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Crafting Shore Capital's Vision in Microcap Healthcare | John Hennegan

John Hennegan is a Founding Partner of Shore Capital and is primarily responsible for the sourcing and evaluation of healthcare investment opportunities and operating executives. In this episode, John discusses the unique and often emotional nature of microcap investing. He also talks about the importance of continued learning as a company scales and describes Shore’s approach to sharing lessons learned across the portfolio. As only a Founding Partner can, John adds color and insight on the past, present, and future of Shore Capital Partners.

Transcript

Introduction

Michael Burcham: Welcome to Microcap Moments, a podcast from Shore Capital Partners that highlights the stories of founders, investors, and leaders who have taken on the challenge of transforming ideas and small companies into high growth organizations.

The journey of building and scaling a business takes one down many unexpected pathways. It's a journey where we learn from our mistakes, fall down often, but have the entrepreneurial grit to pick ourselves up and persevere. Within this series, we will share these stories of success and failure, of the challenges and the rewards faced by those who dare to dream big. And through their lessons learned, we hope to inspire others who are on a similar journey of becoming, growing, and leading.

In this episode, Anderson Williams and I will be talking to John Hennigan, one of the four founders of Shore Capital Partners. As a partner, John is responsible for key investment activities of the firm, including sourcing, evaluating, and enabling the growth of Shore investments in healthcare. Prior to founding Shore, John worked at Henry Crown & Company, the private investing firm for the Crown family of Chicago.

 

Prior to joining Henry Crown, John worked in Citigroup's Investment Banking Division in New York and Chicago, providing merger and strategic advisory services for companies across a diverse set of industries. Outside the office, John is a member of the Shedd Aquarium President's Council and an avid golfer.

 

John earned his MBA with distinction from the Kellogg School of Management at Northwestern University and a Bachelor of Science Degree with Honors from the University of Illinois.

Anderson Williams: Well, welcome, John. Really appreciate you being here today. Will you start us off just by telling us who you are and what you do here at Shore?

John Hennegan: Absolutely. It's great to be here. Thank you so much for having me. My name is John Hennigan, and I'm a partner in the Healthcare vertical. I've been fortunate to be a part of the Shore Capital team going back to 2009.

Genesis of Shore Capital

Michael Burcham: So, John, will you take us back to the very early days and talk about how Shore got started and what it was like getting it off the ground?

John Hennegan: Certainly. Those early days were a lot of fun. It was chaotic, but it's great to fondly look back and remember what it was like. My personal journey to joining Shore Capital began with meeting Justin Ishbia back in 2009. I was coming out of business school at the time, and a mutual friend had introduced me to Justin.

That friend knew that I was looking for a chance to return to private equity, but to do something more entrepreneurial. Justin outlined his vision for building a micro-cap private equity fund, and it resonated with me. My old firm had been focused on traditional middle market acquisitions, an environment that is incredibly crowded, where it's really hard to differentiate.

And I'd seen hundreds of companies that were really interesting. They were just too small to get our time and attention at the old firm. And so, the chance to build something from scratch was incredibly appealing. The chance to serve a part of that private equity ecosystem that was underrepresented was incredibly exciting.

And then I had a chance to meet Ryan Kelly and Mike Cooper, the other two individuals that Justin had recruited and the opportunity got even more exciting. Admittedly, I looked at my wife and said, this will never work. It didn't seem possible. There were four guys in our late twenties or early thirties. Didn't believe that we had the experience or the connections to make it successful, but we each approached it with such a positive attitude.

And Michael, as you know, having started several businesses, in some ways, it's a blessing that you don't know what you're walking into. I think there are moments in launching a company where you feel like you are absolutely on top of the world and you have figured something really special and really unique out, but then there are also moments where you say, oh my goodness, what have I gotten myself into?

Will we ever recover from this? And how could I have ever thought that this would be a good idea? Thankfully, there were so many more moments like the former than the latter for us, and I was fortunate to have a great team and a very collaborative team that was set on our shared success. And in those early days, we spent a lot of time at a whiteboard developing what has become the Shore way.

