In Private with Jim Weight, Weight Partners Capital LLP

In this episode of Termgrid Talks, Diana Doroftei spoke with Jim Weight, Managing Partner at Weight Partners Capital LLP.

Jim founded WPC in 2009. He leads the investment team and chairs the Investment Committee. He also serves as chairman of Trinity and Towerview.

Before launching WPC, Jim boosted profits as corporate operator and private equity advisor at a series of large companies:

• CFO of HiT Entertainment backed by Apax Partners;
• Operating Partner at Fortress for 2005 acquisition of Boxclever from administration;
• CFO of Westminster Health Care, backed by Welsh, Carson, Anderson & Stowe, and Goldman Sachs;
• Divisional board director of Kingfisher (Comet, B&Q, Staples, Entertainment UK, e-Kingfisher);
• Commercial and operational due diligence advisor to numerous PE houses: Montagu, Fortress, Permira, Apax, Terra Firma, Electra, Hgcapital, EPIC, Blackstone;
• Eight years with The Boston Consulting Group.

Jim was a Fulbright Scholar at Harvard Business School where he received an MBA.  He also holds a BA in Engineering from Cambridge.

Diana Doroftei: Jim, thank you for joining us at Termgrid Talks. 

Jim Weight: Nice to be here.

Diana Doroftei: I’d like to start with a question on your investment focus. So you focus on the healthcare space. I’m curious to hear, what do you see as the boundaries of the sector? It’s quite a wide sector, and where do you focus most of your attention?

Jim Weight: You’re right. Healthcare is a very wide sector, and we only focus on part of it.

So the focus for us is the more predictable part of healthcare.

So healthcare services, which will include things like care homes, mental health, rehabilitation, and it’ll also include the lower technology end of medical devices. It might be orthopedic implants or it might be electrical equipment that’s used in an operating theater, which isn’t in itself very complicated, but the fact we use it in an operating theater makes it a healthcare piece of equipment.

What we avoid, because none of us are clinicians, is the part of the market which is very technological in the healthcare sense.

What we’re not doing is taking the pharmaceutical type pets on whether my cancer beating drug is better than your cancer, eating drug, and we find out in 15 years time that actually I was wrong, and it was your one that was the right one to invest in. 

I should say we only invest in the UK. The reason for that is that in our part of the market -unlike pharmaceuticals – the regulation is different in every country; the funding mechanisms are different in every country; employment can be different; property management can be different.

So it’s actually very unusual to come across businesses like ones that we target, which are in multiple jurisdictions.

Diana Doroftei: Thinking about another side of your investment focus, which is the lower mid market. So curious to hear, what do you define as the lower mid market? Where do you see the challenges? It’s a very competitive market, so where do you actually differentiate yourself?

Jim Weight: So when we say lower mid market, I get the impression we’re talking about investments which are smaller than they are for a lot of people who say lower mid market.

The mid market has, in general, has all sorts of definitions. It can be as much as £1bn for an EV.

The market we’re targeting is the market where entry multiples are significantly lower. I’m sure many of the listeners have seen analysis which shows that when you come small enough, EVs drop from double digits and all of a sudden they’re typically five times.

That’s the part of the market where we’re targeting and that usually means an EV up to about £50mn. So an equity check up to, let’s say, £25mn.

But I think that’s I think a lot of people, when they say lower mid market, they’re talking about at least double that, which really means they’re in the competitive part of the market. 

And you said that it’s a competitive part of the market, but the part that we play in, we don’t find competitive at all. And I think the reason for that is that it’s not a fee game. 

So for an investor, you make your money on returns. So the returns are proven in the lower mid market to be much higher. And so if you trust that you can repeatedly produce good returns, then it’s very attractive. 

But if what you’re trying to do is grow your assets under management so that your fees as a percentage of assets under management are bigger, then you won’t be happy in the lower mid market. 

Our track record over 15 years is 5x and an IRR that’s over 100%. 

The sub £100mn EV market has returns in the mid to high 20s. The over £1bn market then has returns in the low teens. It’s just different game. 

Diana Doroftei: And how do you approach the deal sourcing? How do you know what is the best strategy that you have found?

Jim Weight: The healthcare community in the UK is surprisingly small and almost everyone that runs a significant company as an advisor, corporate finance, debt provider fits in one room. Everyone knows everyone.

It’s also somewhat of a – and I’ll choose my words carefully here – but it’s a community that supports each other. People go into health care because of the care word. And so you find that even amongst the people you would normally expect to not have that as their primary objective, you find that they’re a caring community. You’ve only got to read the posts of, for example, some of the law firms that specialize in healthcare, and they won’t be talking about the fees they raised, or the deals they did. They’ll be talking about their charitable work or something like that. 

