Since peaking in 2022, healthcare private equity transactions in eye care exhibited a slowdown through the first half of 2023, attributed to a rise in interest rates, an economic downturn and other macroeconomic pressures. Several private equity backed eye care platforms have turned their attention to organic growth and creating efficiencies across their footprint in order to service their debt and maintain steady growth.
As the economy stabilized and the interest rate environment started to normalize toward the end of 2023, the eye care market has experienced a relative resurgence in M&A activity in the first three quarters of 2024, with nearly 40 transactions completed1. In 2022, during the most active M&A year for eye care, it was reported that only 8% of ophthalmologists worked for a private equity-backed MSO2, showcasing the significant runway for eye care consolidation. Furthermore, with over 13,000 eye care practices in the US, inclusive of ophthalmology and optometry, private equity firms are looking to deploy capital and take advantage of economies of scale by acquiring more affiliate practices. While the current transaction volume is subdued compared to peaks in 2022, eye care private equity backed platforms are poised to continue partnering with quality practices that are leading with clinical excellence and are looking for capital and resources to continue competing at a high level.
Eye Care Consolidation Drivers
Fragmented Market
Ophthalmology is a highly fragmented specialty, with many small, independent practices. Private equity firms see an opportunity to consolidate these practices into larger, more scalable entities, allowing for improved operational efficiencies and negotiating power with suppliers and insurance companies. According to a 2022 report4, the number of private equity-backed ophthalmology groups has grown significantly, with nearly 40% of all physician practice deals in ophthalmology from 2017 through 2021 being PE-driven. Consolidation allows PE firms to standardize care, reduce costs, and increase profitability by scaling up.
Rising Demand For Elective Procedures
In addition to medical treatments for conditions like cataracts and glaucoma, there is also a growing demand for elective ophthalmic procedures such as LASIK and cosmetic eyelid surgeries. The global LASIK market is projected to reach $3.79 billion by 20335, with increasing demand driven by patients looking to improve their vision without the need for glasses or contact lenses. Private equity firms are attracted to practices offering these elective procedures because they tend to generate high margins and are often paid out of pocket, which reduces dependence on insurance reimbursement.
High-Revenue Procedures and Profit Margins
Ophthalmology practices benefit from high reimbursement rates for specialized procedures, such as cataract surgery, LASIK, and retina treatments, which tend to be highly profitable. The global ophthalmic devices market is expected to grow at a CAGR of 5.1%, reaching $120 billion by 20336. With many ophthalmology procedures that utilize these devices being relatively quick, non-invasive, and reimbursable through insurance, PE firms are drawn to the specialty because of the combination of high patient volumes, efficient procedure times, attractive margins and a steady blend of insurance-reimbursed and cash pay revenue.
Current Eye Care Platforms
The Private Equity Strategy
While private equity firms vary significantly regarding fund size, strategy and resources, all initial investments into the space are made with the intention of helping their physician partners achieve economies of scale. This is done through both organic growth & geographic expansion, inclusive of add-on acquisitions, de novo expansion, and the enhancement of ancillary services. To ensure this is done in the most efficient and effective manner, eye care private equity backed groups employ highly experienced operators at both the board and practice level. Through strategically deployed capital, the use of experienced operators, and physicians that can focus solely on delivering exceptional clinical outcomes, the creation of scale can be expedited.
Once an inflection point is achieved, the private equity backed eye care group will look to sell the platform to a new financial partner that may or may not already have an existing eye care business. This second sale will generate a “second bite of the apple” for physician shareholders, and assuming things go as planned, can lead to another successful economic outcome or “Third bite of the apple”. Examples of such scenarios are EyeCare Partners, EyeSouth, and Vision Innovation Partners who have all experienced major liquidity events with their “second bites” and are well on track to their third sale.
While the eye care private equity strategy has multiple successful examples in the space, as aforementioned, there are groups that have struggled comparatively. In groups that have been less successful than others, opportunity remains. As the private equity eye care consolidation wave continues, the largest, most successful groups have, and will continue to, acquire those that tried and failed to do the same. This is even more reason physicians need an experienced M&A advisor on their side in order to weed out potential partners who do not have a successful track record and won’t bring the resources and competitive advantage needed to take the group to the next level.