And really the most exciting part of that to me was walking through every aspect of getting a deal done. Everything from thesis formation, to identifying executives, to completing an acquisition, to growing the business, to ultimately selling that business, and then maintaining great relationships with the entrepreneurs and executives that we'd worked with.

And that process was incredibly collaborative. And I have so much respect for the way that the other three gentlemen approached that situation. No one had a pride of authorship. No one ever said, you know, the way that I used to do this. is the best way. Everybody was there to share what had worked for them, but also the mistakes they had made along the way.

And that transparency, that willingness to admit that things hadn't always gone well, allowed us to cherry pick what approach and what techniques we wanted to utilize at Shore Capital. And if you think about our approach to developing a thesis, that has so many echoes of what Ryan Kelly had done prior to Shore Capital.

If you think about our executive recruitment and identifying great CEOs, that's straight from Mike Cooper's playbook. And then metric management and utilizing data to make smart decisions came from Justin Ishbia's background. And that approach sharing and amalgamating what had been successful for each of us really became now our own approach here at Shore Capital.

And I think that commitment to being transparent about what works and what does not work and recognizing that no one is perfect, no firm is perfect, no approach is perfect, so pervades everything that we do at Shore Capital. And while so much has changed, that certainly rings true today.

The Big Difference

Michael Burcham: In this first segment of our discussion, Anderson asked John to share his thoughts on the big difference in microcap investing and more traditional private equity investing.

John describes the partnership between the investor, Shore, and the founder entrepreneur as an emotional decision and the importance of understanding that the company he is investing in is someone's baby and bringing change to that is not easy.

Anderson Williams: John, I'm curious if you go back to your previous experience in private equity and then the move to starting Shore, what is the big difference?

What are the key things when you moved into the microcap space that were different about private equity in the microcap space than what you had experienced before?

John Hennegan: Certainly, in the early days of Shore, there were a lot less resources available, coming from a well-established firm down to, building a firm from scratch.

You had to learn to do every aspect of the job yourself. And at times that meant, sourcing deals as a partner. At times that meant running out to grab coffee as an intern, whatever it took, we were there to make the sacrifices necessary to do the best deals possible. And again, that commitment to doing whatever it takes still pervades everything we do at Shore Capital.

And I think that is a necessary part of the microcap universe. In larger transactions, it's often an investor monetizing an asset the way that you may sell a share of Amazon or Microsoft stock. You don't spend a lot of time thinking about it. You feel like you've gotten the return that you wanted and you're ready to move on.

Conversely, in the microcap, it's a very emotional decision. This is someone's life's work. It is their child. And while we're oftentimes going to retain that child's name, there's a lot we're going to change. And this analogy, you may be changing their school. You may be changing their religion, maybe changing their neighborhood, whatever it may be, we do make a number of changes to the companies that we partner with.

But those changes are almost always agreed upon up front and in advance. And I think the emotional nature of microcap investing is a very good fit for the team at Shore Capital. We understand what it's like to be entrepreneurs because we are entrepreneurs ourselves. We have the good fortune of having partnered with nearly a thousand entrepreneurs at this point, and we've learned from each of them and thankfully have developed so many great friendships and relationships over the last 14 or 15 years that they help guide us.

And when we make mistakes and we do miss the mark, it's a strong enough relationship that they're willing to share that feedback. That commitment to our entrepreneurs' happiness, our executives' happiness, our investors' happiness drives Shore Capital forward. And I think it's why we've been so successful, not just from a return standpoint.

Those, I think the returns follow from the happiness that we've created for so many other stakeholders.

Building the Team

Michael Burcham: John and the other three founding partners of Shore Capital were all quite young when they launched the business. In the following segment, John describes the value of mentorship and some of the early lessons learned about having focus, thoughtfully picking an area for investment, asking good questions, and a commitment to continuous learning.

Anderson Williams: And you mentioned earlier in those early days of questioning and wondering what have you gotten yourself into? How did you find the expertise that you couldn't have had in your late twenties or early thirties to do all that you were taking on? Where did you find the expertise to support you in those early days?

