The Chicago-based private equity firm the Vistria Group has agreed to sell St. Croix Hospice to an affiliate of the investment company H.I.G. Capital for an undisclosed amount. Vistria’s portfolio focuses on health care, education and financial services.

Minnesota-headquartered St. Croix has a substantial Midwestern footprint that extends across six states and has been on a strong growth trajectory in recent years, completing a number of acquisitions of its own during 2019 and 2020. The company has also added five de novo locations so far during 2020, as well as several others the prior year.

“We are excited to partner with H.I.G. They are our fourth private equity partner, and we’ve had a great relationship with each one. We are looking forward to continued growth and currently serve patients from our 35 branches in six Midwestern states,” Heath Bartness, founder and CEO of St. Croix, told Hospice News.

Vistria has been seeking a buyer for St. Croix since at least July, when the Wall Street Journal published a story that the hospice was going up for sale.

“We received a significant amount of interest in St. Croix and thought there was an opportunity to recapitalize it for the next phase of its growth  Typically we plan in five-year windows, but St. Croix was well ahead of the curve. This time was right,” said David Schuppan, senior partner at Vistria.

In March, St. Croix entered the Missouri market through the acquisition of Serenity Care Hospice in Harrison, Mo., for an undisclosed amount. Last August, St. Croix also purchased Brookfield, Wis.-based Hometown Hospice & Homecare, which consists of three hospice and home health operations in eastern Wisconsin. The company has plans for future expansion with a focus on Midwestern markets.

A number of factors have whetted the appetites of private equity firms for hospice in recent years, including the fragmented nature of the industry, increased acceptance of palliative care services, demographic tailwinds, the changing regulatory landscape, and movement towards value-based payment models.

“Private equity firms typically have a size criteria. Most of the time these these larger portfolio company transactions will be companies that have EBITDA that’s in excess of $5 million. Obviously, this one is significantly bigger,” said Cory Mertz, managing partner at the M&A advisory firm Mertz Taggart. “Management team is always a key consideration. Private equity buyers typically don’t have expertise in that industry. They rely very heavily on the executive team that’s in place.

A culture of regulatory compliance also plays a key role in attracting private equity buyers. As the U.S Centers for Medicare & Medicaid Services (CMS) continues to ramp up audits and other enforcement activity focused on the hospice space, potential investors are wary of organizations that have a spotty record on compliance.

“There are indications of a significant uptick in audit activity in hospice, particularly compliance with rules for billing and eligibility,” Mertz told Hospice News. “If you don’t have strong compliance in place, it can be really difficult to structure a transaction, simply because of the clawback risk to the buyer.”

Geographic location is also a key factor that can determine whether a private equity firm will invest in a hospice. For instance, high hospice utilization rates and growth among the senior population can pique an investor’s interest.

For example, Iowa, where St. Croix opened three de novos in the past 12 months, ranked seventh in the nation for hospice utilization in 2018; 56.6% of Medicare decedents elected hospice, compared to a national average of about 50%, according to the National Hospice & Palliative Care Organization.

Demographic tail winds are strong in Iowa, where the estimated number of people age 65 and older accounted for 17.1% of the total population in 2018, according to the U.S. Census Bureau. In 2018 Iowa ranked 17th nationwide in the percentage of population age 65 and older. According to projections by Woods & Poole Economics Inc., by 2050 the proportion of seniors will reach 20.3% of the total population.

Similar trends exists in the other Midwestern states where St. Croix has a presence, spurring the company’s expansion.

“Over the years, as society has more openly and honestly talked about end-of-life care, we have seen more individuals choosing hospice when faced with a terminal diagnosis, and more families reporting that hospice helped their loved ones pass gracefully,” Alok Sanghvi, managing director at H.I.G. Capital added. “We’re honored to be partnering with Heath and the St. Croix team to continue to support their important work of providing compassionate hospice services.”

Vistria Group, which also owns hospice provider Agape Care, foresees further investment in the space in coming years.

“We think [hospice] is an attractive area that is poised for growth as the baby boom generation ages. Plus, and consistent with our investment thesis, hospice adds a lot of value to individuals, their families and communities, and the broader health care system more generally,” Schuppan told Hospice News. “Hospice has a strong value proposition for the healthcare system, and just as importantly, the individuals served. We also think there’s a solid secular growth outlook as the silver tsunami takes full effect.”