David

Welcome to the Clifford Chance Australia Private Capital Podcast. My name is David Clee. I'm a partner in the Corporate M&A team here at Clifford Chance. And today our guest is Doctor Michael Cristo. In addition to being a qualified medical doctor, Mike is a Cofounder and Managing Director of leading Australian private equity firm Genesis Capital, whose portfolio companies include Sana Health, Crux Buyer Labs and Pacific Smiles. Mike, welcome to the podcast. It's great to have you with us. Thanks for joining.

   Michael

TIt's fantastic to be here, David.

David

Thank you. Excellent.

Well, to start us off, can you tell us about Genesis Capital and its focus areas of investment?

Michael

Sure thing. Genesis Capital is Australia and New Zealand's only healthcare focused private equity firm. We focus on, as the name suggests, healthcare businesses, but in particular we focus on them in the lower mid-market. So businesses that are often found or owned that require some capital or a partner to come and take them to the next level, that's our wheelhouse. And following on from that, actually the other area of focus for us is partnership deals. We are very often partnering with founders and working with others to achieve those businesses aims.

David

One of your investment philosophies is to invest in what you know and given your background in medicine, clearly you know, healthcare, but did you have any concerns about narrowing the focus of your investing just to healthcare and whether there would be a sufficient investable universe for you to work within?

Michael

Yeah, actually that's a question we get levelled at us quite a bit, David. It's never really been an issue. My business partner at, Genesis, Chris and I have been investing in healthcare now over the course of almost 20 years in both in our prior firm as well as today. And so I think we know that there is a depth of universe there for healthcare businesses, particularly at that end of the market, the lower mid-market where we play

But Australia is new to specialist firms, and it is, it has taken us a little bit of, a little bit of time to educate investors and, and other market participants that actually it is, it is large enough and deep enough here in Australia to support a specialist model.

David

And I know you have a, a broader investing background, but is there anything specific about healthcare that spans all of the different aspects of healthcare investing? 
Is there a, a commonality to healthcare opportunities or are all the different sort of dental versus clinical quite unique?

Michael

The answer is actually, it's a little bit of both.

The way we broadly divide up the healthcare investable universe here in Australia would be there is core healthcare services providers, doctors, dentists, you know, psychologists, etcetera. And all those businesses have differences, but they've got a lot of commonality too. 

And so very often when we're investing in a new dental platform, we're taking insights that we've gained from the last general practise business we invested in or whatever, whatever else it may be and rolling out a really similar tool kit to workforce expansion or you know, integration of bolt-ons etcetera to that platform. But that's a very distinct series of problems too. For instance, our pharma services practise. So pharma services is another important area of healthcare in Australia and New Zealand. We have, we are arguably the best place in the world to run particularly in early phase clinical trial.

And so the, the companies that support that ecosystem, so CRO's laboratories, clinical trial sites, recruitment companies for participants are all flourishing in Australia and, and in New Zealand. And the challenges that those companies face are very different to the ones that are faced by provider services. Your, your customers are large pharmaceutical companies or biotechs.

Business development is, is a, is a skill set you really need as opposed to when, when the government is your major payer. And so there's a different tool kit that will often roll out for, for those investments. And then, you know, again, for tech enabled healthcare services or consumer healthcare services or even community care dealing with, with the disabled or the aged care population. So there are these distinct areas of healthcare that have commonalities within them, within them, but you know, some commonality more broadly.

David

But, but really in each of those, each of those verticals and when you're looking at a new vertical, do you, how do you educate yourself about the, the sector, particular sectoral dynamics of that vertical? So dental, for example, we obviously know each other well, not obviously, but we know each other through our work together in the dental sector in relation to Pacific Smiles. But how, how did you educate yourself about dental before you invested in that area?

Michael

I think there's a common misconception that because we are healthcare specialists that we come with deep expertise at any given sector or any given business. And so as, as you've quite rightly alluded to there, very often that's not the case.