John Hennegan: We were so fortunate in so many ways to find great executives to partner with, both in the C suite and at a board level. We also learned a very valuable lesson about focus. Going back to the earliest of days, we knew it would be a microcap thesis, but it actually took us a couple of months to settle on healthcare.

Because we believe that there was an opportunity across the microcap landscape as we still feel today. But in the early days, we were looking at a wide variety of deals and in a given a week, I may look at a landscaping business, a tax preparation business, and even a logistics business in Alaska. It was impossible to be knowledgeable and a true value-added partner to businesses across such a diverse spectrum.

And so, we quickly realized that to be the best partner we could be for the entrepreneurs and for the executives and to deliver the best returns for our investors, we had to be much more focused. And so, we began to hone our focus and really zero in on healthcare. And then within healthcare, we picked two niches that we thought had outsized potential for growth.

After we began to do a lot of primary research on those sectors, talking to executives who had worked in the space, going to conferences, reading any publicly available information, once we have achieved a certain level of knowledge, we then were able to approach potential board members and explain to them our thesis and why we thought Shore Capital would be a good partner in that sector.

And I'll forever be thankful to the executives that took a chance on us in those early days and were willing to be board members. Michael remembers this very well as an early board member. We couldn't make it economically meaningful to those individuals. Certainly, they were going to be compensated, but these were incredibly accomplished executives that the outcome of a small microcap investment, wasn't going to change their life in any material way, but they knew that we were interested in learning from them.

We knew that we were committed to listening to them and that we shared their vision for what was possible in their industry. I think that's really what attracted them to be a part of the team. And those early board members were so, so kind to us and sharing so many lessons, recognizing when to grab us by the collar and pull us back.

I'll never forget our poor first CEO, wonderful guy, really patient individual, four private equity investors with only one business. We had a ton of questions from him going into as much minutia as what was going on in this month's phone bill. And he took all of that in stride. And again, the board members were there to grab us by the collar and say, is this strategically valuable to the business?

Is this what we want to be talking about right now? And also, your life lessons about being a better investor. Teaching me to ask questions in board meetings rather than make declarative statements. If you have a question about the incentive program that they're developing, rather than explicitly stating what I think an incentive program should look like, asking them how do they believe these incentives are going to change behavior.

What risks come out of this program? And asking those questions allows all parties in the room to learn. I believe, certainly I'm hearing feedback from a really accomplished executive and so I'm going to learn a great deal. But also, I believe you can only teach something if you truly understand it.

And so by putting them in a position to explain their thought process and explain what they expected to come out of it, it helped them grow as executives as well. And again, it pervades Shore Capital, but there is this commitment to continuous improvement and learning. And so, it was never taken as caustic or a challenge to their authority.

It was, hey, please help me understand this. Because if we do it well here, I know we can do this well again at hundreds of other businesses. Again, that is something that has not changed over the last 14 or 15 years. The ability to learn from one board member and impact not only that business, but then roll that lesson out to dozens of other companies, fundamentally allows us to go faster while bearing less risk, which I think is a huge source of Shore's returns.

Michael Burcham: John, you're so right. I think asking good questions rather than making statements helps everyone in the room learn. It's also less off putting, so no one gets defensive when you ask a question. When you make a declarative statement of what you think should be, it's either their way or your way. And when you ask a question, it can be our way.

John Hennegan: Absolutely agree. And I think, again, you know, coming back to the question of differences in microcap investing versus perhaps larger company investing, because it is more emotional and because you have an entrepreneur in that room, again, you're talking about their baby. And it's very easy to frame a statement in a way that makes them defensive, and if they're defensive, they're less inclined to share.

And I think we would all agree that if we're open and honest with each other, we will get to the best answer. We will get to the best solution. And so, it's critical for us at Shore to make sure that we're fostering an environment where people can be transparent and we can be honest about things that aren't going well.

One of my favorite board meetings ever was an executive at Behavioral Innovations, an autism therapy business, was giving a presentation on a marketing program that he'd launched. This was an incredibly accomplished executive. The marketing program there had been absolutely fantastic, quarter over quarter, year after year, but this particular initiative had not worked.

