Yesterday’s announcement that Carlyle is acquiring Sedgwick is a clear indication that the work comp services industry remains a favorite of private equity investors.

The transaction, which valued the giant TPA at $6.7 billion, far exceeds the previous record set by the ill-fated One Call deal. It also produced very healthy returns for previous owner KKR; it bought the company for $2.4 billion just four years ago.

A 180% increase in value over a brief four years speaks to Sedgwick’s successes over that period, a clear and compelling growth strategy, and strong belief in management, which remains an investor in the company. (To be clear, a big chunk of this value growth was also driven by two major acquisitions, discussed below)

Here’s my brief take on why Sedgwick sold for so much.

Management

I’ve crossed swords with CEO Dave North in the past, but no one can argue with the success he and his team has delivered. I’ve also come to know several senior management folks, and they are, to a person, impressive.

Strategy

Work comp is shrinking, and TPAs are perhaps the only segment of the industry that will benefit from that shrinkage.  As claim counts decline, more insurers are choosing to have TPAs handle more of their claims.

Sedgwick also increased its internal work comp services expertise and capabilities. One example – the pharmacy management program overseen by Paul Peak PharmD is delivering impressive results.

North et al embarked on a clear diversification strategy several years ago, a strategy evidently designed to continue the company’s growth by dramatically increasing its footprint internationally and in property adjusting. Sedgwick’s acquisition of Cunningham Lindsey and Vericlaim positioned the company to profit from climate-change driven events such as hurricanes, fires, tornadoes and the like.

Wise indeed.

Scarcity

I’d be remiss if I didn’t reprise my comments from a few weeks ago –  there just aren’t that many work comp services assets to buy these days. To be clear, Sedgwick is neither a Pinto or a Gremlin; far from it.

The services industry has bifurcated into really big companies – Mitchell, Genex, Sedgwick, One Call, and relatively small ones – MTI America, HomeCare Connect and the like. While there are several firms occupying the middle ground, overall the number of potential acquisition targets has shrunk dramatically.

Because the big companies are really, really big, relatively few PE firms have the financial wherewithal to buy them.

As a result, when assets do come to market, investors seem willing to bid up prices.

What does this mean for you?

There are ways to succeed and profit in a consolidating, highly mature industry.

Paradigm announced it is purchasing Adva-Net, a Florida-based company with a network of pain management providers. While terms weren’t disclosed, word is the price was north of $105 million, a very healthy multiple of earnings.

I interviewed Paradigm CEO John Watts a few weeks back, but decided to hold off on publishing it until this deal was done. Watts, who has an impressive resume including multiple leadership roles in the “real world” (outside of work comp) is impressive; he has a clear strategic vision for the company, knows what he doesn’t know, and appears to understand the critical importance of branding. Quotes are from Watts

We talked about his strategy for Paradigm and the acquisitions the company made over the past year plus – specifically Foresight Medical and two case management firms – Alaris and Encore. In addition, Paradigm just acquired several ‘advisory solutions’ focused on pain management, catastrophic claims, and back care from Best Doctors.

Frankly I’ve long been somewhat puzzled by these acquisitions; NCM is old school, Foresight is anything but (and was wicked expensive).

Before those additions to the company, Paradigm had “a nice longstanding business doing pretty much one thing” – managing a carefully selected inventory of catastrophic claims, and doing so quite well.  Management realized that a sole focus on cat claims wasn’t enough and the company needed to diversify.  Acquiring case management assets, a business that Watt noted is “way more traditional than the cat claim business”, gave that cat claim “operation access to about 500 +/- employed nurse case managers.” Not only did this expand Paradigm’s ability to handle cat cases, it increased it’s customer footprint, provided a training ground for cat nurses, and added some “synergies” – management speak for reducing overhead expenses like management, finance, and HR.

Going forward, Paradigm “wants to stitch together assets with the ability to take risk in complex acute situations to manage clinical outcomes…[the company will likely handle] more types of catastrophic conditions while also moving into lower severity claims.” Alaris and Encore (Paradigm’s NCM firms) help them do that.

Foresight was another acquisition; I asked how these services align with Foresight.

Foresight stands on it’s own. According to Watts, it has a “Strong focus on implants, cost and quality…Foresight is also building a high performance orthopedic network using data analytics.”

In the near future, expect Paradigm to be a “big player in the musculoskeletal space.” The company (again this was several weeks ago) was “in an acquisitive place now.”  Going forward, the plan is to focus on becoming known as expert in managing ortho surgery care…first, couple [Foresight’s ortho network] services with NCM, then add catastrophic services.”

At the end state, expect Paradigm to handle a defined bundle from point of injury to back to work.

Future expansion will likely include a “front end solution on musculoskeletal condition to help clients avoid unnecessary surgeries” and the tools to do that.

So, Paradigm is focused on adding depth and breadth to the solutions it provides work comp payers – adding services to help with less acute claims, and broadening its capabilities to handle more of the claim medical service spectrum.

In this context, Adva-net will add a pain management provider network. After a rather prolonged development period, the company’s earnings recently ramped up significantly. The business model is primarily a traditional percentage of savings arrangement – the more services delivered, the more dollars earned.

The acquisition brings another specialty-focused business, some additional customers, and a provider network to the Paradigm portfolio.

The acquisition was expensive, but as the company has shown with Foresight, it isn’t afraid to pony up the bucks when it sets its sights on a deal.

My take.

Paradigm is intelligently diversifying and has a coherent and promising strategy. That said, I still don’t understand the prices paid.