There has been a significant rise in private equity acquisitions of single-specialty medical practices over the past decade, with an extreme focus in Dentistry, Dermatology, and Ophthalmology. More recently, Pain Management, Urology, Gastroenterology, Women’s Health, ENT, and Orthopedics have come into focus.
Although physicians have many options, a transaction to private equity has become the most common route for physicians looking for an exit opportunity or succession plan, especially one that can create meaningful economic liquidity. As physicians consider their exit strategy for their practice, it is pertinent that they are well-informed on the current market environment.
Doctors are considering the private equity option for many reasons. Practice management and business operations have become increasingly complex and more time-consuming. From navigating labor laws to negotiating reimbursement rates, providers have found themselves spending less and less time practicing medicine. The COVID pandemic has only further shed light on the added stress of running a business’s day-to-day operations. As private equity consolidation continues to sweep across the United States, physician leaders must become more educated and better equipped to assess partnership opportunities.
Over the past several years, there has been an increasing number of private equity firms participating in healthcare M&A transactions. Much of this increased investment in healthcare is driven by the current macroeconomic environment with record low interest rates, a prolonged bull-market, and record levels of uninvested capital spurring a rise in acquisitions in the significantly profitable healthcare services sector. As more firms compete for similar deals, physicians have reaped the benefits of continued favorable valuation multiples. These private equity firms allocate money across the entire spectrum of healthcare specialties, including ophthalmology, urology, gastroenterology, dermatology, pain management, and, most notably, dentistry.
Notable investments include Goldman Sachs acquisition of MyEyeDr, Audax Group’s acquisition of United Urology Group, Waud Capital’s acquisition of GI Alliance, and NexPhase Capital’s acquisition of Clearway Pain Solutions. Dental consolidation, which has been ongoing for a longer time than other specialties, has seen Heartland Dental trade on three separate occasions, most recently acquired by global private equity firm KKR in 2018. The aforementioned platforms’ success continues to drive interest in the space, as other groups seek to replicate their results. The combination of a favorable investment environment and increased competition has resulted in physicians receiving historically high investment valuations.
Private equity firms historically shied away from investing in single-specialty medicine practices due to the healthcare industry’s complexity and regulation. However, in the last 15 years, there has been a significant uptick in physician practice M&A activity. This change in mindset has been driven by solving the complexities of early private equity success demonstrated in dentistry and dermatology. Heartland Dental was founded in 1997, with only one office. After 15 years of internal growth, in 2012, the Ontario Teachers’ Pension Plan took a majority investment in Heartland. At the time, Heartland consisted of 397 practices across 21 states. Following growth initiatives implemented by Ontario Teachers, in 2017, annual revenues were estimated to be $1.3 billion, more than doubling revenues when Ontario Teachers first made their investment. In March 2018, KKR, one of the largest private equity groups globally, acquired a majority interest from Ontario Teachers. Heartland Dental has since grown to over 1,000 dental practices across nearly 40 states. Forefront Dermatology is a further case study of how private equity groups can exponentially increase a physician practice’s growth.
Forefront was founded in 2001, and the platform first took private equity investment from Varsity Healthcare Partners in May 2014. At the time, Forefront operated 40 clinics across four states in the Midwest. In February 2016, Varsity sold its majority stake to OMERS Private Equity. At the time of OMERS investment, Forefront operated 80 clinics across 11 states in the Midwestern and Mid-Atlantic region. OMERS has since developed and scaled the platform, and currently, Forefront operates more than 130 clinics across 16 states. Through the right growth strategy and cultural fit with a private equity partner, physician platforms can scale at exponential rates. Private equity groups typically look to scale physician platforms in a 5-7 year cycle before selling the platform, recognizing a healthy return on investment. Private equity investors continue to be attracted to physician specialties that benefit from an aging population, supply and demand imbalance, increasing prevalence of chronic conditions, and a healthy mix between medical procedures, while still maintaining a cash-pay component.
Practices that lead with quality care while maintaining the full scope of services, diversification, scale, and infrastructure ease investment risk for private equity groups and are especially attractive.
Private equity firms have maintained a “platform-based” strategy. This strategy is characterized by firms making a large initial investment with a regionally-dominant practice that can be utilized as an anchor, followed by add-on investments in smaller practices to quickly establish multi-state and regional dominance. The idea is to build scale while recognizing synergies driven by geographic proximity. Another prevalent strategy for investor groups is to acquire strong, clinically-excellent practices all across the country, regardless of location, establishing a brand known for exceptional patient outcomes.