And I always applauded that executive and I love to cite that example because he had the humility to come in and say, hey, we tried something. We piloted something. It seemed to be working. We got more aggressive in our spending and then quickly realized this was not working and had to stop. The ability to walk into a board meeting and share that experience and really demonstrate that humility, not only did it make the board cherish that executive even more, but I think it creates an environment for the rest of the executives to say, hey, we are not perfect.

We are going to make mistakes. Now we win far more frequently than we lose that shows up in the returns. But again, it's never a straight path to success.

Cultural Commitment

Michael Burcham: Shore Capital over the past 15 years has grown from four individual founders to nearly 150 team members. Passing on knowledge and insights to younger team members has its own challenges.

In the upcoming segment, John talks about how he and the founding partners have shared their learnings and experiences with new members of the team as Shore has grown.

John, nothing will replace some of the wisdom gained in those early years when it was the four of you to one entrepreneur, but Shore has grown a lot and changed over the year and even now in our investment team.

There are layers of folks under a partner from a principal to a VP, associate, and analyst. How do you think about as a founder, the best ways you share that learning to those coming after you in the organization, the new members of our team who will never get the chance to sit in a room with four partners and one entrepreneur, but you want them to be really talented at their craft and be great investors.

How do we take what you all learned early and memorialize that down to the next generation of people in the company?

John Hennegan: It's a great question. I believe it is a cultural commitment to continuous improvement in learning at Shore Capital that will never change. And that began even with the four of us shortly after founding.

My partner Don Pierce joined the organization and Don had a lot of great ideas that allowed us to improve in what was already working reasonably well but had so many opportunities to get better and that openness to change, that openness to feedback is a critical part of it. However, we also need to document and learn from what we've done.

And one of my favorite traditions at Shore Capital is we've got a file called What We Learned, or WWL. What We Learned files well over 100 pages at this point. And every time we've hit a major milestone, we stop and put in writing what we learned from that experience. And if it's 150 pages, I would bet 145 of the pages are dedicated to mistakes that we've made, but the remaining five, you know, representing successes and what we could have done to make it an even better success.

But that what we learn file is the greatest repository of microcap information that anyone could imagine. It's a wonderful tool for me as I go back and try to reflect on, hey, entering my last sale process, what did I think about in selecting an investment banker? What do I wish I would have done differently?

It's also a wonderful tool for the next generation of leaders at Shore Capital. We've grown so quickly to go from four of us in a tiny office where I heard every phone call my colleagues made to now, spread across multiple offices and with a rapidly growing team. How do we translate all of those lessons to the next generation and the, what we learned file has been a wonderful tool to do that.

In fact, twice a year in the summer and in the winter, we take the entire firm and kind of lock ourselves in a room for a strategy discussion. And from the four of us that founded the firm to the newest receptionists that joined the Shore team, we will walk through that what we learned file and remind each other about the mistakes we've made and lessons we've learned.

And the goal is to allow the next generation of leaders at Shore to scale so much faster than I was able to, to allow them to make better decisions without earning all the scars. That I've picked up along the way and I applaud our junior team members for taking that on so seriously and being so committed to learning and asking questions and then they themselves pushing it forward by sharing things that they've learned from their experience.

And again, it isn't just talked about, it's rigorously documented so that we can all read it together.

 

Michael Burcham: John, I love that example you give about what we learned, cultures built not only by the lessons learned, but also sharing not just the work, but some fun to get to know each other as humans and to respect one another personally, not just professionally.

Can you share some early stories that you think helped really define what it means to work at Shore that are part of our culture even today?

John Hennegan: Yes, from the very beginning, there's been a commitment to having fun as a team. And I credit Justin Ishbia for recognizing very early on that if those social bonds are there, we'll be a better investment team together.

Because if I know you as a friend, it's easier for me to speak up and for you to take that as constructive feedback rather than a personal attack. And so, it encourages a culture of openness, which allows us to get to the best answer on a faster timeline. But tactically, it was as simple as, I'll never forget we were about a month in to working together and Justin out of the blue said, ‘All right, everybody cancel what you've got this afternoon. We're going miniature golfing’, right? Justin notably hates golf, but wanted to go as close as he was going to get to a golf course was going miniature golfing.