And actually the little bit of expertise that we have by virtue of being a specialist means that we know how much we don't know about a particular sector. So dental is a great example.

When we looked at Pacific Smiles, our most recent dental investment, which is the one that we worked on together, we did have the benefit of having made previous dental investments. We owned a dental business and Chris and I had made dental investments in our prior lives as well. But there were still differences unique to the part of the dental market that Pacific Smiles played in. And so we knew that there were gaps in our knowledge and in our understanding.

And so by partnering with, for instance, the founder of Pacific Smiles, Alex Abrahams, and other dental participants in the market, we look to bring on experts to help us better understand the businesses and the sectors that we invest in and as some more amenable to bolt-on and scaling than others.

David

So dental, for example, is that one that's sort of particularly scalable for you?

Yeah, this is a, this is another, another question we get asked a fair bit. I think you'll see a lot, particularly if you're a generalist private equity investor. Healthcare roll ups seem easy.

You can buy your neighbourhood psychology practise or physiotherapy practise maybe for 3456 times earnings.

And if you've pulled a corporate together, then that might trade in in into the double digits of EBITDA. So you know, rinse and repeat, you've got, you've got multiple expansion happy days.

What I found time and time again is that unless there's a real reason for scale, is there, is there a benefit to someone? What I found time and time again is that unless there's a real reason for scale, is there, is there a benefit to someone? Is it benefit to the clinician, benefit to the patient, preferably a benefit to the patient, benefit to the, the underlying payoff to that scale. 

Then actually the, the multiple expansion alone isn't enough with, with dental, it's a, it's a really great example there. There is some, some real benefits of scale. There's, there's benefits in the procurement.mThere's benefits in the ability for you to kind of negotiate and have dealings with the payors and being the insurers that are often very large.

And so there are benefits that accrue from that scale where in some other sectors of healthcare there might not be. And more specifically now to you personally, your medical background suggests that investing wasn't your first professional calling.

Can you talk about your decision to study medicine and then subsequently pivot into the financial world via rolling business consulting with Bain.

Yeah.

So I, you know, I was in high school, I'd, I'd always wanted to do medical research. I, I didn't really have much of A focus on being a clinician, but, you know, understanding how the human body worked, helping, helping the community, helping the, the population by through research, discovery of, of new medicines was always something that I was very keen to do.

And I, I came to believe that actually having a medical degree in order to, to pursue that path would be the, would be the, the best way forward.

So went and studied medicine with with a square focus on medical research. During my medical degree, I did manage to do some clinical research. I did a year of honours in stem cell. And while that all sounds very sexy, the the reality of research in this country is that it is chronically underfunded with limited resource.

And so you spend much more of your time fighting over use of the fume hood then you do contemplating the mysteries of the human body. And so while simultaneously getting frustrated there, I had founded a business during medical school that was a, a healthcare education business. And the opposite experience was, was one that I felt that it was, you know, actually quite easy with some with some passion to to grow that business into an important market need.

And I really enjoyed the impact that we were having by virtue of growing that business. And so it was that taste that that got me thinking, well, maybe, maybe a pathway to business is the right thing.

The consulting firms like Bain, I assume they still do it, but back in those days would come to universities and give talks about what it is they do and how they think.

And I remember 1 talk I heard it was actually BCG, not Bain that talked to how they, how they thought through the founding of Jetstar within, within Qantas.

And I remember being quite inspired by the thought process I went, went through and then how that translated into, into tangible action.

And I thought to myself, I, I could do that. And so applied for, applied for a job with Bain and ended up, ended up going there.

I think you just said that in addition to doing a medical degree simultaneously, you founded a business.

Is that right?
That is right.

Have you found additional hours in the day that the rest of us don't have? 
How did you, how did you do both of those things at the same time?

I think it started like, like like what many students, it started out of necessity. You have to fund your, your lifestyle and fund beers at the, at the bar after, after uni.

