The Eberts-supervised fund had invested $100 million just a few months earlier, in March 2017, as part of a $488 million deal that greatly enhanced the reputation of the U.S.-based company. Chicago and its founders.
Eberts, who later retired from Goldman Sachs after 30 years, described why the company invested in Outcome Health and agreed to let Shah and Agarwal take $225 million off the table. The company – which operates a network of TV and tablet screens mainly in specialist doctors’ offices – has been profitable and growing rapidly, he said.
Outcome Health’s revenue nearly doubled year-over-year, and the company predicts sales will triple to $450 million in 2017 following the acquisition, according to a note presented before court. The company’s operating profit — or earnings before interest, taxes, and amortization — is close to 50%.
Also appealing to investors is the company’s claim that its advertising platform, which targets patients while they are in doctor’s office, has generated an increase in sales. Pharmaceutical company sales are twice as high as traditional TV and newspaper ads.
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Prosecutors allege that the company overcharged its customers for advertising it didn’t deliver, which inflated the company’s financial results by as much as 25%. The government argues that investors who relied on those results were defrauded. Shah, Agarwal and Purdy have denied the allegations.
The investment agreement has an unusual structure. Goldman and others will invest $100 million in a holding company that will go public within four years. When the IPO happens, their investment will convert into shares at a rate that includes a 20% increase per year. If Results go public after one year, Goldman’s shares will be converted into shares worth $120 million at the IPO. Eberts said Goldman used a similar structure in its investment in Uber.
“Our security structure has effectively resulted in a 20% return on stock purchases in a future IPO, with what we hope is a reasonable margin of safety,” he said.
Goldman is the largest investor in a $350 million deal that involves other private and venture capital funds. The total fundraising amount eventually grew to $488 million. The $225 million payment to Shah and Agarwal raised questions for the investment committee.
“We believe the company is worth $2.5 billion or more. In that context, the distribution to founders would be a little less than 10%,” Eberts said. “While it’s a large amount of money, it’s not a huge percentage of their wealth.”
Goldman and other investors, including Google’s Capital G and the Chicago venture capital fund formerly led by Governor JB Pritzker, eventually sued Shah and Agarwal to reclaim some of the money they had received. part of the investment after allegations of fraud emerged.
Just months after the deal, those fraud allegations also raised questions about the due diligence of Goldman and other investors. Shah’s attorney, John Hueston, raised those questions when he began cross-examination on Monday. He pointed to an email from a member of the investment committee for the Goldman fund, noting that one of the examples of return on investment seems small. “I suppose we’ll look for more?”
This story first appeared in Crain’s Chicago Business.
