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There has been a significant rise in private equity acquisitions of single-specialty physician practices over the past decade, with a particular focus in Dentistry, Dermatology, and Eye Care. Over the past couple of years, private equity has diversified their specialty focus to include Pain Management, Urology, Gastroenterology, Orthopedics and Women’s Health, with additional specialties including ENT and Podiatry recently hitting their first wave of consolidation.
Although physicians have a multitude of options, a transaction with private equity has become one of the more common avenues for founders exploring succession plans and/or growth capital. As physicians consider a potential exit strategy for their practice, it is pertinent that they are well-informed on the current market environment.
Over the past several years, there have been an increasing number of private equity firms participating in healthcare M&A transactions. Much of this increased interest in healthcare is driven by the current macroeconomic environment, substantiated by record-low interest rates, a prolonged bull market, and all-time high levels of uninvested capital, or “dry powder,” espurring a rise in acquisitions in the significantly profitable healthcare services sector. As more firms compete for similar deals, physicians have reaped the benefits of favorable valuation multiples. These private equity firms are allocating capital across the entire spectrum of healthcare specialties, with certain areas experiencing more prolonged transaction cycles. Dental consolidation in particular has been privy to private equity investment for over 20 years, while dermatology, eye care, and pain management has been consolidating for over 5 years now. Most recently, specialties including orthopedics, gastroenterology, urology, podiatry, ENT and women’s health have begun to consolidate as well. Some notable private equity partnerships include Omers’ acquisition of Forefront Dermatology, Goldman Sachs’ acquisition of MyEyeDr, Partners Group’s acquisition of Eyecare Partners, New Mainstream’s US Urology Partners, Waud Capital’s GI Alliance and NexPhase Capital’s acquisition of Clearway Pain Solutions. The success of the aforementioned platforms continues to drive interest in the single-specialty space, as other groups seek to replicate their results.
Private equity firms historically shied away from investing in single-specialty practices due to the complexity and regulation in the healthcare industry. However, the demonstrable success of early platforms laid the groundwork for sustainable investment in multi-site healthcare service organizations. Founded in 1997, Heartland Dental has grown to over 1,000 dental practices with the support of four separate private equity partners over the last 20 years, the most recent being KKR, one of the world’s largest private equity firms. In the last 5-10 years, there has been a significant uptick in physician practice M&A activity, with interest that has been validated by initial, successful case studies in Dermatology and Eye Care.
Forefront Dermatology is another example of how private equity can exponentially increase the growth of a physician practice. Founded in 2001, the platform was created through an initial investment from Varsity Healthcare Partners in May 2014. At the time, Forefront operated 40 clinics across 4 states, primarily in the Midwest. In February 2016, after less than two years of ownership, the platform had grown to 80 clinics across 11 states in the Midwestern and Mid-Atlantic regions, allowing Varsity to sell the business to OMERS Private Equity and delivering a “second bite of the apple” to the physician shareholders. OMERS has further developed and scaled the platform to more than 130 clinics across 16 states.
Similar to Forefront, EyeCare Partners, headquartered in St. Louis, has been successful in growing and expanding within the physician practice management space. First acquired by FFL partners in 2015 with approximately 63 locations, EyeCare Partners quickly grew to 450 sites across 14 states. Partners Group recently purchased EyeCare Partners at a premium valuation (over $2.0bn) in 2019.
A private equity partner that is both an optimal cultural fit and offers a cohesive growth strategy enables a physician practice platform to scale significantly more rapidly than they otherwise could independently. Private equity groups typically look to scale physician practice platforms over a 5-7 year investment cycle before ultimately evaluating an exit, recognizing a healthy return on investment for all constituents. In particular, private equity investors continue to be attracted to physician specialties that benefit from continued growth in the aging population, supply and demand imbalance, and increasing prevalence of chronic conditions. The supply of qualified healthcare providers currently lags behind the demand created by the aging US population, resulting in favorable macroeconomic conditions that support the deployment in capital towards such investments theses.
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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 thesis is to build scale while recognizing synergies driven by geographic proximity. Another prevalent strategy for investor groups is to acquire strong, clinically-driven practices across multiple geographies, 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, and instead 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. As such, 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 important, aspects of choosing a private equity partner. To ensure the continued success of a physician practice, it is crucial that there is strategic alignment and mutual respect between the parties, which can be accomplished by fully vetting all possible partnership opportunities. Not all private equity firms conduct business the same way, and it is important to be comfortable with the partner that you have entrusted to grow your practice. Advisors have intimate working relationships with all major platforms and healthcare private equity groups, and have relevant insights into the varied growth strategies employed.
Advisors can provide tremendous value when evaluating the decision to sell your practice. A trusted advisor has the ability to elicit the highest values for your business, while simultaneously assisting in identifying private equity firms that will be the right cultural fit to achieve your succession plans. Physician Growth Partners offers unparalleled transaction advisory services, drawing on significant experience from the successful sale of 20+ physician practices over the past 3 years, along with unmatched relationships across the industry. The founding partners of PGP have worked with a multitude of healthcare specialties across all geographic regions. 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 team’s consistent involvement throughout the duration of your transaction process – this ensures that the story of the organization isn’t compromised, and your goals are achieved. Once initial conversations are completed and bids have been submitted, Physician Growth Partners will request the remaining interested parties to submit a Letter of Intent (LOI), a more formalized offer outlining all key transaction terms. We work with the shareholders to select a partner from this group that offers the ideal 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. As the healthcare M&A landscape is constantly evolving, it is crucial to select an advisor with experience navigating the potential obstacles that can occur during the due diligence and closing process of a transaction. This ensures the resulting transaction meets both parties expectations.(LOI), a more formalized offer outlining all key transaction terms. We work with the shareholders to select a partner from this group that offers the ideal 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. As the healthcare M&A landscape is constantly evolving, it is crucial to select an advisor with experience navigating the potential obstacles that can occur during the due diligence and closing process of a transaction. This ensures the resulting transaction meets both parties expectations.
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 or an in-person meeting with our team. We’ll learn about your goals and objectives as a physician owner and determine if we are the right advisor to help you achieve those milestones. If you decide to undertake a transaction process, the typical timeline is approximately 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 organization, 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 our intimate conversations, relationships, and past transactions with the majority of private equity firms interested in healthcare services, we are acutely aware of the relevant buyers that would be interested in your business. This allows our team to run an efficient transaction process that engages only firms relevant to your practice. 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 potential buyers that we collectively 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 a final partner is selected, our team and the selected firm will work together to close the transaction as expeditiously as possible.