The Exchanges

Q So let's talk about HCA. What was the company then and some of the history?

A It's got a really interesting history. So the company was founded back in the late 19 sixties by Tom Frist Sr. and his son Tom Frist Jr. And they would be able to do a much better job than I ever could talking about the founding of the company, but basically they saw a market need for well-capitalized, well-run hospitals, generally in city settings, and they went about building a great company to try to deliver that. So the company grew over time, mostly organically with maybe a little bit of M&A, Then eventually the company had gone public. I don't remember exactly when, I think either sometime in the seventies. Actually, then the family took the business private in the late eighties, which was really in the first wave of LBOs. It was still, wasn't a particularly large transaction at the time. It was a large for an LBO, but still a smaller scale transaction. But the family basically saw an opportunity to take the company private again. Those were in the early days of LBO investing when you could Make those investments with very small equity accounts, and if you get good growth on a very small equity account, you can have a very successful investment, and so that turned out to be a very successful investment. They came back public again sometime in the early nineties, and continued to grow up through that time period with this really well thought out core strategy around If we …

AI assessment note: “the company was founded back in the late 19 sixties by Tom Frist Sr.”

Q Once you got through the business diligence and confirmed that thesis, this feasibility study you had to jump into, how did you go about that?

A Well, it was pretty delicate because as you might imagine, the last thing a public company board wants is Noise around some sort of large-scale transaction before they have conviction that it's actually going to happen. Keeping all of this really tight and private until the right time to announce it was incredibly important to everybody, and part of that was bringing together a really good, trusted, and narrow equity syndicate that we thought would be big enough to fill out the capital. Of course, the frists were an important part of that capital base as well, and so that was us, and KKR, and then Merrill Lynch at the time, We're also making pretty large scale private equity investments off the Merrill Lynch balance sheet. It was Bain Capital, KKR, Merrill Lynch, and the Frist family speaking for the equity, but then we also needed to figure out how do we fill out north of twenty billion dollars worth of debt that was going to need to be underwritten for this transaction. We really took a staged process for that. So Merrill Lynch was already part of the group, and they certainly weren't going to be able to speak for that entire amount of debt on their own, but they could speak for a relevant portion of it, and more importantly, Probably a good litmus test for whether or not they were going to be willing to underwrite a large portion of that. We thought the best approach was to …

AI assessment note: “bringing together a really good, trusted, and narrow equity syndicate”

Q At the time, once you have these, whether soft or hard commitments lined up and you can go to the board, how prevalent were public to private transactions back then? There's certainly a lot of them today.

A We were certainly before the wave where it became a very active market. So if I think over a long, long period of time, Public to privates were always happening. I'd done a few before this one, but I wouldn't say they were a growing part of the investing world. They would just periodically happen when there would be an opportunity where a private buyer might see more value than the public buyers and manage to put something together. Shortly after HCA, as the debt markets heading right into the GFC got really hot, there was a period of time where lots of different public to privates could happen and frankly did happen, but HCA was really on the very, very front Edge of that, and maybe you could debate whether HCA even helped to kick off what became a much more active wave of take privates. So we were on the front edge of that, but it was certainly something we're aware of and thinking about. So the part about HCA that was probably made it seem potentially less plausible was literally just the sheer size. It was the largest transaction ever at the time, and by far the largest that had happened since the late eighties during that first wave of big LBOs.

AI assessment note: “We were certainly before the wave where it became a very active market.”

Q So when Merrill Lynch had its troubles in the financial crisis, presumably it didn't continue to make these equity investments. Curious if anything happened with their ownership of HCA?

A You're right. They did stop making these kind of equity investments. They were merged into B of A somewhere along the way. It was still the same, actually, day-to-day team members that we'd been interacting with all along, but now they were part of what became called BAML, so Bank of America Merrill Lynch. And so in one sense, nothing changed, but at the same time, the bank itself had some balance sheet considerations and really wanted to figure out where they could generate liquidity to help out with their balance sheet. And so Unfortunately for them, they pushed to sell their HCA stake once we were a public company, certainly with the benefit of hindsight, earlier than was optimal, and so we went public sometime in 2011. They sold their whole stake shortly thereafter, and HCA went on a really nice stock price run basically ever since then. They went public at around 30 dollars a share, And I think the stock is currently somewhere in the mid to high 200. And so it's been a really good investment for anyone who bought at the IPO and held onto it. But because of Bank of America Merrill Lynch's balance sheet considerations, it may have been exactly the right decision for them. I don't know what they were dealing with on their balance sheet side, but it did result in them exiting and liquidating their HCA position a lot earlier than the rest of the equity consortium.