So that also means it doesn’t suit everyone, because a lot of people with a finance background struggle to integrate into a community where the first criteria is that you care. 

Diana Doroftei: Interesting. I’d like to go back to what you mentioned about the use of debt. I’d love to hear you say you don’t use it at entry but eventually you do.

Jim Weight: We have but on our realized track record we did.  

Diana Doroftei:  And is that a result of the kinds of businesses you buy, the size the risk, or are there other considerations?

Jim Weight: It’s primarily the size of businesses. What we define as the lower mid market really is quite small businesses. Usually we’re the first, what you might call outside equity. Often we’re buying from a founder. That means they’re not really run like sort of small corporations. 

What that means is that there’s just operational risk in the businesses. Until we’ve done what we do – which is bring that kind of appropriate corporate know how to the small business, you know, control systems, governance,financial controls, financial predictability – and that takes time.

So during that period of getting our arms around the business, it’s often not helpful to additionally bring financial risk through leverage. That being said, once we have got our arms around the business, if, for example, it’s a buy and build or a roll out where we’re developing new sites, then using leverage to do that is something that we do.

Diana Doroftei: And when it comes to leverage, do you have a specific policy or is that more dependent on situation by situation?

Jim Weight: It’s very much situation by situation. But to illustrate, a little bit, I previously worked in the bigger ticket, LBO world, where the top half of the single digits is normal.

Four times would be a lot in our market. It would be unusual. Two times would be more typical.

That also means the debt providers are very different. You go back a few years ago, and it was high street banks. And often, I mean a regional office of a high street bank. Not even headquarters unless it was a specialist sector like healthcare. 

More recently, there are now a few debt funds, but debt funds, again, tend to be more in the asset management game. So you’re not going to build a big group of assets, but you will be able to operate in a relatively uncompleted market.

And then there’s also a third group now which has evolved over the last 10 years or so. Those are firms which iinvested equity through the tax efficient schemes like VCTs and EISs, who also now do debt into the same market. So for example, we’ve worked a lot with Triple Point, which is one of those kinds of firms.

Diana Doroftei: Interesting. So we’ve seen a development from that perspective and a shift away from banks, which is very much a trend.

Jim Weight: It’s the trend that’s happened all the way up and down the market and it’s has happened in the lower mid market too.

Diana Doroftei: Exactly. Switching gears a bit. You mentioned technology and AI. What is the impact you’re seeing of technology in the sector that you’re investing in, and what are the opportunities?

Jim Weight: So far, the impact has been relatively limited, but it’s coming. 

Now I have a bit of a technology background from my youth, which might not be obvious in what I do today and in fact, I’ve just come back from a week at Stanford University being educated on healthcare and AI. So I’m, at least for this week – I’m up to date.

What you’re definitely already seeing is AI being applied to technology where it was already being used. So I was, for example, with someone last night where one of the leading who’s a non executive director of one of the leading providers of patient record technology for care homes. They’re going to be able to now extract benchmarking data. So that even if you only run one care home, you’ll be able to benchmark your performance – across a whole suite of measures – against other care homes. 

And phase two of that will be that they’ll then run analysis, AI driven analysis through all the data they’ve got, to try and predict not great things about to happen to one of the residents so that the home can intervene before whatever episode that might be. 

So I think what we’ll see is that kind of provision. So technology we’re already using becoming much more powerful. 

In other parts of healthcare you’re already seeing that too. One of the most talked about is radiology. So a lot of radiology providers now have trained their radiology suite – and this is before the days of evidence foundation models – they’ve trained their radiology suite on pre existing and pre diagnosed X rays, MRIs, whatever it might be. 

So now they present the X ray of the broken leg. They’ll present it to the radiologist, not just as the raw X ray, but with a few rings around it saying you might want to look here, you might want to look there and we think this is a break, but could you just check please? So that kind of thing is already happening in the sort of pre large language model world. 

One thing I was particularly impressed with last week was the diagnostic capabilities at a sort of GP type level of the latest generation of large language models. I met with the head of innovation from Microsoft, who happens to be a doctor, and he was telling me some stories which were really just quite impressive. That as a  patient, you can go and see your GP much better briefed. And as a doctor, it really does help you, help you give a double check. 

Another big area which is sort of live now, is around real time patient records. So for example, you can go and see your GP,  the whole conversation will be recorded by an AI. At the end of the conversation you’ll get a summary, the GP will get a summary for the notes and it’ll produce a first draft of the letters to go to the your referring clinician, whoever that was, to be checked and then sent off. And if you’re not in the UK, it’ll also produce an invoice with the correct billing posts so that the invoice actually gets paid to go off to the insurer. So those kinds of administrative processes, I think we’ll see a lot of development. 

