Healthcare Private Equity

Physician Practice M&A

Private equity’s interest from 2010 through the first half of 2020 was fueled by record-low interest rates, a prolonged bull market, and all-time-high levels of un-invested capital, or “dry powder”. In 2020, there was a brief slowdown due to COVID-19, but mergers and acquisitions swiftly regained momentum throughout the initial half of 2022. It was not until June 16th, 2022, when the Federal Reserve began interest rate hikes that the M&A market started to lose its momentum and valuations began to decline. That being noted, private equity in healthcare remained robust, with investors directing their capital towards recession-resistant assets. Nevertheless, these private equity investors dove further into the numbers to ensure they could effectively support the value under their portfolio.

In recent years, private practice physicians have faced the most difficult challenge – trying to maintain their independence while adapting to previously unforeseen macroeconomic pressures such as rising inflation, payors and retailers becoming competition themselves, and declining reimbursements; all pressures that are contributing to physician groups selling ownership of their practice to private equity and other strategic acquirers in order to better compete.Although physicians have a multitude of options, a transaction with healthcare private equity firms 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.

PE-Backed Platforms Growth by Specialty Chart

Source: Healthcare Dealflow

Why is Private Equity Investing in Physician Practices?

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 healthcare 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. Healthcare 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 in the healthcare space 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.

Click the images to expand the graphs below.

What is Private Equity’s Physician Practice Strategy?

Healthcare 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 the 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 in healthcare. 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 are created equal, 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.

How Does an M&A Advisor Create Value?

Physician group owners see value during the transaction process based on PGP’s healthcare investment banking approach:

Education – Gain a deeper understanding of the value of your practice and how private equity could benefit your practice, assessing its potential to align with your goals and succession strategies
Decision / Engagement – Determine if you would like to hire an advisor like Physician Growth Partners to represent you in a transaction process
Positioning /Preparation – Finalize the marketing and buyer strategy for your practice. Physician Growth Partners acts as an extension of your leadership team, gathering all of the necessary qualitative and quantitative information on your practice in order to create marketing materials to present to prospective partners
Create Competition – Engage with potential healthcare private equity partners to identify the most interested groups, and select specific ones to meet with your practice. Physician Growth Partners will utilize competition and market insights to achieve the most advantageous outcome
Finding the Right Partner – Arrange discussions with the highly interested partners, assess which group aligns best culturally, and offers support to facilitate the ongoing growth of your practice while preserving clinical autonomy. Physician Growth Partners will conduct thorough reverse due diligence to ensure your practice aligns with an organization poised for long-term success
Negotiation and Closing – Physician Growth Partners will strive to negotiate all significant deal terms in the LOI that would be reflective in the purchase agreement, employment agreement, and operating agreement before your practice signs the letter of intent, leveraging competition while aiming to prevent any unexpected surprises

Four-step approach to find the right partner.

What does the Physician Practice Transition Process Look Like?

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.

Physician Practice M&A

Why is Private Equity Investing in Physician Practices?

What is Private Equity’s Physician Practice Strategy?

How Does an M&A Advisor Create Value?

What does the Physician Practice Transition Process Look Like?

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