And I never, I never saw myself as a, as, as an entrepreneur, but the business was one that taught people how to, how to perform better in the exam that's required to get into medical school. It's called the UCAT now.

And I, I performed well in that exam myself. And some people in the E below me at school asked if I could, if I could teach them.

And I said no, I couldn't do that, I wouldn't know how. And they said, we'll pay you $75.00 an hour. I'm sure I could work it out.

And then from there, the business flourished.

Word of mouth.
We expanded Interstate and in into New Zealand, hired, hired tutors. And I found that a really rewarding experience.

Yeah, yeah.

Far more rewarding than working in a servo, which was how I got through law school.

But looking back on your time with Bain, are there any learnings, be it technical, cultural, otherwise, that you continue to apply now in your capacity as a private equity investor and business operator?

Does it inform your day to day at all now?

Yeah, so I was only at Bain.

I think it might have been only 16 months, maybe 18 months, but despite that, as anyone that, that, that knows me knows that I really do credit that period of time as being utterly transformative for my career.

And I'm an evangelist for, for folk in in a similar position to me to, to go through consulting to broaden their, their potential career pathways. I was AI was a, a medical student, just graduated and, you know, knew the 6th differential diagnosis of abdominal pain.

But even though I'd founded a business, I, I didn't know what EBITDA was. I, I didn't know any, I didn't know how to structure my thinking.

I just had entrepreneurial instincts and that 1618 months of Bain really did transform me.

And I think the skills that I use today, I think the number one thing is that it, it teaches you structure, how to structure your thinking around a commercial problem. And if you can structure your thinking really well around a commercial problem, then you can structure your communication.

And if you can structure your communication, you can very often bring others along the journey with you. And I find that those are skills I, I still use over and over again today.

And was there a lot of structured training to help you to develop those skills or was it on the job or a bit of both?

No, the, it, it's a bit of both

But that is one of the benefits of, of, of working at a, a multinational like a bane.

They, they have, they have the budget and it's part of the value proposition to go to the, the structured training. And so as a, as a grad, we got sent to Cape Cod in the US, spent a couple of weeks there getting taught what EBITDA was and how to think about a bubble chart and RMSROS and all that, all that good stuff. But as in most jobs, most of what you take with you is, is the on the job, on the job training and consulting is, is often structured in, in small groups.

You're working very intensely in, in, within a group of four over the course of, you know, 3-4 months have a longer case lasts and you're working with some of the best, the best minds in, in, in, in finance.

And I learned a lot from the people I worked with there.

And so any tips for anyone thinking of going into consulting or even anyone who's thinking of hiring a consulting firm for their business?
I think if you're thinking of, I think a tip I'm often finding myself give is that young folk who see themselves in in some sort of career in finance, understand that consulting and banking are the two typical entryways into, into such a career.

And tossing up which of those, which of those two pathways to go

And I think it depends on the skills that you want to learn and how you, how you, how you value them.

And so I, I find myself often giving the advice that if you are first and foremost a, a, a deal junkie and you really want to learn the anatomy of a deal, how a transaction works and investment banking, there is no better place.

You, you will get the reps on how to build a deal model, how to think about capital structuring, you know what different bidders think about.

But it actually is only until you get to the relatively senior levels in investment banking that you start thinking about the business as opposed to the deal.

Whereas in consulting, I think you learn about the business really early on. But the trade-off is, you know, will very frequently hire people from consulting 345 years in and they don't know how to read a balance sheet. And so each has their own trade off, but I personally really value that ability to, you know, structure your thinking around a business, pull apart, pull it apart, pick up each piece and then put it back together again. That's a, that's a really important skill set in investing and potentially a shared experience is the, the lack of sleep between the two.

Is that your experience in consulting as the, as the, the myth, the truth?

Look, it's a, it's a special time in your life.

You know, you're, you're in your 20s, you maybe don't have the obligations that you do when you're when you're in your 30s.

