Fund focus: Genesis reinforces Australia’s specialist thesis

Few Australia-focused managers have closed debut middle-market funds in recent years. Potentia Capital and Genesis Capital are exceptions to the rule, and both happen to be sector specialists, focusing on software and healthcare, respectively. Chris Yoo, a partner at Genesis, doesn’t think is a coincidence.

“In most developed markets in the northern hemisphere, the mid-market has moved towards sector specialization,” he says. “You’ve got Potentia in software, trying to be the Vista Equity Partners of Australia, and I think we are the next iteration of that. We’re one of the first healthcare mid-market funds. It’s odd because in most other markets there are hundreds of specialist mid-market funds.”

Genesis is a spinout – just like Potentia, which closed its debut fund at the end of last year. Yoo and Michael Caristo previously worked at mid-market generalist Crescent Capital Partners, where one or other of them played a senior role in every healthcare deal over a period of 10 years. Genesis was established in 2016 with two business strands, deal-by-deal investment and corporate advisory.

Having completed a handful of investments, Yoo and Caristo felt the time was right to raise a blind pool fund. Exploratory work began in late 2020 and a formal launch came in March with a A$150 million target ($112 million). They tapped domestic investors – mostly family offices and high net worth individuals (HNWIs) via wealth management groups – for a A$115 million first close in July.

Institutional investors were targeted for the final close. Genesis received commitments from one local fund-of-funds and two larger US-based fund-of-funds, which frequently back emerging managers. These institutional players encouraged the firm to close below the A$200 million hard cap, concerned that the fund size might outstrip the lower mid-market strategy. Fund I closed last week on A$190 million.

Yoo emphasizes the importance of the private wealth segment as the other sources of funding run dry. Many superannuation funds have effectively turned their backs on the domestic mid-market, preferring more consolidated and international portfolios populated by managers that can offer discounts on fees.

“Local fund-of-funds used to seed new managers, but they have been squeezed. And the traditional dynamic is that offshore institutional investors want to see local support before they jump in,” he says. “There aren’t a lot of options in the mid-market, but a lot of wealth now resides with family offices and HNWIs. Many of them write checks you would typically see a much larger institutional investor write.”

The standout investment from the deal-by-deal phase is SmartClinics, a general practice network acquired in 2019 as a quasi-distressed asset. The founder had embarked on an ambitious roll-up strategy, accumulating 30-40 clinics and establishing a head office to coordinate activity. The goal was to create a platform comprising 150 clinics, but management of the underlying businesses was weak.

“That and the large head office costs meant it never made a profit under his ownership. There was a lot of senior leverage, and the bank lost patience and started making moves,” Caristo, also a partner, explains. “The founder knew we were looking at general practice networks – they are at center of the healthcare ecosystem, benefiting from referrals and great government support – so he reached out.”

Genesis bought the debt and worked on bringing the head office to size, improving the performance of the underlying clinics, and boosting doctor satisfaction. This led to revenue growth and, ultimately, a healthy profit. SmartClinics was merged with a larger business, and Livingbridge acquired a majority stake last December. Genesis secured a 5x multiple and retains a minority interest.

The doctor satisfaction element is not to be underestimated, given the sometimes-fractious relationship between private equity firms and the clinicians who staff – and sometimes partly own – professional healthcare services businesses in Australia. Yoo and Caristo believe their experience, which includes consulting as well as deal-making, stands them in good stead. Caristo even trained as a doctor.

“We have been there and done that in terms of the doctor models. Being able to understand how to work with doctors, what doctor models have worked in other jurisdictions makes all the difference,” says Caristo. “For example, in our dental business, each clinic has a dental partner who owns 20% of the equity. We want to work with the senior clinicians rather than have an antagonistic relationship.”

The team of 12 addresses several different business models. While SmartClinics was a turnaround, Totally Smiles, the dental asset, is a roll-up and health therapy services provider Therapy Pro is a roll-out. Both are in Fund I. A third new investment, residential rehabilitation business The Banyans, will grow organically but pursue acquisitions judiciously.

Genesis’ sweet spot is companies with EBITDA of A$2-5 million that require equity checks of A$10-30 million, although a starting point of A$5 million would be considered for buy-and-build opportunities. It aims to take portfolio companies through the A$10 million threshold, at which point larger private equity firms get interested. This is what happened with SmartClinics.

“Australia doesn’t have many A$10-30 million healthcare businesses that can demonstrate growth, so we tend to get a lot of interest from the private equity buyer set,” Yoo adds. “Because new managers aren’t coming to market, existing players float up and raise larger funds. This creates clear air for us in the mid-market, so we can buy at one level and sell at another.”

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• Topics
• Australasia
• Fundraising
• Growth
• Healthcare
• Australia