Q2 2021 Leadership Letter - Adam Blumenthal

June 25, 2021

Adam Blumenthal

Managing Partner - Blue Wolf Capital Partners

Adam is the Managing Partner at Blue Wolf Capital Partners. Blue Wolf Capital Partners is a private equity firm located in New York City with a distinctive approach to building stronger businesses. Founded in 2005, they manage over $1.6 billion in capital and combine a focus on operational, strategic and financial discipline to responsibly transform companies. Prior to Blue Wolf, Adam served as the First Deputy Comptroller for the City of New York and was also the President at American Capital Strategies. Adam hails from New York City and is an avid mountain climber.

Matt: What’s an unusual habit or unique thing you love?

Adam: Relatively later in my life compared to most people, I became very interested in rock climbing and mountain climbing. Of course, those are activities that younger and less sedentary people than me take up. I was introduced to this in my early 50s by a colleague who had been a mountain guide before he became a banker and I really fell in love with it. The thing that I think is so rewarding about climbing is that it requires continuous problem solving. You're looking at a mountain or a cliff, and there is a way up. You may not see it right away, but it's seeing the potential of a way up. Then it's navigating all of the emotions as you climb which are critical to actually be able to do it. On every climb there's a crux that is difficult. There will be a time where you get frustrated, and you have to stop. You have to breathe. You have to think about what you're trying to do; you have to slow down and look around you and reorient yourself before you can make progress. Ultimately, then you either get to the top or you don't. In either event, the quality of your climb has to do with your ability to be calm, work slowly but consistently, and be aware of your surroundings. To me, that's a good metaphor for what most of the experience of life is like. The other thing that I think is so interesting about climbing is that it involves a lot of risk management. That is, you have to start with the assumption that getting to the top is optional but getting back down is mandatory. You know what your priorities are and then you have to manage what you do in light of those priorities. If you get confused in those priorities, for example, if you think getting to the top is mandatory - you'll make very bad decisions. So, there's always this exercise in prioritization and risk management that you have to engage in continuously. When you do these activities in normal life they can be frustrating, anxiety provoking, and require lots of hard work, but when you're going off on the side of a mountain, it's the same activity, but it's very simple, stark, and direct, therefore it's really compelling.

M: Do you think your perspective on climbing is a byproduct of your experience as an investor and how you look at things through the lens of risk?

A: What’s appealing to me about climbing very much reflects what I've learned from a long career in investing. I probably wouldn't have been a very good climber when I was in my 20s. I would have just run at things, try to run up the mountain, force my way up, and burn myself out. Likely, I would have given up exhausted. I think it’s a question of maturing. It’s about maturing investment judgment, considering prioritization, considering risk management, and considering the need to slow down, observe your surroundings and think about what you're going to do before you act. They're all hard to do but they're much more effective than the idea of “never mind the torpedoes, full steam ahead” approach. I think what I've learned to do in investing prepared me to really identify and enjoy those parts of mountain climbing. Of course, being outdoors in beautiful places and staying fit doesn’t hurt either. There's lots of ways to do those things but doing it on the side of a mountain fits really well with what I've learned to do through my investing.

M: Are there any books about leadership that are favorites of yours or that you typically recommended to your investment leadership teams?

A: There are two books that I think are very interesting and I often have a reason to recommend them to people. One of them is by a professor at Yale, Jeff Sonnenfeld. It's called Firing Back, and it's really about learning from adversity. It provides case studies of executives who failed. In many cases they've been fired from a job but they’ve had the resilience to reengage, learn the lessons from whatever went wrong, and double down to come back up and become more successful than they had been before. People respond to failure, challenges, and rejection in different ways, but having the resilience to accept those experiences, learn from them, and come back to build something better and stronger than before is a very important leadership skill. Firing Back is a great set of case studies about people who have successfully shown that resilience.

The other book, which is about a different aspect of leadership, is called The Seventh Power. It's by a guy named Kevin Hancock, who is CEO of Hancock Lumber in Maine. It's a family owned business, one of the major timber companies in the state of Maine. Kevin's book is really about learning to listen as an executive. Kevin really had to learn to listen because he developed a medical condition that made it extremely difficult for him to talk. So, he had to adapt his leadership style to a world in which he couldn't dominate the room and tell people what to do because it was quite difficult for him. He had to find other ways to understand, influence, and lead. I think the story of his journey, which really was about skills development but also his personal development, was really inspiring to me. It's very aligned with the concept of servant leadership and has themes around the need to listen, learning by listening, and guiding rather than dominating. The story outlines how it was really something that he was forced to adopt, but turned out to make him far more successful and a far better leader. Both of those are the books that I recommend to lots of people.