And it's a good trade off to make that you're going to use your time to accelerate some learning.

So yes, it's, it can, it can sometimes be intense.

So after your time with Bain, you worked with Crescent Capital as a senior investment professional.

Are there any highlights or key takeaways from your time investing with Crescent?

Yeah, I vividly remember when I first joined Michael and the team at Crescent that I knew that private equity was the career I wanted to have for the rest of my life.

I didn't know what private equity was when I was a medical student joining Bay and I wasn't, you know, there are, there are lots of, lots of joiners that have that firmly as, as something they've got in their sights.

I fell into it in my time at Bay and working as a consultant for private equity firms.

I thought I liked it, thought I'd give it a go.

And when I, when I worked at Crescent, the ability to so quickly see the get, get feedback on the impact of your decisions and, and it being kind of the bleeding edge of commercial thinking, I found really rewarding. And so even to this day, my wife says I skipped to work.

I, I knew that I loved private equity as soon as I, as soon as I joined Crescent.

And the great thing about Crescent was that it it really it had already a thriving practise in healthcare. Investing healthcare was something that I didn't get to do quite as much of it at Bain and I wanted to find my way back to it.

And it's the sort of place and had had the sort of culture that really rewards self-propelled individuals.

If you wanted to give something hard to crack or you wanted to take ownership of a particular business problem, have at it was the sort of culture it had. And so I revelled in the impact I could have on, on these businesses in, in finding businesses that I thought would make great investments.

And, you know, within a really short period of time, I was doing things like, you know, leading the listing of a public company. We, I, I worked with Crescent and listed Life healthcare in, in, in 2013.

And I was maybe two or three years into my career at that point.

And towards my 4th or 5th year, I even got the chance to be the interim CEO of one of our investees, which was an experience I found in invaluable and, and use use a lot of what I learned from that to this day.

And so the ability to add value in a way that you felt was best in, in your patch was something I really, I really enjoyed at Crescent. So quite a lot of responsibility straight away.

And and you sort of could, could kind of dictate it yourself. So I was, I was the sort of guy that was like, yeah, bring it on.

I'll, I'll, I'll, I'll, I'll swim my hardest.

And yeah, that was the sort of thing that was rewarded at Crescent.

And so following your time with Crescent, you cofounded Genesis Capital with Chris Hugh, who you met at Crescent.

In making that decision, did you see a gap in the market, or did you have a desire to write your own story together or was it a a bit of both/

It was, it was a bit of both. So it was probably more the former than the latter.

I think Chris and I, so I, I, you know, for, for obvious reasons, given my background, was really drawn to healthcare investing. And so at, at Crescent, all I did was healthcare investing. For Chris, it was a little bit different. He, as he describes, he fell into it because of how much of it that the Crescent did And so maybe 80 to 90% of his time was spent in the healthcare part of the portfolio. But we often felt like we were healthcare specialists trapped inside a generalist. We'd seen, we kind of looked up around the world and it's seen that a specialist models of investing, we're gaining ever more traction.

You know, I think there have been a number of publications that say that specialist investing is, you know, adds about 5 IRR points to, to a fund versus generalist peers. And, you know, we saw that and really did believe and had a lot of conviction that Australia was a place that could reward specialist investing. And additionally, if you looked overseas, the two industries that reward specialists the most, healthcare and, and technology. And there was already a technology specialist that had, that had preceded us.

We weren't the first specialist firm in the country. And we said, well, someone's gonna, someone's gonna fill that spot in, in Australia. And we think it should be us. So we very intentionally came out and founded a, a healthcare specialist and, you know, focused on the, on the lower mid-market. And it was a, it was a very, very big cherry on top that I got to work with, with such a close friend.

And who would I, who I'd had a great working relationship with up until that point.

