Private equity groups normally start with a general partner who invests 1% or 2% of total capital committed and raises the rest from other players, usually institutional investors. Miguel “Mike” Fernandez, however, has successfully turned that formula on its head.

Florida-based MBF Healthcare Partners LP, co-founded by Fernandez in 2005, takes to the field with a top-heavy configuration of investors. Fernandez’s family office, comprising himself and his children, invests 80% of the capital needed for a deal and raises the balance from some 50 limited partners. “We have so much of our own capital invested that we’re going to be very cautious in doing quality-oriented deals versus quantity of deals,” he says. “And our financial performance and return on investment have proven us right.” The fund has a historical gross internal rate of return (IRR) of 84%.

Fernandez says he has never had to knock on doors to find co-investors in the MBF fund; they come to him. Nearly all the outside investors are very high-net-worth individuals who have had experience in health-care services. “Health-care is a broad field that represents almost 18% of our economy,” he says. “It can vary from physician groups to insurance companies, from bricks-and-mortar to distribution. We try to allow in investors who bring know-how to the table, not just capital.”

Fernandez says MBF’s outside investors are unique in that they have been operators at one time or another, and there are also some corporate transactional lawyers in the mix. “They have built their own companies, so they have a certain expertise, whether it’s in pharma or other areas,” he says.

From Operator To Investor
Fernandez has a keen appreciation of operators because he operated health-care companies before he became chairman of MBF. An émigré from Cuba who came to the U.S. with his parents and sister in 1964, he built and sold 11 health-care services companies between the mid-1970s and 2005. These included Group Tech Systems, a national database of health insurance information; Comprehensive Benefit Administrators, which was sold to RHMO, a public company, in 1990, with an IRR at exit of 68%; Physicians Healthcare Plans, which was sold to Amerigroup Corporation in 2002, with an IRR of 139%; and CarePlus Health Plans, which was sold to Humana in 2005, with an IRR of 249%.

The Humana deal was a watershed event for Fernandez because it included a non-compete clause that prevented him from operating in the managed care or insurance business for five years. “That was my metamorphosis from an operator to an investor, a different mind-set,” he says. “There’s a certain level of control that an operator needs to have over his business. As an investor, you have to cede some of that operational control, and take more of a governance approach to the business.”

Around the same time, he suffered a “small heart attack” that prompted him to question whether he wanted to continue to drive himself so hard. The fund was the vehicle he chose to slow down, which he didn’t do. “I work harder today than I did back then,” he says.

Quality Over Quantity
MBF, which has investment capital of $500 million, currently owns control positions—51% to 100% ownership—of six operating companies that generate more than $2 billion in revenues. One is a young startup. The others range from Navarro Discount Pharmacies, which Fernandez says is the largest Hispanic pharmacy chain in the nation; to Nutri-Force Nutrition, a vitamin manufacturing company; to eMindful, an Internet-based behavior-modification company. SunCrest Healthcare provides services to the elderly in their homes.

The sixth operating company is Simply Healthcare Plans, an insurance company that focuses on one illness: HIV/AIDS, a nonstarter for other insurers. MBF insures HIV patients through a product called Clear Health. The idea is that providing preventive care to HIV patients, making sure they are taking their medications, providing transportation to a pharmacy if necessary, offering them nutritional services and communicating with them in person weekly result in patients leading comparatively normal lives. Earvin “Magic” Johnson, the retired professional basketball player, has signed on as an owner of Clear Health, as well as a patient and advocate.

MBF tries to buy one good company a year, says Fernandez. “Our goal is not to do a lot of deals; our goal is to do a good deal,” he says. MBF also adds companies to those it already owns. “Even though we may buy only one operating company per year, that may not include that we may have done six other acquisitions that we inserted into one of our operating companies. The add-ons are part of the model we use to grow our business,” he says.

The MBF office in Coral Gables, Fla., run by Fernandez and his longtime partners Jorge Rico and Marcio Cabrera, looks at about a deal per day, and over the last five years has examined some 1,200 or 1,300 deals. “We narrow it down to a deal in which (a) we understand the space and (b) we trust the management and what they’re trying to do,” says Fernandez.

They seek out health-care companies that are either insolvent or very well managed. “If they’re well managed, our focus is to provide them with capital to grow and give them strategic advice,” he says. “If it’s a company that’s broken, the task is to fix it, grow it and hopefully someone will appreciate its value and buy it in the future.” He notes that two HMOs the firm currently runs were financially insolvent at acquisition.

