Is PE investment in CROs scaring away clients?
Published July 2014
Private equity (PE) remains heavily invested in the CRO sector. However, there has been recent debate in the industry as to whether PE backing is having a negative influence and is making CRO sponsors nervous. Is there any merit in this view?
Italian CRO Cromsource has been outspoken on the matter. On the back of expanding its European headquarters, Cromsource attributed its ability to deliver its client proposition to “remaining free of the influence of private equity investment.” In an interview with ‘Outsourcing Pharma’, Kerry Dyson, Cromsource’s Head of UK Operations, stated that sponsors are wary that PE investment may pave the way for disruptive acquisitions and therefore instability, ongoing change and short-termism – PE investors typically seek to build value over the short to medium term and then sell their investment; CRO clients’ projects are often long term.
While this hesitance is understandable, I believe it is misguided. To achieve a successful exit, PE needs a well managed and steadily growing business and during the period of its investment will use its skills and connections to professionalise and scale services, develop international growth, as well as fund acquisitions. Furthermore, PE’s best exit, and most strategic price, is almost always going to come from a trade sale to another company in the sector. This all leads to one thing – the PE investor’s interests being aligned with both the CRO’s management team and the sponsors to develop a company with strong customer relationships and increasing market share. For proof, you have to look no further than the world’s largest CRO by revenue, Quintiles. Taken private by a consortium of investors in 2003, including founder Gillings and two private equity houses, Quintiles went public again in 2013. Further more, of the top 10 CROs globally, six are currently private equity-backed and have been for the last 3-7 years. PE backing shouldn’t be viewed with nervousness in the CRO market, but as an opportunity for financial support combined with operational expertise.