Or we implemented a policy in the early days that anytime we invested in a new company, we would go out and celebrate together and spouses and friends were always welcome to join for those moments, which really made it a team celebration, a family celebration so that my wife who has seen me gone far too often, at least gets to acknowledge, hey, all of that hard work is culminated in this moment that we all get to share in that success together.

And that welcoming family atmosphere continues through to today. I wanted to host an event at my house. I've done this a couple of times in the past, where we'll bring a large contingent from Chicago out to the suburbs. And I thought, hey, before I announce this to the entire firm, I'll just give a couple of people a heads up that it's going to happen.

And I emailed our managing partner and COO and they came back and said, John, it's great that you want to host another party at your house, but actually another partner is hosting a party at their house that day for the junior team. So, can we look at rescheduling? And that to me was such an eye-opening moment.

There are so few firms in this sector that have partners that want to have the junior team at their house, that want to spend a Friday or Saturday night with their colleagues. And for us here at Shore, it truly is our friends. And so, it's a very natural extension to spend time together in our personal time.

But the fact that multiple senior team members had targeted the same day just speaks to how invested in the culture so many of us are.

Challenges and Adaptations

Michael Burcham: In the following segment, Anderson asked John about the opportunities and challenges relating to the growth of Shore, and how he thinks about protecting the culture with an ever-expanding team.

Anderson Williams: So, John, from the partner seat, from the founder seat, as you think about the What We've Learned conversations, as you think about this culture that's so powerful within Shore, what do you see as the opportunities and challenges as Shore continues to grow to keep those things a part of the Shore identity?

John Hennegan: For me, probably my biggest fear for the last five years has been maintaining our culture. Everyone at Shore Capital works incredibly hard. I would say the typical teammate at Shore Capital is working more than their peers at other private equity firms. But we balance that investment of their time and sacrifice that we're all making by having more fun than any other firm as well.

And that comes back to some of the discussions we had just a moment ago. But for me, culture is so critical because I believe the processes, the tools, the systems that we've developed at Shore will continue to deliver better than average returns. I hope it's by a sizable margin as it's been historically, but I'm confident in those resources and those systems generating great outcomes.

However, the breakdown would occur if we lost our culture. And to me, that's why it's more critical than ever that we continue to invest in our people and invest in the next generation and creating growth opportunities for them. And we've done that through a number of ways. As we talked about all of the fun that we regularly have, but also that was an impetus for launching new verticals and moving outside of healthcare.

We had wonderful teammates that were young and deserved more room to grow. How do we create growth opportunities for them? The vast majority of private equity firms just instantly moved to larger funds. For us, it was a chance to expand across the microcap, which led to the launching of our food and beverage fund, then our business services fund, then our real estate fund, and our industrials fund, and so forth.

And there will be more to come on that front, I'm certain. And I think the culture is so important to investing, because when you're doing great deals, it's easy to have fun. It's in the challenging moments that you really lean on your culture, and it's when we have disagreements. The four of us that started in the early days are great friends and get along incredibly well, but we can still fight like siblings.

And I'm not afraid to say when I think they are making a mistake, and thankfully they're not afraid to speak up if they think I'm doing something wrong as well. And having that culture and having those bonds enables us to push one another farther, and I think that will be consistent at Shore Capital for many, many years to come.

So, then my mind goes to how do we continue to build culture in our portfolio companies. How do we continue to share the lessons learned? We have so much experience. We've made so many mistakes over the years. If we can share that information with others, they will learn faster. They will grow faster. They will deliver better outcomes for themselves and for our team and for our investors.

And sharing those lessons comes about in a variety of ways. Prior podcasts have talked about the Executive Leadership Academy, an event where we bring the top five to 10 executives from every company to Chicago and have a series of guest speakers like business school lecturers and so forth. Perhaps most importantly in those events, we have an opportunity for collaboration among the teams.