MBF focuses on lower-middle-market companies (with $10 million to $20 million in EBITDA). “The number of lower-income families is much greater than the number of wealthy families, so we have focused our services to an income level that is below the mean,” says Fernandez. “We target that population. They are more loyal customers; they tend to shop around less. They are grateful if you provide them personal services. It’s easier and cheaper to keep an existing client than it is to find a new one.”

And just as it caters to the aging population for health-care services, MBF focuses on the fastest-growing population in the U.S. “The Hispanic population is by far the largest segment of the demographics of our nation today,” says Fernandez. “Being one of them gives you an advantage.”

MBF historically holds on to an acquisition for five to seven years. However, its best deal took just over two years. In December 2002, MBF acquired CarePlus, a Coral Gables managed-care outfit that serves Medicare-eligible Floridians through a Medicare Advantage HMO, for $29 million. CarePlus owned 10 distressed medical centers employing 30 physicians that offered diagnostics, lab services, vision care, pharmacy and wellness programs. It covered some 49,000 members through a network of more than 1,000 contracted health-care providers.

CarePlus had a lot going for it. It was located in Florida, the country’s fastest growing Medicare Advantage market, where only 18% of the eligible population was enrolled in a Medicare Advantage health plan, and South Florida was blessed with a niche Hispanic market. Moreover, Florida seniors tended to use medical centers for most of their health-care needs, resulting in extremely low turnover.

MBF created a marketing strategy that grew same-store revenues by 25% in 2003, and led an operations team that increased year-over-year EBITDA margins from 6% to 11%. In three years, the team led CarePlus from an EBITDA loss of $16 million to earnings of $54 million. MBF sold the company to Humana in February 2005 for $419 million—more than 14 times invested capital.

The fund’s exit strategy has never been to go public, says Fernandez. “In today’s world, you have to be a masochist to be in the public market. Your secrets are not your secrets, your projections are forecasted, every competitor knows what you’re doing, the government is breathing down your back and making your life impossible,” he says.

MBF’s model has been to sell to a buyer in search of a good asset, and convert its stock into cash. “None of us operators that currently run our companies is of the mind-set that we want to run public companies,” says Fernandez. “This isn’t to say it might not happen, but that is not the driver from our side.”

MBF Healthcare Partners LP, which started in 2005, has divested of three companies. The annual returns vary from Atlantic Dental Inc., with 74.5%; Hospitalists, with 46.8%; and Medical Specialist Distributors (“a former Bain Capital company that failed,” Fernandez notes), at 33.3%.

“We’re blessed by the fact that we’re not driven by fees, we’re driven by making a company successful, and in that process you create jobs,” says Fernandez. “You don’t sell a company because you’re downsizing or producing an inferior product. You sell a company because you’re growing and have a superior product.”

No new MBF funds are in the pipeline. “Ours is kind of an evergreen fund,” says Fernandez. “Since we’re 80% of it, it doesn’t have a finite term. The document says it will terminate after eight years, but at my discretion, I can extend it. When we sell something, we invest the money back in the fund.” As for letting in new investors, “If it’s the right LP, yes,” he says.

The Deal As An Educational Tool
The Fernandez family office is the lead investor in all MBF deals, putting up 80% of capital. In fact, Mike Fernandez’s five children, ranging in age from 8 to 33, own 99% of all holdings. “I did that for estate planning reasons,” says Fernandez.
Early involvement in the family business is part of the siblings’ financial education, which Fernandez considers essential in order to grow wealth. “I tell my five kids that in life there are consumers and producers, job creators. I try to educate them—not always successfully—about the differences. From very early on, by age 15, my kids have quarterly meetings with our money managers, with our investors in the fund.”

He says it’s also important to make plans for the fact that one of them may not be qualified to take the place of the patriarch.  A generation or two could pass with a non-family member at the helm before someone in the family steps into a leadership position.

“Not all children are created equal, but they all deserve an equal opportunity to know what’s on the table,” says Fernandez. “I’m very open with all my kids about what the assets are, what the logic is, what the asset allocations are, why we are diversifying X, Y and Z.”

At the same time, he is acutely aware of incentives, providing a safety net without crippling the children’s ambition by making their life too comfortable. “Although the family trust is what you might call a mega-net-worth type of trust, the children are entitled to receive only an amount equal to what they make,” he says. “So, if you want to be a teacher and make $40,000 a year, that’s exactly what you’re going to get. If you want to be a teacher who starts a chain of schools and now you’re making $3 million a year, that’s what you’re going to get.”