A look at Sheridan Capital’s value-creation approach to backing healthcare companies
In the healthcare private equity sector, scale and speed usually dominate the landscape, but at Sheridan Capital Partners, the story is quite different.
The Chicago-based investment firm’s main focus centers on hands-on operational commitment to the companies it backs, said Sean Dempsey, industry veteran and Sheridan’s co-founder.
Dempsey and his partner Jonathan Lewis founded the GP firm just over 10 years ago, building a solid reputation by helping founder-led healthcare companies grow through investment in human resources and processes. Its workforce now numbers 40 people, though nearly half are on operations and business development.
The highly mixed team reflects the firm’s vision of itself as an active partner working alongside founder-led companies, said Dempsey. “This deep, practical ‘partnership’ with founders has been a core principle since the firm’s inception, alongside our defining nature, which is being a sector specialist,” he told Markets Group.
AI dominates the scene
When asked about key opportunities this year, Dempsey has no doubt that artificial intelligence represents the dominant structural trend in the healthcare sector, believing the sector is uniquely suited for it.
He pointed out that the 2020 pandemic acted as a ‘catalyst,’ forcing the sector to take data and technology more seriously in order to improve efficiency.
“Healthcare has huge amounts of data but is technologically backward,” he noted. “Systems are archaic, fragmented and extremely labor-intensive.”
Due to a combination of data-rich, technology-poor and labor-intensity, he believes AI will be a major tailwind for at least the next decade.
However, new technologies will not replace the workforce. In a market worth around $5T in the U.S. alone, roughly 60% of the service sector, including hospitals and home care, is labor-intensive, said Dempsey.
“AI will not replace people,” he added. “Instead, it will focus on all the costs that occur before and after the clinical procedure: scheduling appointments, obtaining prior authorization from insurance companies and the billing cycle among other tasks.”
To successfully implement AI, vertical specialization necessary, including understanding patient data, how to develop software and models that comply with regulations and how to operate within the regulatory framework.
As for the sectors where interest is waning, Dempsey noted that doctor-led businesses, such as medical groups and outpatient clinics, have proven highly popular with investors in the post-pandemic period but are now facing a more challenging environment.
“Post-pandemic, the ‘silver tsunami’ drove an increase in patient numbers. Healthcare was shifting from hospitals to more cost-effective outpatient facilities and older doctors needed support with recruitment, marketing and infrastructure — areas where private equity can clearly add value.”
Then, conditions turned. “Interest rates jumped and labor costs rose, which squeezed margins and made acquisitions more expensive. As a result, physician practices have fallen out of favor over the last couple of years,” he explained.
As AI makes medical practices more efficient, Dempsey believes that investor interest in these businesses will begin to grow again over the next five years, with AI optimizing the economics of medical groups, making them more attractive to investors.
Dempsey prefers to steer clear of sectors heavily reliant on Medicare and Medicaid, as U.S. politics is extremely unpredictable.
He uses Medicare Advantage as a cautionary tale: “Medicare Advantage long had strong political backing so many assumed it would benefit from policy “tailwinds” under the current administration. Instead, the latest proposed rate increases were much lower than expected, shocking the market and illustrating how unpredictable this space has become.”
The ethos of the specialist
When focused on deal creation, Sheridan stands out for its very deep, slow-burn thesis work.
“We don’t chase the first deal that fits a theme,” Dempsey explained. “Instead, we spend roughly two years developing and underwriting each investment thesis in a specific healthcare niche.”
The second distinguishing feature becomes clear after the investment. Dempsey explained that, from day one, the firm assembled a specialized operational team made up of “doers” who go on-site, manage key initiatives and integrate into the company for six-month periods.
“Our value‑creation approach has evolved from a light, centralized model into a much more embedded, ‘resident’ model,” he noted.
A signature feature of the firm is its “internal leadership” program in which Sheridan employees can step into a company as transformation leads or de facto chief of staff to the chief executive officer (for example, during an acquisition), handling project management and helping the CEO’s team, often stretched thin, to get the job done.
Dempsey explained that, in some cases, they may serve as interim chief financial officers, which he contrasts with the use of staffing agencies, where quality and continuity are harder to control.
Instead, because these individuals are part of Sheridan’s team and are focused on creating long-term value, they ensure greater consistency, speed and alignment than external temporary workers, said Dempsey.
“Big houses like Blackstone have heavy ops resources too, but we bring that level of support down into the lower‑mid‑market, which is rarer.”