IVCA New Member Interview: Tim Dugan of Water Street Healthcare Partners

IVCA New Member Interview: Tim Dugan of Water Street Healthcare Partners

December 16, 2008

CHICAGO - “ Water Street Healthcare Partners recently joined the Illinois Venture Capital Association. Managing partner Tim Dugan talks about the firm's investment approach as well as the opportunities and challenges that exist in today's private equity landscape.

Illinois Venture Capital Association: Water Street Healthcare Partners was formed in 2005. What are the backgrounds of the firm's partners? What motivated them to join together to form Water Street?
Tim Dugan: Our team has a very strong history. We have invested together for more than 10 years prior to founding Water Street.

Together we established and built the health care practice of One Equity Partners - “ the multibillion-dollar private equity arm of JP Morgan Chase - “ and completed more than $3 billion of transactions in health care and life sciences companies. We founded Water Street in 2005 with the belief that we could make a greater impact in health care by investing exclusively in middle-market companies.

We have gone on to recruit and build one of the most extensive and diverse teams of health care executives and private equity professionals in our industry with leaders who have held executive positions with some of the world's leading health care companies including Baxter, Caremark, Johnson & Johnson and McKesson.

IVCA: What is Water Street's investment range?
TD: Our transactions typically range from $50 to $500 million. One of our specialties is acquiring divisions and product lines from global health care companies.

We also partner with middle-market companies that are looking for a strategic partner to help them with long-term growth and value creation. We have partnered with some of the world's premier health care companies on our investments including Johnson & Johnson, Smith & Nephew and Gentiva Health Services.

IVCA: What sectors within health care does your firm target? What is the desired stage of Water Street portfolio companies prior to investment?
TD: We have a very targeted investment approach in which we identify the most attractive health care segments for long-term growth and invest in companies that offer the strongest platforms for transformational growth in those segments. Our goal is to leverage our industry knowledge and relationships to build our investments into market-leadership companies.

Segments that we currently target include diagnostic devices, medical products, pharmaceutical services, specialty distribution, specialty pharmaceuticals and specialty services. We invest in established companies with leading market share, strong sales and distribution capabilities and potential for expansion.

IVCA: How has this sector  evolved since the fund's formation in 2005?
TD: Health care has been and continues to be one of the largest and most consistently growing sectors of the global economy. A number of factors - “ including aging demographics, technological advances and a shift toward consumerism in health care - “ continue to drive growth in the industry.

Of course, what's changed today is that we are facing very challenging market conditions. While not immune from the current economic downturn, health care is one of the few sectors that continues to experience growth and investment activity.

IVCA: Water Street has a decidedly Chicago name. What is the geographic scope of the firm?
TD: Water Street is a global firm with the majority of our investments and activities concentrated in North America and Western Europe.

We are very proud of our Chicago heritage and chose our name to reflect the rich business history of Wacker Drive where we are headquartered and which served as backbone of the city's business in the 1800s when it was known as South Water Street.

IVCA: How is the firm responding and exploiting challenges to the economy at large?
TD: While health care historically has been insulated from recessions, it will certainly experience some impact from today's unprecedented market conditions. The long-term outlook for health care continues to be very strong.

Our focus is effectively managing our investments through these near-term challenges and positioning ourselves well for future opportunities. We believe the current environment will present unique opportunities for attractive acquisitions that didn't exist previously.

We will continue to leverage our strong team of health care executives and industry connections to pursue the strongest opportunities for strategic growth.

IVCA: What are your predictions for the private equity sector in the year ahead?
TD: Given the unprecedented state of the markets, I think everyone would agree that predicting the future is a challenge. The coming year will be one of the most challenging years for private equity. However, for those firms that have positioned themselves well, it also will present unique and exciting opportunities.

As valuations continue to return to more reasonable levels and as the financial markets stabilize, I believe you will see select private equity firms capitalize on a new and growing set of opportunities that weren't previously available. Prices will be lower and the capital structure will be much more conservative.

IVCA: What is your take on the Illinois private equity community? How do you plan to leverage the IVCA?
TD: Having worked in private equity for 20 years, it has been rewarding to be part of the growing number of private equity and venture capital firms based in Chicago.

Interestingly, Chicago has become the hub of health care private equity investing with an impressive concentration of firms focused on the sector. We look forward to partnering with the IVCA and its members to further advance Chicago as an attractive and growing financial center.

IVCA: What are the primary philanthropic activities for you and Water Street?
TD: We support organizations that are focused on advancing health care and education. Some of the organizations I personally spend time with include the Chicago Public Schools Renaissance 2010 program and Teach for America.

IVCA: What do you do for fun what you're not investing private equity?
TD: When I'm not working, I spend most of my time with my family. My wife and I have three sons. They keep us very busy with their sports and activities. I also enjoy playing golf, reading and traveling.