 

So, we'll get all of the CEOs in a room, all of the CFOs in a room and so forth. Then we'll have the chance to get all of the multi-site healthcare companies in a room and all of the manufacturing companies in a room and all the food and beverage companies in a room. And that peer-to-peer learning really cuts out Shore as the middleman in some ways and allows them to speak in a peer-to-peer way that we can never replicate.

And so, propagating that and growing that is absolutely critical to me. However, I'd say the next generation of challenges for Shore will be going a layer deeper than that in the organization and getting to training and education for our frontline leaders. It's easy to get all the CEOs together. There's only one per company, but how do you get all of the clinic level managers together?

How do you get all the factory managers together? That's a bigger time commitment, a bigger dollar investment. And quite honestly, many of them are in positions where they can't get away for extended periods of time. So, we need to bring the education and training to them. And that's why I believe one of the next big advancements for Shore Capital will be greater utilization of the learning management system that you and your colleagues have developed.

This is an online system in many cases that allows these individuals to have access to some of the best training possible in our business schools but brings it in a way that is tailored to their challenges. So, things like, how do you give an employee a review? How do you have a difficult conversation? How do you resolve conflict?

Those are things that are innate to some people, but to the vast majority of us, we need training, we need experience. And rather than just learning from experience, allow them to enter that first situation with the framework that they can utilize and build upon to have the greatest chance for success.

We have a mutual friend that says, good judgment comes from experience and experience comes from bad judgment. We're trying to get them the experience without the sacrifice of having that bad judgment early on. And it's particularly difficult for so many of those frontline leaders because oftentimes they were the best at the job immediately below that and therefore, they were promoted.

So, they go from being a group of peers to now managing their former peers. It's a big leap for a first-time leader. Utilizing the learning management system and gaining access to their peers allows them to be so much more successful in that position and continues to propagate a great culture.

Michael Burcham: John, a follow-on question to that particularly relates to the training of frontline managers and even the LMS is that because of the growth that we experience in our companies, the company can easily outgrow any one person, manager, leader, participant. And I know one of the things you and other partners are committed to do is to help everyone who becomes part of the Shore organization to at least have the opportunity to grow in scale at the same pace as the company, because we frankly can't afford to keep replacing people.

I'd love to hear some of your philosophy and thoughts on that, because I do think the LMS is a great complimentary tool to helping people rise to the occasion and do more than they've imagined they could do, particularly if they've come into this partnership through an acquisition.

John Hennegan: I absolutely agree. So many of our investments are service oriented businesses, meaning the assets of the organization are the people. And so turnover is incredibly damaging for us, incredibly expensive to us. It's also a strategic consonance with the values of our entrepreneur partners. They value the people that help them get to the phase where Shore Capital is an interested investor.

We want to see those people continue to grow and flourish with the organization as well. Again, so much of this comes back to culture. If we're able to retain great people, they will help propagate a really healthy and productive culture. And so, it's incumbent upon us to educate them, to train them, and then create opportunities for their growth.

And one of the things I often say to the entrepreneurs and business owners that I meet is a partnership with Shore Capital is the greatest thing that can happen for their team because rapid growth creates more promotion and growth opportunities for those individuals. If you're a relatively static, small organization, or maybe you're adding a couple of locations per year, that is only one or two promotion opportunities for any given individual.

If we're opening dozens of locations per year or launching new product lines or completing add on acquisitions, each of those moments creates an opportunity for growth for their team members. And it's a chance for our executives to continue growing and developing new skill sets as well.

I had a meeting shortly before this with an executive who had a background in new clinic construction or new site development. We've begun to do add on acquisitions together. That is a new muscle for that CEO to develop. He's taken to it incredibly well, in part because he has his peers to turn to and all the resources of Shore Capital available to him.

Investment Philosophy

Michael Burcham: In the next segment of our interview, I asked John about why he and his founding partners chose the healthcare space as the industry within which they would do their initial investments. John speaks to how the team built complementary expertise to help healthcare entrepreneurs and clinical leaders have greater impact.

John, you focused your initial investments and built your expertise in healthcare. Can you talk about why Shore chose that sector as its starting point?