M: In line with Jeff's book Firing Back and developing resilience from failure, do you have any examples from failure that later led to success and if so what did you learn in the process?

A: When I was in my early 30s, I was part of a company that I helped start called American Capital. We had originally started as a merchant banking firm, but in 1997, when I was 36, we went public. We became what's called a Business Development Company. It was an organization that makes loans and investments in small and midsize businesses and we would pass through the earnings to our shareholders without intervening taxes as a way of promoting economic development. That became a very successful business. I was President and Chief Operating Officer and was the number two person there for five years as we grew to a $1 billion portfolio of investments across the country in small, family owned, and midsized companies. I realized that despite the fact that I had a wonderful job in a growing company which I had devoted 13 years of my life building, I wanted to walk away. I just didn't want to do it anymore. It took a lot of people by surprise. I will say that if you spend 13 years building something and then realize you just don't like it and you don't like what you're doing, that feels like a failure when it happens. But you have to recognize that when you build a big institution, you have a lot of constituencies. You have investors, you have big teams of people, and that institution may be a great company, but it’s important to know your role. My role was in helping get it off the ground and building it and getting it to the billion dollar level. But taking it to the next level really was a job for somebody else. So that's how I was able to walk away. After that I spent three years in public service running the New York City pension system. Then I went and founded Blue Wolf, which is an investment company private equity fund that does exactly what I want and enjoy. So, I think at the time I left American Capital, it felt a little bit like a failure, but with a year or two’s perspective, it was actually just a good decision.

M:  How did you work through making the decision to leave your role in American Capital?

A: It was very difficult. As you spend and invest a lot of time in building an institution you somewhat identify yourself with it. You’ve hired all the people, you've created a lot of the processes. It's kind of your life. So, admitting that it's grown into something that's great, but it's just not the right thing for me, takes a lot of introspection. As time went on, I found myself not very happy in my job despite that from a business perspective, we were doing quite well. It doesn't take a lot of introspection to figure out that you're not particularly feeling happy, but takes a lot to figure out why. I looked a lot at what I was doing every day and I realized it wasn’t what I wanted to be doing. I realized that as a company, we effectively became a lender. As I thought about my life and reflected on when I was younger, I had never wanted to be an executive of a company or a lender. Now here I was doing quarterly earnings calls about our net operating income and focusing on loan quality. None of these were things I ever had wanted to do. As the institution grew and was thriving, I knew I could walk away and it would continue to get better. It took a lot of introspection and discussion with the board of the company, our investors, and the rest of our management team to get everybody comfortable with the transition. It was the right thing to do as there was a team that was ready to take on my responsibilities so that the company could continue to grow and to generate returns for investors. Then I had the opportunity to move on to new challenges and opportunities that I love.

M:  What are the characteristics you look for in the leadership teams of your portfolio companies?

A: There are a few. The first is a commitment to integrity. It’s our belief that we can work our way through and solve almost any problem to find a way to grow through value creation as long as we are all open, transparent, and honest in our assessment of situations. The only thing that gets in our way, is when we have people that are on the same team but they are shaping information and reporting information to reflect an image of the world the way they want it to be rather than the way it is. To me, being able to be transparent and honest about what you see and what's happening around you while being able to discuss that openly with other people is at the core of integrity. Relationships based on integrity are the foundation of every successful investment that we've made. In addition to that, operational excellence is something that we strive for. We have a phrase around here that we often use, which is “relentless daily execution”. A commitment to relentless daily execution is critical to achieving operational excellence. We have rarely had a successful investment in which the leaders didn't share that commitment. Those two things, integrity and a commitment to operational excellence through relentless daily execution, characterize the leaders that we like to work with.

M: Can you share the impetus of Blue Wolf’s investment thesis in the healthcare space?