And we've learnt that Genesis wasn't your first start up, but it was your first start up with a cofounder and you've achieved a lot together with Chris. So I'd been interested to understand if it was a a 1 + 1 = 3 scenario right from the start, or you know, or even how your relationship has evolved over the years together. Well, that actually wasn't my first start up with a cofounder. I cofounded that that education business with my now wife.

She wasn't at the time.

So but that'll that, that may make more sense because I often to answer your question about what it's like working with Chris, I often think about it like a like a marriage and it is an obligation that we take seriously when we when we take on other people's money to invest. They are backing us and, and, and the way private equity works is you're investing that money potentially over up to a decade, decade long by the time you have exited the last business.

And so you, you really look each other in the eye and say, OK, we're going to be working together for the next decade. If we raise this next fund.

Are we, are we good?

And, and you do have to, to work on that relationship from time to time. But absolutely the, it's been, it has been 1 + 1 = 3. I would say Chris and I have and it's very important I think for cofounders in, in private equity to have a, a, a bedrock of shared philosophy.

So we see value similarly, you know, we, we have the same vision for, for where value sits in the market and what, what we like and what Genesis should stand for. We have a really similar, almost identical view on, on how we, how we want to be custodians of our reputation and the firm's reputation. We think of Genesis as being a very long game for us.

We're relatively young as it, as, as it comes to private equity founders and we want to be in this game for, for decades. And so we're always insisting that we make decisions that will preserve our reputation for decades into the future.

And maybe the third thing that we share is a, a common view of the right culture for, for our team. I think there is a cultural shift amongst founders of private equity firms as you get more and more of the generation like myself and Chris that worked for a private equity founder as opposed to, you know, founded it from whole cloth. If you went back to the 90s and early 2000s, private equity was a new industry in Australia and that cohort of founders I think is culturally quite different from the common set.

So that's what we have in common, but we have differences that are generally additive.

We are, we're different in how we how we see an approach in investment.

So while we see value in the same way, I'm often pushing the boundaries and, and kind of getting a little bit ahead of myself on, you know, what we could do with the business and Chris might kind of bring me back down to down to earth on that.

And we're maybe temperamentally a little bit different as well. We get along with different, different people and different executives. And so sometimes that'll be a, that'll be a MIC CEO or founder or that one might be a Chris one.

And so overall it's been a, it's been a really productive partnership.

But when you make investment decisions, do you make them together? So for example, if you believed in something, but Chris had reservations, would you only proceed if you both had conviction?

Absolutely.
We make all investment decisions together. And even if it's a, a deal that is being sponsored by one of the two of us, both of us where the, the responsibility of that investment decision, it's also a really important check and balance. So there are some private equity firms that have one, one strong voice and, and, and it's that voice that kind of carries the, the investment process with us. We've, we've very intentionally made it so that there is a check and a balance. I think by the very nature of private equity investing, you're getting very, very close to a business and you have to, to get a successful deal done. 
You have to have an attitude that you are trying to get the deal done. You're trying to remove obstacles, trying to remove roadblocks.

I think, you know, you would have seen that firsthand as we work together on, on Pacific Smiles. If, if, if you don't have that attitude, there's always a reason to not do a deal.

But as a result of that, you're getting, you can sometimes start to believe, believe the story and kind of believe in, you know, get too close to management and, and the business.

And so you need the external check who is, you know, as important on the investment committee as yourself to, to sense check that and say, well, you know what, actually, I'm not sure. I think maybe you've been led astray there.

Yeah.

So it is, it is very important. I noticed that dynamic a couple of times on Pacific Smiles when we'd be going down a particular road and then, you know, Chris would be copied in on the correspondence and ask a question that was along the lines of are we sure about that?

You know, have we thought about, have we thought about this enough?
Absolutely.
The absolutely critical role that that you played. And I and I do it the same on on his deals.

And that concludes part one of our engaging discussion with Doctor Mike Cristo of Genesis Capital here on the Clifford Chance Australia Private Capital podcast.
Please join us next time when we'll continue this interesting conversation.