John Hennegan: Admittedly, I did not have a background in healthcare. Thankfully, my partners did. But as we assessed the microcap landscape, we realized that healthcare was a great starting point for Shore Capital.

In part because there's a natural competitive moat in healthcare. You're only going to drive so far to a physical therapist. You're only going to drive so far to a doctor's office. It's also an inherently local purchasing decision. If I am driving to Florida with my children and we want to stop and grab a hamburger, it's very easy to pull into a large chain restaurant where we know exactly what we're going to get.

If I'm going to walk into a dentist's office or a doctor's office, I don't necessarily want a big national brand. I want somebody that feels local and feels affiliated with the community. That natural moat gave us a chance to be competitive with even the largest of firms and even the largest of private equity organizations.

It also seemed to be a great fit with our skill set at Shore Capital. We knew the clinicians would bring the medical expertise and the knowledge of the patient, which was a perfect complement to our expertise around growth, recruiting, marketing, and so forth. And quite honestly, the parts of the business that I really enjoyed and my partners really enjoyed, were very often the parts of the business that the clinician hated, right? They didn't want to talk about technology. They didn't really understand digital marketing and they're certainly capable of understanding IT or understanding digital marketing, but it requires significant investment of their time.

And they'd rather utilize that time to have more time with their children or more time with their friends or whatever their personal endeavors may be. And so it was a really complimentary skillset. Furthermore, I think there's a generational shift occurring that necessitates the involvement of private equity in healthcare.

If you go back several generations, it was common for a doctor to raise a child that was a doctor and far too often that was a father handing off the business to his son. As we've advanced as a society and see greater gender equity, those dynamics have shifted and it's been compounded by the cost of education.

 

Michael, you and I worked together with our orthodontics business. In that field, I believe roughly 52 percent of residents today are female. The average resident graduates with 450,000 in student loans or so. So even if they wanted to start their own practice, or even if they wanted to buy into an existing practice, they oftentimes don't have the money or the means to do so.

Or they've put creating a family on hold. They put their personal life on hold for so long. They want to be part of an organization that's going to provide better benefits, that's going to provide maternity options, and so forth. And we as an organization of scale can meet those needs. Conversely, we're always looking for young, talented doctors to join the organization because I believe with our scale, we can provide better training and better education, better compensation, and better benefits too.

So truly everyone in the ecosystem wins, and I believe that the next generation of clinicians recognizes this change much in the same way that someone coming out of college who wants to enter consulting would look for a Bain, a McKinsey, a BCG, or entering investment banking, you'd look for a large bulge bracket investment bank like I did and so many of my peers.

The next generation of clinicians realized, hey, that big company experience actually isn't a negative. It's quite the opposite. It's very positive for me because I'm going to have a network of mentors, a network of peers that doesn't replace their formal education in any way, shape, or form.

It augments that, right? And I'd say everyone listening to this podcast can think about there's something you learned in your career that was not taught to you in college. So many clinicians feel that same way and we can be that final portion of their education.

Michael Burcham: So, John, in addition to those generational shifts, what are one or two of the other changes you see in healthcare that really provide a great rationale for the partnership between a healthcare provider organization and Shore Capital?

John Hennegan: Certainly, we talked about the change on the supply side, what the clinicians are experiencing. I think it's critical to talk about the changes on the demand side as well. One of the most common themes we talk about, probably the most common theme we talk about in the healthcare vertical at Shore Capital is the consumerization of healthcare.

For many, many generations, you went to a generalist who then referred you out to a specialist. And if my doctor said to go see this ENT or this ophthalmologist, I didn't ask any questions. I just went to the person that I was referred to. Today's consumer is much more dynamic. The second they receive a referral, they are on their smartphone looking up Google reviews.

They are going to social media to see what their friends have recommended. That consumerization of healthcare has dramatically changed how providers must communicate their value proposition to potential patients, to potential customers. So, things like, hey, wait times, here's what our wait times are going to be.

