Fifth Street Finance completed the acquisition of Healthcare Finance Group (HFG) on June 12, 2013. We sat down with Dan Chapa, former president and now CEO of HFG, to learn more about the acquisition and what the future holds for HFG.

“The greatest benefit of Fifth Street’s ownership of HFG is access to capital,” declares Chapa. “Fifth Street is a public company, operating nationally with over $1.2 billion in market capitalization, and its access to capital will support HFG’s growth goals. It is the best of all worlds, because HFG will continue to operate independently as a separate company and will not be integrated into Fifth Street’s operations. We will retain the established ‘HFG’ name.”

HFG was formed in 2000 after the management-led buy-out of Daiwa Securities Group’s healthcare group. Isaac Soleimani, HFG’s CEO until the Fifth Street acquisition, led that buyout. The company is headquartered in New York City and has business offices throughout the U.S. HFG initially was solely an asset-based healthcare lender, primarily providing revolving lines of credit secured by healthcare provider accounts receivables. In 2005, HFG raised additional equity from two private equity firms and expanded its product offering to include term debt.

Chapa was hired in February 2006, soon after that equity raise. “My initial responsibility was to reorganize HFG’s sales and marketing efforts,” he states. “In October 2008 I was named president of the company. My responsibilities included sales and marketing as well as portfolio management, underwriting, field exam, IT and legal.” Under Chapa’s leadership, the company focused on developing well-defined policies, procedures and credit guidelines. It also continued to increase its asset-based capabilities while expanding its term debt financing.

The Falcon Has Landed

“During that time we built our system of record, which we call Falcon,” notes Chapa. “We have two full-time programmers on staff that helped build this loan and collateral monitoring system for healthcare asset-based lending from the ground up. About a year ago, we knew we had achieved our goal of building an infrastructure that would allow our business to be scalable.”

HFG had prepared the Falcon platform with the goal of selling the company. “We were backed by private equity, which typically has a five to seven year timeframe for monetizing the investment, so we built the platform with the plan of first growing and then being sold to a strategic buyer.”

The sale process began more than a year ago, and HFG considered a number of potential suitors. “We identified Fifth Street as a good partner for us,” explains Chapa, “because they were active in the ever-growing healthcare industry — and they could provide the capital we needed to continue the expansion of our platform. HFG has good credit capabilities and the capital to continue expanding our asset-based lending, but we needed additional capital to grow our term debt and cash-flow lending abilities. Fifth Street will allow us to do this in a meaningful way.”

Fifth Street provides comprehensive financing solutions including first lien, second lien and mezzanine debt, in addition to a unitranche product. HFG is a good complement, because it provides the asset-based lending that Fifth Street does not do. “HFG also provides cash-flow and term debt senior secured financing in a manner that supplements Fifth Street’s efforts,” states Chapa.

The Falcon system allows HFG to gather significant information on a healthcare provider’s accounts receivable. “That information has proven to be very helpful in asset-based lending as well as in understanding a healthcare provider’s revenue cycle and financial performance,” asserts Chapa. “It is a very good credit risk management tool that will benefit us as we expand our term debt and cash-flow lending capability. Falcon allows us to get granular, detailed information on any healthcare provider’s working capital component. I am not aware of any other system in the market today that allows you to do that.”

Expertise at the Right Time

“Healthcare finance has always been our expertise — it is all we do,” exclaims Chapa. “Fifth Street will continue to offer their products and services to healthcare and other industries, and HFG will bring revolving lines of credit, senior secured cash-flow and term loans for healthcare providers.”

Chapa says that the demographics for healthcare remain positive. “Now that we have some clarity around ObamaCare and its associated changes, we predict continued consolidation in the healthcare industry. That will drive investment, particularly on the private equity side. Smaller providers will need to make investments to keep pace, and that will require both equity and debt capital. Since we are providing senior debt capital, there should be tremendous opportunity for us to grow. Healthcare continues to become more and more complicated, so companies such as HFG that have great healthcare expertise are likely to do well.”

HFG strives to make its expanded approach a smooth experience for its clients. “We have some important brand traits that we live by here: delivering healthcare expertise as well as financial and capital expertise to the middle market while being very creative in providing financial solutions to our providers,” emphasizes Chapa. “We really hammer home seamless execution and clarity of execution to our current and potential client base. We are also known for our customer service. On a scale of 1-5, where 5 is ‘very satisfied,’ we score in the 4.6-4.7 range in our annual customer surveys.”

According to Chapa, HFG’s organizational structure is similar to other middle-market lenders. Senior staff includes a chief information officer, a chief accounting officer, a national marketing manager plus managers of capital markets (syndication) and business development (sales), underwriting and portfolio management, operations (including human resources) and data analytics.

HFG is most active in the market sectors that tend to have a larger working capital component, particularly those that generate Medicare, Medicaid and insurance company receivables. “We have a wealth of expertise in those sectors, and we pursue them aggressively,” says Chapa. “The sectors we pursue the most are hospital and nursing home chains, home health and hospice companies, long-term acute care hospitals, pharmacy services, behavioral health services companies, healthcare staffing, diagnostic imaging and clinical lab companies. Our transaction sizes range from as little as $5 million and as large as $150 million. With this new platform and the capital that we now have access to as a result of the acquisition, we will probably go as high as $250 million.”

Like most lenders, HFG feels the pinch of a competitive marketplace, and much of the sting comes from the traditional banks. “We originate larger transactions but also have a very active syndication area. While banks are often investors in the senior debt loans that we engage in, they also tend to be our biggest competitors.”

Chapa observes that today’s major institutions have good healthcare expertise, but they tend to deploy that expertise in the larger middle-market and corporate space. “It is the middle market companies that can really benefit by our expertise. Healthcare lenders must have a very good understanding of what happens in the healthcare market in order to avoid trouble from a credit or risk standpoint. The keys to success will be the ability to lend money efficiently, satisfy the middle market’s debt capital needs, speak their language and understand their businesses. We think all those factors are going to play well into our platform and our opportunity for growth. With the capital that Fifth Street will provide, we expect to see significant growth in our business over the next three to five years.”

Looking Forward

When Chapa was asked what has changed from where he sits, he states, “The access to capital is the thing that has changed. When the acquisition closed on June 12, we had already opened up some new financing vehicles that should allow us to significantly expand our cash-flow and term debt lending capabilities.”

Things are moving quickly, and the HFG team is very excited about opportunities for growth. “We’re ecstatic! When we were looking for a buyer, we had a number of different suitors including banks, private equity firms and other strategic buyers, but we could not be happier with Fifth Street as our partner. They will help us take the platform that we have already built and grow it with the processes and systems we already have in place.

“We expect to have a very busy second half of 2013. We have great people, high employee satisfaction scores and a motivated, talented staff. We are well-positioned to take advantage of the opportunities that exist today in healthcare middle-market lending.