Water Street closes second fund on $650m

The fund will give the healthcare-focused private equity firm an estimated $2bn of purchasing power for middle market and divestiture deals, the first of which will be the acquisition of a controlling stake in a portfolio company of Gentiva Health Services for $147m.

Chicago-based Water Street Healthcare Partners has closed its second fund on $650 million (€447 million), exceeding its original target of $600 million and bringing the firm’s total capital under management to more than $1 billion.

The second fund would follow the same investment strategy and target size as its predecessor, which closed in 2005 on $400 million and has 10 investments consolidated into 8 portfolio companies, according to founding managing partner Tim Dugan.

“In this one, we would expect around 11 or 12 consolidated portfolio companies,” Dugan said.  He estimated the purchasing power of Water Street Healthcare Partners II at about $2 billion dollars, to be invested over three to four years.

Dugan ascribed the firm’s rather quick fundraising process – which only took “a couple of months” – to strong demand from existing investors in its first fund. However, the second fund also attracted some notable new investors, including billionaire investor George Soros’ Soros Strategic Partners. Other new investors included Blue Cross Blue Shield of Arizona and Danske Private Equity. The placement agent for the fund, as for Water Street’s first fund, was Credit Suisse.

Medical devices:
where the money is

Fund II’s first transaction, scheduled to close at the end of the month, is Water Street’s $147 million purchase of a 69 percent interest in CareCentrix from its parent, NASDAQ-listed Gentiva Health Services. CareCentrix is a manager of home health care services for managed care organizations in the US.

About half of Water Street’s investments are corporate divestitures from healthcare companies such as Gentiva that wish to divest of non-core businesses. The rest are middle market buyouts.

Overall, Dugan remains bullish on the healthcare sector, despite some uncertainty in the market as to how the US presidential election, in which both candidates are promising to reform the American healthcare system, will impact the industry.

“If you listen to what the politicians are saying, they’re talking about providing insurance coverage to those who don’t have it or providing better coverage to those that do. What that will do is increase the utilisation of certain healthcare products and services and that could be a good thing,” Dugan said.

Water Street specialises in the outsourced services, distribution and medical device sectors of the healthcare market and typically seeks transactions between $50 million and $500 million. 

It was one of two healthcare-focused private equity firms to emerge from Chicago-based One Equity Partners, which is now the private equity arm of JPMorgan. The first, Linden Capital Partners, was formed in 2002 after managing partner Eric Larson left One Equity. Water Street followed in 2005 when Jim Connelly, the former president and COO of Caremark International, teamed up with with Dugan and Kip Kirkpatrick, who previously led healthcare investments for One Equity.