AI assessment note: “they pushed to sell their HCA stake once we were a public company”

Q What was his impetus for making that call?

A The whole Frist family being led by Tommy, they are just tremendously insightful Leaders of businesses, but also investors. And I just think he saw the same opportunity that we saw, which was at the moment in that 2005, six timeframe, what public investors and hospital companies were largely focused on were admissions trends and bad debt trends. And those are generally two fairly volatile things within hospitals because things like flu seasons or fluctuations in patient mix can drive Fair bit of quarterly ups and downs and variables like that. So those are important variables to hospitals, but the short-term volatility in those variables is not necessarily linked to the long-term health or strategic value of any given hospital company or hospital system. And at the time, the market was just bouncing all over the place based on very short-term fluctuations in these variables. Tommy was, like I said, an incredibly astute observer of all this, and he helped us build our understanding as well. But we'd always had a thesis that this really strong, well-capitalized, sophisticated urban hospital system should be the right way to deliver tertiary or really high acuity patient care, and that that would be a great platform to be able to invest behind. And so we're all looking at this same set of facts and basically saying the market's just getting it wrong. If you take a long-term view o…

AI assessment note: “he saw the same opportunity that we saw, which was at the moment in that 2005, six timeframe”

Q As you worked your way through the financial crisis, how did you approach the recapitalization and then exit from the business into the public markets?

A On the recapitalization front, right from, 2008, when we started talking about it in the boardroom, we knew that we just needed to have a long-term plan around how we just continue to spread our capital maturities over time. The next day after you do an LBO, you typically have a debt maturity stack that looks something like All of my debt comes due in years six and seven, or something like that, give or take. They vary a little bit. We said, look, as soon as we have opportunities to do so, once the market's healed a little bit, we didn't do very much of it in 2008 or nine, but starting into 10 and 11 and thereafter, let's just start over a long period of time in a very prudent, measured way, chipping away at that. And so we started Issuing incremental debt offerings out into later maturities, out beyond that six and seven year mark, and using that to refinance our year's six and seven type maturities. And so, you know, in a pretty gradual way, probably over the course of 2010 to 2014 or 15, we really just smoothed off that whole maturity wall, and we refinanced a little bit of it with equity in the IPO, but not very much. The IPO is actually mainly Secondary capital, because we had done a good job of growing into our capital structure and already going down the path of, of spreading it over time. And so we got to the point where we had no one year was a big wall of maturity and…

AI assessment note: “we really just smoothed off that whole maturity wall, and we refinanced a little bit”

Q And if you pulled out your negotiating class from business school, do you remember any of the dynamics as you were getting close to the end that you said, okay, how are we going to get from where we are to getting this thing agreed?

A I do sort of remember my business school negotiating class, and I'm not sure that really came into play here, for me at least, because one of the things that's liberating sometimes in a negotiation is just literally knowing where your last dollar is and getting to the point where you just need to put it on the table. Because look, as much as we love this company and this opportunity, we're also in the business of trying to deliver really good returns to our investors, and so we build our models, and we do our math, and they're never perfect, but we do our best to think about what is the right risk return opportunity, and we come to a maximum price that we're willing to pay, and of course, then our job is to pay as far below that maximum price as possible, but I do think that this To us, felt like a case, maybe they were doing a great job in negotiating. I don't really know what, I never knew what their reservation price really was, but the board did a good job of convincing us that at our initial bid, where, like I said, we did have a little bit of room left, they weren't going to transact, and, and so we came back a couple times, but when we finally came back with our final proposal, it was literally our last dollar, probably even a little bit beyond what we thought our last dollar was going to be. I've been in a few of those negotiations where The other side, either because t…

AI assessment note: “when we finally came back with our final proposal, it was literally our last dollar”

Q How did added layers of complexity come into that discussion because it was a group consortium of buyers?