A: Around 2011 I was asked to serve as an independent trustee of the UAW Retiree Medical Benefit Trust. That's the entity that pays for the retiree medical benefits of every unionized worker who worked at Ford, General Motors, or Chrysler. Roughly $60 billion worth of assets were spun off into an independent trust through ownership stakes in Chrysler, General Motors, and a lot of equities and fixed income securities from a variety of companies. We had this obligation to pay for the retiree medical benefits of almost a million people, who were really the industrial working class of middle America. These people had worked the majority of their lives and had been promised and were depending on the continuation of these benefits for the rest of their lives. At the time this trust was established, it was not considered likely to succeed. If you recall, some people thought that this was the problem that had bankrupted the auto industry. Over the course of the next decade, the trust became a remarkable success story. Now it’s really fully funded and there's more than enough assets to pay the benefits. Although we were an independent trust, we had substantial representation from the United Auto Workers Union on our board. We really were there to serve the members, and so reducing benefits wasn't in the cards for us. So there we were, with this terrible problem. We had projections of healthcare cost inflation where we would probably go bankrupt. We had a million people depending on us and no one to turn to for more money. We couldn't get more money from anybody, and all the while, we have a legal obligation to take care of folks for the rest of their lives as long as the money lasts. So how did that become a success story? Well, the way it became a success story was through managing population health. This was older Americans with chronic medical conditions. The reason that it's so expensive to take care of them has to do with a lack of coordination and honestly a lack of responsibility on the part of healthcare institutions who manage their health. This management is typically not consistent with the result of improving their quality of life, keeping people out of the hospital and keeping people from being sick, getting the right answers the first time, all without requiring large amounts of medical care. If you do those things consistently it turns out, your health costs increase far below the health insurance trend lines. All of a sudden, a terrible problem becomes not a problem at all because your population becomes healthier. Here is a simple example. Glaucoma is an early warning sign of diabetes and people who have advanced diabetes have poor quality of life and consume a lot of resources in the healthcare system. If they didn't have diabetes, they would consume less resources and have a better quality of life. Well, it turns out that if you know you have to manage people’s health benefits for the rest of their lives, you should give them the vision benefit. Then you should send them a postcard, every quarter, if they haven't utilized it that year reminding them that they really should go to the eye doctor to utilize their vision benefit. I want to find out if they have glaucoma, because if they do, I want to get ahead of the diabetes and prevent them from getting it so their quality of life improves and the fund stays solvent. That's one small example but there are hundreds of things like this in the American healthcare system that everyone's aware of, but nobody has the incentive to implement across a large population, consistently, at scale. But in our case, we did have that incentive because we had no ability to cost shift, and we had no access to incremental funding, so the only option left for us was to do the right thing. Which we did and it really worked. What I learned from that experience I brought over to the healthcare investment side of Blue Wolf. We have investments in companies like Fox Rehab that provide physical therapy to a largely geriatric population to prevent falls, improve mobility, and improve quality of life. We know that this business is going to be successful because we're tapping into the ability of prevention and resiliency, to improve population health and therefore improve the performance of the overall healthcare system while improving the life of our individual patients. Another example is when we put an urgent care center into a federally designated physician shortage area, as we do at ModernMD. We're doing the same thing for a population of mothers and children in communities where there is no access to physicians. You know what, if you do that, the mothers and children who are primary customers - remain healthier, they get more preventive care, they get more wellness, their lives are better, and they put less strain on the already stressed healthcare infrastructure. So the payers in those communities recognize the downstream benefits of providing that access far outweigh the cost of an urgent care visit. Much of our portfolio has growth that's driven by that fundamental perspective.

M: What are the characteristics of the healthcare companies that you believe will be most successful in the future, specifically through the lens of population health?

A: I think you have to combine two things to really be successful. First, you have to have a motivated and turned on set of caregivers in your organization. It’s really about culture. Portfolio companies and companies with strong, unified cultures, that really celebrate the role of the caregiver and understand caregivers' motivations by being patient centered outperform those whose cultures are weaker. I think culture is underestimated but a very important piece of success in managing healthcare services organizations that employ lots of caregivers, which is really what's necessary for our approach to population health. The other differentiator is good use of technology. Technology and culture are closely related to each other, as technology facilitates culture and communication. Certainly, there are ways of capturing information and pushing out information that technology makes possible and the companies that are really good at utilizing technology in this way outperform those which are not. One of the things that typifies the American society today is the enormous gap between great implementations of technology and poor implementations of technology. A relevant example of this ties back to the efforts to answer questions about COVID. For example, how many people got COVID in the last 18 months in the United States, in what neighborhoods, in what demographics, and what were the exacerbating factors? There are places where we probably know those answers really well with a lot of precision. Then there are places where the data is terrible. You’re dealing with various jurisdictions and various forms of organizations. It often has to do with how we’re able to utilize technology to capture and report information. The companies that are at the good end of that, certainly out-compete those that are at the bad end and I think the COVID pandemic really gave us a fascinating and sometimes horrifying insight into the gap between good and bad.

M: Are there any emerging technologies that you’re tracking that you feel will have a transformational impact on healthcare?

A: I think that the question of home-based monitoring for senior citizens and vulnerable populations as a whole, is something where there’s a potential for tremendous improvement. For example, on managing falls, managing changes in basic patterns in the activities of daily living, and feeding that into triggers about when greater levels of intervention are important. There’s tremendous potential for this as these technologies develop, as people become more technology savvy, as broadband becomes more pervasive, and as technology simply becomes more adaptive. That's going to have a big impact on some of the most costly and difficult parts of the American healthcare system.

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