In March 2017, the fund, overseen by Eberts, invested $100 million in a $488 million deal in March 2017 that dramatically raised the profile of the Chicago-based company and its founders.
Eberts, who later retired from Goldman Sachs after 30 years, explained why the firm Invested in Outcome Health and agreed to let Shah and Agarwal take $225 million off the table. He said the company – which operated a network of TV screens and tablet computers in most specialist doctors’ offices – was profitable and growing rapidly.
Outcome Health’s revenue nearly doubled last year, and the company was projecting sales of up to $450 million in 2017 following the acquisition, according to a pitch deck shown in court. The company’s operating profit — or earnings before interest, taxes and depreciation — was up nearly 50%.
Also attractive to investors was the company’s claim that its advertising platform, which targeted patients as they were in doctor’s offices for treatment, increased the drug company’s sales by twice as much as traditional TV and print ads. .
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Prosecutors claim the company overbilled its clients for ads it did not deliver, inflating the company’s financial results by up to 25%. Investors who relied on those results were defrauded, the government argues. Shah, Aggarwal and Purdy have denied the allegations.
The investment deal had an unusual structure. Goldman and others will invest $100 million in a holding company that will go public within four years. When the IPO happened, his investment would convert into shares at a rate that included 20% growth each year. Had the result become public after a year, Goldman’s stake would have been converted into $120 million worth of shares in the IPO. Eberts said Goldman used a similar structure in its investment in Uber.
“Our security structure was effectively providing a 20% return, which we expected to be a reasonable margin of safety when buying stock in future IPOs,” he added.
Goldman was the largest investor in the $350 million deal that included other venture and private-equity funds. Total fundraising eventually grew to $488 million. The $225 million payment to Shah and Agarwal raised questions for the investment committee.
Eberts said, “We believed the company was worth $2.5 billion or more. To put that in context, the distribution to the founders would have been a little less than 10%.” “Although it was a large sum, it was not a major part of his wealth.”
Goldman and other investors, including Google’s Capital G and the Chicago venture-capital fund previously backed by Gov. were led by JB Pritzker, eventually sued Shah and Agarwal To recover some of the money received as part of the investment after allegations of fraud surfaced.
Just months after the deal, those fraud allegations also raised questions about the due diligence done by Goldman and other investors. Shah’s lawyer, John Houston, raised these questions as soon as he began his arguments on Monday. He pointed to an email from a member of the investment committee for the Goldman Fund, noting that one of the return-on-investment examples seemed small. “I guess we’ll be looking for more in labor?”