A In a theoretical sense, anytime you have more parties around the table, it's always a little harder and a little more complicated. We've always found that to be a pretty good dynamic for us, and we found the KKR team and certainly the Frisk family and the Merrill Lynch team to be really good partners in all of this because nobody was really showing up with a lot of Ego, or need to be the one who is right, or need to be the one who is the loudest voice at the table, including, by the way, the Frist family. They're the ones who probably would have had the most right to do that, but they're just an incredibly smart but humble group of people who's always willing to listen to good ideas from others, and so it ended up just being a very consensus-driven process. I've done a decent number of consortium transactions over time, and I've just found it to be an asset in the investing business to be Open to the types of dialogue and compromise that you need to be able to make to have effective consortium dynamics, and that in the long term, there's a lot of investment value that can be created by having healthy dynamics around the table, and so we certainly had a lot of conversations, but the nature of those conversations tended to be Okay, if there's a question or a difference of opinion over an issue, let's just figure out what more work we can do, what more facts we can bring to the ta…

AI assessment note: “it ended up just being a very consensus-driven process”

Q Two years into this transaction, you run into the financial crisis, and you had mentioned two phrases that called to mind, I wonder what happened. One is bad debt risk, and the other is Merrill Lynch. So I would love to hear what was that experience like when you hit the financial crisis for HCA?

A The good news is the bad debt risk that I referenced earlier related to patient bad debt, so uncompensated care. So that wasn't our balance sheet, but you raise a good question, which is we had a lot of debt on our balance sheet. Now, the good news is when you put these types of LBO transactions in place, you generally have reasonably long timeframes on your debt and plenty of cushion if you've underwritten appropriately around your operating cash flows and what you're going to need to service that debt, or maybe not plenty of cushion, but enough That for it to be appropriate within the context of, of the operations of that kind of a business. So we head into the financial crisis. Day one, that didn't affect our balance sheets. Our balance sheet was all underwritten and put in place, and we'd, you know, swapped out our interest rates, and so we had what we had from a balance sheet perspective. The business had been performing well, so it was generally on plan, but at the same time, you're looking forward and you're thinking, okay, well, at some point, we'll need to, Either exit this business or go public, and we're going to need to refinance all this debt, and if the debt markets are in a really bad spot, that could be a challenge. Now, the good news is that was still years out before we really had to be worrying about those dynamics, but it certainly hit the boardroom conversa…

AI assessment note: “The good news is the bad debt risk that I referenced earlier related to patient bad debt”

Q What were your biggest lessons learned from the deal?

A For me especially, I was 10 years into my career, but still call it mid-stage in career, and so there was definitely a lot to learn there. I'd say one is it was a, especially in healthcare, a really good reminder that the system can change over time. We owned this company through the Affordable Care Act, and that drove lots of different dynamics, some helpful, some challenging through the healthcare sector. And anytime you own a particular healthcare services business, you can never really predict where the next election's going to go, where the next regulatory initiative is going to go, and so you have to step back and think about, can't predict all those things, What is it that I feel good about underwriting and standing behind? And in general, it's, is this the right way to be delivering great patient outcomes in a way that is efficient and effective for the overall system? If that's true, then even if you can't quite predict where all the different regulatory dynamics are going to go, or the way pair dynamics are going to go, nothing can go wrong, but you feel like you're probably in a pretty good place in the system. If you find yourself looking at a business that is narrowly premised around some Nuanced regulation, and if that regulation changes, your business model is going to blow up. That's a much harder place to be, even if it's a perfectly good business. Another less…

AI assessment note: “I'd say one is it was a, especially in healthcare, a really good reminder”

Q So what happened when you went to the port?