Many physicians are worried about the prospect of private equity interfering and affecting patient experience while dictating to the physician how to practice medicine. The majority of private equity firms are aware of this risk. Instead, they aim to remain in the background, working to eliminate inefficiencies and drive synergies, while allowing physicians to take leadership roles and remain fully committed to patient care. For this reason, investors seek to provide capital and invest in physicians that are strong leaders and those that have impeccable reputations. Cultural fit is one of the most underrated yet essential parts of picking a private equity partner. To ensure a physician practice’s continued success, there must be strategic alignment and mutual respect between the parties involved. To best ensure this happens, physicians need to explore and exhaust all of their options. Not all private equity firms conduct business the same way, and it is essential to be comfortable with the partner you have entrusted to grow your practice. Advisors have intimate working relationships with all major platforms and healthcare private equity groups and have insights into how each private equity firm attempts to grow following an acquisition.
Advisors can provide tremendous value when deciding to sell your practice. A trusted advisor can elicit your business’s highest values while simultaneously assisting in identifying private equity firms that will be a cultural fit that achieves your succession plans. Physician Growth Partners offers unparalleled transaction advisory services, drawing significant experience from the successful sale of 20+ physician practices over the past three years, along with countless conversations with industry leaders. The founding partners of PGP have worked with many health care specialties across all regions of the US. We are extremely dedicated to providing impeccable service, ensuring that each and every one of our clients receives an outsized outcome. Physician Growth Partners differentiates itself from its competitors with its leadership teams’ constant involvement throughout the duration of your transaction process – this ensures that the story of the business isn’t compromised, and your goals are met.
If you want to learn more about the marketplace and what a potential transaction would look like, we invite you to schedule a phone call with our team. Over the phone, we’ll learn about your goals as a physician owner and determine if we are the right advisor to help you reach those goals.
If you do decide to undertake a transaction process, the typical time is around 6-9 months. In the initial stages, we will gather historical data from your practice, beginning with a series of phone calls to discuss the story behind your business, while understanding your motivation for wanting to engage in a sale. Our team will then carefully craft marketing materials to display the company’s full picture to prospective private equity buyers with past acquisitions in the physician practice sector.
Through intimate conversations with the majority of private equity firms interested in healthcare services, we are acutely aware of the relevant firms that would be interested in your business, so we can better run an efficient process. Following a few discussions with these firms, they will place an initial range on your practice’s enterprise value. We work with you to narrow the list to the firms we feel offer the best partnership and value combination. Selected firms will then meet with you and visit the practice’s facilities to get a full picture of the business.
Physician Growth Partners will then work with the shareholders to select a partner from this select group that offers the perfect combination of value while maintaining the right strategic fit. Following weeks of due diligence from both parties, the transaction will close.
The Healthcare M&A landscape is continually evolving, and it is crucial to select an advisor with experience navigating the many hiccups that can occur in the due diligence and closing process.
If you want to learn more about the marketplace and what a potential transaction would look like, we invite you to schedule a phone call with our team. Over the phone, we’ll learn about your goals as a physician owner and determine if we are the right advisor to help you accomplish them.
If you decide to undertake a transaction process, the typical timeline is around 5-7 months. In the initial stages, we will gather historical data from your practice, beginning with a series of phone calls to discuss the story behind your business, while understanding your motivation for wanting to engage in a sale. Our team will then carefully craft marketing materials to attract prospective private equity buyers.
Through intimate conversations, relationships, and past transactions with the majority of private equity firms interested in health care services, we are acutely aware of the relevant firms that would be interested in your business, so we can better run an efficient process.
Following discussions with the relevant private equity firms, we instruct the group of buyers to formally submit an initial offer for your practice. Once we receive the offers, we work with you to narrow the list of firms that we feel offer the best combination of partnership and value. Selected buyers will then meet with you and visit the practice’s facilities to get a full picture of the business. This is also the opportune time to learn more about the selected buyer’s strategy, experience, relationships, and goals.
Once the meetings are complete, Physician Growth Partners will request the parties to submit a Letter of Intent (LOI) or final offer.
We will work with the shareholders to select a partner from this select group that offers the perfect combination of value while maintaining the right strategic fit. Following a period of exclusive confirmatory due diligence from both parties, the transaction will be in a position to consummate.
The Healthcare M&A landscape is constantly evolving, and it is crucial to select an advisor with experience navigating the many hiccups that can occur in the due diligence and closing process.