
Making Daren’s job even more interesting were the complications that often come with acquiring small businesses.
“There was a lot of travel, and a lot of dealing with all the different personalities in the business, and dealing with underlying issues in private companies that weren’t apparent pre-acquisition,” Daren says. “You would find out things weren’t as rosy as you thought they were.
When facing such stresses, having a supportive backer is crucial—particularly as plans can go awry. At one point, the company moved into a segment that didn’t perform as well as expected and Crescent helped Daren get out of the sector. Private equity, Daren says, does not get as emotionally tied to decisions as management can.
“They helped us divest that business, which freed up cash flow that could be used as working capital to reinvest back into the business,” Daren says. “If we hadn’t made that decision as clearly and freely as our private-equity friends helped us [to do], we wouldn’t be in the same position we are in today.”
Crescent exited entirely during the IPO but is still on the board. This is a sign of the commitment good private-equity teams have to ensuring that there is still value in their portfolio companies for buyers.
LifeHealthcare now has 145 staff and its five-year strategy is to expand beyond its three existing growth channels—spine/ neuro, orthopaedics, and cardiology.
It is becoming more involved in the co-development of products so it can own some IP. But it has no plans to become involved in manufacturing because, Daren says, this is a slow and risky path that would make the company less nimble.
Daren says his experience with private equity was “true joint ownership”, enabling LifeHealthcare to act like a bigger company than it was.
“I always felt I could pick up the phone and speak to them,” Daren says. “There was always buy-in to the issues and joint accountability for the outcomes.