But I do think we’re a long time from AI becoming a clinician. I don’t think most of us are ready for that. You’ve got to remember that these models are all trained on data. The bulk of the data they’re trained on is text. There are some images, some videos, but they’re trained on data. 

So a good GP, you’re going to a good GP, and a good GP will be reading your body language, looking in your eyes, eyes of the window of the soul. They will be looking at your facial expression, and they’ll be picking up a lot from your mood. It’s a very long time before AI is going to be able to do that as effectively as a human being does.

Diana Doroftei: And a follow up question, because your focus is the UK market. Are any of the trends that you’re talking about around AI, is there a difference between the adoption in the UK versus the US? Is the US market ahead of that, or are we relatively similar?

Jim Weight: I think it’s all fairly early pretty much everywhere is my impression. 

In the UK for the bulk of healthcare – and this sort of gets onto a slightly different conversation, which we should have – but the National Health Service employs 1.7 million people or thereabouts. If you look at rankings of organizations by size in the world, it’s safely in the top 10. You start with the Chinese army, the American army, the Chinese railroad, the Indian railroad, Walmart, and round about where you get to Walmart, you get to the National Health Service. 

So in a big organization like that, it’s hard to roll out innovation quickly. So for these new technologies, they’re more likely to start in the private sector, possibly a sort of pilots and a little bit of bubbling up from the bottom. Whereas top down initiative within the National Health Service, it’s difficult. 

And that is an example of the role, or one of the roles, that the private sector plays In this country, when it works with the National Health Services and with local authorities for social care. Which is that it sort of plugs gaps. With a large organization, they will often find difficulty finding capital or finding focus for niche activities. And that’s what often gets plugged by the private sector, whether that’s entrepreneurs, charities, private equity, funded businesses, whoever it is. That’s the role of the private sector.

Diana Doroftei: Lastly Jim, I would love to hear about your personal experience founding your own private equity fund. How has that been and are there any lessons that you would give to a person just starting off and looking to work in private equity. 

Jim Weight: The usual founder of anything’s answer is that a whole bunch of stuff happened that I didn’t completely foresee but in the end it’s been a great 15 years. 

I think my advice for someone starting out today would be that – certainly in the US, I think very much here now – the private equity market is maturing, if not matured. What that’s meant is there’s much, much more specialization. Wind the clock back when I was in private equity investments which were funded by other people, and almost every firm would do almost anything. These days sector focus is a big keyword. That’s why we just do healthcare. We’re much more effective at it than we would be if we drifted off into other things. 

Size focus – size ranges used to be huge. That’s why we only do lower mid market and in a mature market, it works. As I said to you before, our returns, realized returns to date have been five times. We wouldn’t have been able to make that kind of returns without that focus. 

So I think for someone starting out, the question I’d be asking myself is, ‘given what I enjoy, which one of those niches do I want to be in’?

If you take two extremes. As I said earlier on, the businesses we invest in are operationally fragile. When we invest in them, that means we work very closely with them. It’s sleeves rolled up, grubby kind of investing. People who like the business of doing business, like that. If you’re a really super smart financial analyst and you don’t like the grubby end of business, then large cap PE might be for you. If you’re someone who cares, healthcare might be for you. If you’re someone who loves building things, an industrial specialist might be for you. So all of those kinds of specializations are out there now. So I’d be asking myself, what is it that floats my boat?

Diana Doroftei: What do I actually like?

Jim Weight: Yes.

Diana Doroftei: And the healthcare investment focus, any particular areas and what you focus on.

Jim Weight: So a couple of things that we look for in the businesses that we target. We particularly like segments where – whoever the payor is, they’ll pay for quality. And the reason we like that is twofold. Firstly, it means you just orientate the business towards delivering quality. Your quality improves and as a result, there’s more demand for what you offer. And you get on this kind of virtuous circle. There’s more demand, that means you can put your price up. That means you can reinvest some of the extra money you make in quality, which means your quality gets better, the demand gets bigger. It’s  just a great way of running a business, particularly in an organization where the staff are there because they care about whoever they’re delivering the service to. They just love it. 

The second reason we like it is because a lot of other investors, financially orientated investors, really struggle with it because you’ve got to have the experience that you can trust. That when you get the quality right, profit will follow. 

In most kinds of financial investing, people start with profit and try and push the operations to make profit. So this requires a leap of faith that, if you don’t think the right way, you’ll struggle with it. 

And we find those businesses are often surprisingly in less demand than regular businesses. 

The second kind of business we like is ones where it saves money for the payor. So that’s then just an easy sell. 

Diana Doroftei: Well thank you Jim very much. 

Jim Weight: Pleasure. Thank you.

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