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Cressey & Co. wants to invest in companies that have an innovative edge that will improve — not just disrupt — health care in the coming years.

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Cressey & Co., the Chicago-based private equity shop raised $995 million for its latest health care focused fund — outpacing its target.  

The larger than expected raise was a direct result of investors’ confidence in the Cressey team and their ability to source investments that are on the cusp of utilizing technology to improve the delivery of healthcare, said former Sen. Bill Frist, a partner based out of the Nashville office.

The PE team spends energy and time studying select areas of health care, including the veterinary space, talking to every player in the sector before beginning to zero in on potential partners, he said.

Cressey wants to invest in companies that have an innovative edge that will improve — not just disrupt — health care in the coming years.

The goal is to link up with middle market companies that have a model to redefine their corner of health care within the next decade, rather than scaling growth through leverage, Frist said.

A dozen Cressey staff get together to narrow the list to five from about five dozen areas they “think will be important in the future,” said Frist.

Then all 12 set out to learn everything they can, and network with everyone from entrepreneurs to established CEOs in the space over a year before they think about what investments to make, Frist said.

“We will come into an auction because that’s where so much of the game is but typically we spend time getting to know people,” said Frist.

The areas could range from nutrition and food to pediatrics to end of life care — but one component potential investments must have is a tech-enabled approach.

“By the time we invest we will have spent a year looking at the industry. I’m not a futurist but I’m constantly thinking about how to make it better five years from now,” said Frist. “I’m constantly asking who are the experts in the five fields.”

It’s a new, bigger era for Cressey.

In a “huge change” for Cressey, Fund VI will be tackling tech-enabled delivery as a top consideration, Frist said.

“That’s where our priority has moved,” he said.

They’ve brought on new operating partners, including one with substantial tech expertise, who can help guide companies earlier on the ground.

‘CEOs fully buy-in or we don’t invest’

The exploratory conversations give the team a chance to gauge which middle market companies have a culture that aligns with the fund’s vision of innovation and improvement.

Frist said the Cressey team stresses culture and its mission statement, which includes improving health care, from the earliest conversations.

“We are an investment institution, but with a vision to make American healthcare the best in the world” said Frist. “CEOs fully buy-in or we don’t invest. We talk about it and we open with it. If it’s not important to them then we shy away from it.”

The PE shop gravitates toward smart, effective management teams who can, possibly, move from one Cressey partnership to another.

Cressey scouts middle market companies solving a niche problem, and run by teams who are open to early and frequent executive mentoring.

“They are already making money so you know it works because  it’s solving a health care problem that isn’t being looked at elsewhere,” said Frist. “We help take it from three disparate communities and take it to 25 or 30.”

It was a fast-paced fundraise

Cressey raised about $350 million more than it planned, thusly creating an add-on fund of $105 million. 

The goal was to raise $750 million for the primary fund and the firm didn’t want to raise more than $1 billion for fund VI. Since it received more commitments faster than expected, it created a $105 million add-on fund.

Investors like its focus on finding smart teams to build companies around rather than looking to grow and immediately exit, Frist said. It closed Fund V in late 2014 at $615 million.

Frist said the shop expects to raise its equity check size to about $100 million, up from $50 million, meaning it can invest in larger companies. It’s still solidly in the middle market, he said.

The sidecar will mean select companies could see a total of $150 million from Cressey.

Filings show previous investors in both Cressey funds IV and V include Northwestern Mutual and the Florida State Board of Administration, which per a filing invested a combined $125 million across those two funds.

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