 

Knowing that you're going to have a predictable experience for that customer is very important today. Communicating ease of scheduling. Again, I would have been a taker years ago of whatever appointment was available. Today, we've got a generation of consumers that want to get on their smartphone and book the appointment online.

That consumerization of healthcare has been really, really great for Shore Capital because it plays to our strengths around utilization of technology, better digital marketing, and it's frankly easier for us to brag about so many of the clinicians than they would ever do about themselves. I also think it's a natural extension to the rest of the economy.

What it takes to communicate a value proposition in healthcare really isn't unique versus business services, industrials, or food and beverage. And so again, it allows us to create this ecosystem at Shore Capital where we are all sharing lessons learned and all growing bigger, faster, and stronger together.

Looking Ahead

Michael Burcham: Given the firm's success in forming partnerships within healthcare and the growth of those organizations, the next evolutionary step for Shore is the creation of a middle market fund. In this final segment, I ask John to speak about those plans and what he and his partners hope to achieve in the creation of such a fund.

So, John, the next evolutionary step for Shore and healthcare investment is the creation of a middle market fund. Can you just talk to our audience a bit about the rationale behind that and perhaps the kind of investments that might be focused on with that particular fund?

John Hennegan: Yes, I'm a huge believer in the opportunity to create a larger cap fund at Shore Capital.

 

I view it as the next logical extension of our growth. We'll continue to launch new microcap verticals, but there are also so many great companies in the Shore ecosystem today. It's a shame to let them get away and work with another investment group. If we know they're going to continue to grow at 20, 30, 40 percent per year, why allow another investor base to realize those gains?

And instead of protecting that for the limited partners and investors that have been so great to Shore Capital over the years, in many ways, building a microcap company is about building a foundation for growth. You've got to have the right executives, the right systems, the right tools, the right technology.

But after those are in place, so much of it then becomes about replication. And in the healthcare vertical, oftentimes that is replicating over a very narrow geography. We are going to build the largest urgent care company in these select states. We are going to build the largest orthodontics company in these select states.

Well, there isn't something unique about the two or three or four states that we often select. Frankly, that model would work in any of the 50 states across the U. S. and probably into several foreign countries. And so, if we've built that foundation, if we have that strength, why not continue to let those winners run, if you will?

And I think one of the challenges of private equity is that we have a finite horizon. The investors entrust us with their capital. We invest that as best we can, but then we're obligated to return it to them on a shorter timeline. If we had more time, I know that we could take those businesses even farther.

So, we have an inherent advantage as well because we've seen these companies up close. We know the challenges, much like we talked about, you don't really understand what it takes to launch a business until after you've done it. We'll do an immense amount of research on any given niche, but it's only after you start operating the business that you truly understand the pros and cons of that industry.

To then double down on those investments, you have such a distinct advantage against any other investor that would be looking at that business. It allows us to better price the asset and better understand the opportunity in front of us. And with the support of our limited partners, I believe we should launch an advantage fund focused on these larger opportunities.

And as you both know, there are several companies in the Shore portfolio today that are in excess of, you know, 50 million in EBITDA or in excess of 100 million in EBITDA. And so, while the origin of Shore Capital will always be microcap investing, and that will always be a huge opportunity for us, we're running large businesses today.

And it'd be a shame to let those go to someone else, only because we didn't have the mandate to continue that growth.

Michael Burcham: John, thank you so much for joining us today. It's been a delight to talk to you, not only about your journey, the early days of Shore, but as we've grown some of the changes and specifically healthcare and the evolution of our healthcare investing.

Thank you very much.

John Hennegan: It was a lot of fun. Thank you both so much.

Anderson Williams: Thanks John.

Michael Burcham: This podcast was produced by Shore Capital Partners with story and narration by Michael Burcham. Recording and editing by Andrew Malone. Sound design, mixing, final editing and mastering by Mark Galup of Reel Audiobooks.

Special thanks to John Hennegan and Anderson Williams who shared in the interview with me.

This podcast is the property of Shore Capital Partners, LLC. None of the content herein is investment advice, an offer of investment advisory services, nor a recommendation or offer relating to any security. See the Terms of Use page on the Shore Capital website for other important information.

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