A The board was in the loop from the very beginning. I think that's always important whenever you're engaging in this type of a transaction is you really always want this to be happening with the full knowledge and consent of the board. So the early on conversations with the board, I think we actually even used the words feasibility study. We said, look, we think this could be a way to deliver really interesting value to your shareholders. But we don't want to put you in a position where that has any chance of getting out there until we feel like we can stand behind it, and you can assess whether you want to engage in a transaction like that, but it's hard for you to assess that when it's a theoretical thing. So here's the information that we would need, here's the work we'd like to do, and here's how we want to stage that to minimize the risk of it somehow leaking out before you as the board decides how you want to talk about it. And of course, there's a little bit of risk involved with that for the board, because there's never any guarantee that it'll stay as tight as we might all want it to. But the board thought that risk was worth taking to potentially be able to deliver a lot of value to their shareholders. And so that was how we went. This might be the only time that I've ever bought a company without ever having actually visited the company's headquarters or real estate. …

AI assessment note: “The board was in the loop from the very beginning.”

Q How would you apply the experience of going through that to the current market environment?

A It's one of the things that we talk about with our investors, or really anyone who asks is, what are the benefits of having lived through multiple cycles? I started in this business in 97, so we saw the dot-com bubble and the burst there, and then lived through the GFC, and, and then, honestly, one of the more unusual, if you call it a cycle, was the fact that post-GFC, we had 12 years of a lot of different tailwinds going up and to the right, even to the point of, Heading into a pandemic, as we all experienced in early, and assuming that was going to cause all kinds of dislocation, and then sitting around a year and a half later, being somewhat amazed that didn't happen. At some level, one of the concerns that people who've been around for a long time had then is, there was already this building view that, you know, risk was probably being under-discounted just because nothing bad had happened in a long, long time, and even when the bad thing happened, nothing bad happened. So, and so it was really uncomfortable Looking at the risk return profile of some of the transactions that were happening in that 2000, call it 21 or early 22 time frame. But at the same time, a lot of investment professionals who'd had a lot of success over time investing behind some of that upward momentum was interesting tension. And then now we've obviously had dislocation in the debt markets and disloc…

AI assessment note: “one of the lessons of all these cycles and all these crises”

Q Well, this is going to be a fun one to go back in time, and maybe we should start with what was being capital like, and what was the environment for deals like leading up to the HCA purchase?

A This one is now, what, 16 or 17 years ago, so it's fun to do a bit of a walk back in time. Part of the way I might answer that, especially as to the Bain Capital part of it, is it might be helpful if I frame where we are now, go back to where we started, and then use that to lead into what that world was like then. Because I've been at Bain Capital now since 1997, so 26 years now, and it's been a really interesting evolution to watch over time. The quick snapshot of where we are now, we're a global asset manager across a variety of different asset classes. We've got a hundred and sixty-five billion dollars under management, 24 offices around the world and about 1600 employees. Our largest business, that's a little over half of that AUM is in private equity, but we've also got a very large credit business. So that's where we are now. If I rewind back to the very beginnings of Bain Capital, which was even before my 26 years, we started off in 1984, and it was a spin out of a group of consultants who came out of Bain Consulting under Mitt Romney with this core concept that if we think we're capable At understanding industries and understanding companies, let's deploy that skill set as investors rather than as advisors. So we wanted to really look to develop deep insights around sectors and businesses, use those insights to try to create and source investments, but then also use th…

AI assessment note: “frame where we are now, go back to where we started, and then use that”

Q Once you bought the business, were there aspects of the operational game plan that the Frisk family thought they could implement on being private that they hadn't been doing as a public company?

A As a general matter, you know, public company boards have the same objective as anybody, which is you want to create, obviously, Good value for your customers, good value for your employees, and good value for your investors. But I do think that the nature of trying to deliver value to public company shareholders does get more complicated by the need to always drive your quarterly results on an ongoing basis. And look, there's plenty of public market investors who have long-term orientation, but there's also a subset of the public market that is a little more short-term oriented and tries to invest around Some of those nearer term quarterly dynamics. And it is in some cases painful for public companies to have a lot of volatility around their stock price. It can be disconcerting to your employee base when you see your stock price moving around. And so even if, you know, with the best of intentions, I think a lot of public companies find themselves having to manage around some of those shorter term dynamics, when I think for the most part, they would much rather be focused on, you know, what are the long-term investments I need to make? And Over time, that will deliver good short term results as well, but most businesses aren't so linear that you don't have, you know, some amount of volatility around the mean, even if it's just all heading in the right direction. And so, in a ca…

AI assessment note: “it tends to let you take actions more quickly operationally”