Why Now?
Compete Stronger
As the eye care landscape continues to evolve, it is becoming significantly more challenging for smaller practices to compete with larger, consolidated platforms. As a result, independent physicians are heavily motivated to transact in an effort to control their own destiny and raise their compete-level in their local markets. In addition to maintaining ownership in the new entity they sign on with, many groups will ensure clinical autonomy stays 100% controlled by the physicians.
Maximize Practice Value
Eye care groups of all sizes continue to receive premium valuation considerations, so long as they have a strong clinical and financial profile. As established private equity backed eye care platforms across the country look to expand their success in existing and new markets while competing with their peers, independent eye care practices are benefitting from very seller-friendly deal structures along with attractive economic consideration, making the private equity option increasingly appealing.
Optionality & Succession Planning
Outside consolidators such as United Healthcare’s Optum Health, Walgreens, large health systems and other “payvider” insurance conglomerates are becoming more acquisitive of independent physician practices. Optum, for example, is the largest employer of physicians in the U.S., with 90,000 physicians employed or affiliated with the organization. Following that trend, it is imperative that independent eye care group owners get educated on long term strategic options and exploring a private equity partnership has become an increasingly popular option. Even if a group doesn’t end up doing a deal, getting educated and exploring a competitive transaction process helps practice owners zoom out, helping them look at the bigger picture; allowing them to think about what the next 3, 5, and 10 years could look like if they maintain the status quo, were to partner with private equity, and/or sell to a health system or retail giant.
Key Considerations For Practice Owners
When evaluating a potential partner, it is extremely important to find the right fit to ensure a strong go-forward partnership. PGP advises that four critical factors are considered when evaluating whether a partner is right for your practice
Maximize Economics and Achieve Most Favorable Deal Terms
Strike appropriate balance between total EBITDA credit vs the EBITDA multiple
Receiving credit for various tangible growth initiatives in the business (new locations, new providers, new service lines, etc.)
Achieve Clinical Autonomy
Ensure there is a strong level of go-forward governance control at the local level
The practice maintains directional control at the company, including work schedules, vacation days, work location, and retention of staff
Maintained control of provider recruitment and retention
Ensuring potential partners have the resources to execute against the strategy
Access to capital and economies of scale
Adequate level of administrative and operational resources provided (Accounting / Finance, IT, RCM, Marketing, HR & Recruiting, Business Development, Legal, etc.)
Track Record of Success
Partnering with experienced healthcare / PPM ‘Operating Partners’ with a history of adding significant value and operational guidance in the PPM space
Proven ability to align with young and newly recruited providers
Exceptional key performance metrics (recruitment, attrition, location growth, service line expansion)
What Happens After the Transaction?
One of the biggest questions practice owners have is “what happens after the transaction is consummated?” If you are doing a transaction with a reputable private equity platform, physicians will largely continue to operate “business as usual”. The private equity partner will look to implement certain growth initiatives, but these initiatives will all be items that were discussed at great length in advance of consummating the transaction. On the clinical front, physicians will practice medicine the way they always have. Clinical autonomy is maintained, and an advisory firm like PGP negotiates this on the physician group’s behalf. As for infrastructure capabilities, groups that lack back-office sophistication will typically integrate into the “platform” practice’s EMR, Accounting and PM systems. Outside of day-to-day operations and clinical delivery, the most notable change is the holding of rollover equity in the new partnership by selling physicians. Due to the fact a substantial liquidity event is experienced, shareholders are required to utilize a percentage of their proceeds in the form of equity in the new enterprise. This is desired by the Private Equity firms as they want to maintain alignment with the physicians that they have invested in, creating a shared goal of a “second bite of the apple” when the platform ultimately experiences a subsequent sale 3–7 years down the road.
What to Look For in a Partner and Why an Advisor is Important
Every private equity sponsor views the world through a different lens when it comes to their motivations, growth plan and relevant experience within the space. When seeking a partner, it is imperative for practices to be diligent in ensuring alignment for the future. The partnership is not permanent, but the years following a transaction will need close collaboration from each party for it to be successful.
Physician Growth Partners (PGP) works on behalf of independent physicians to ensure their goals and succession planning needs are met through a transaction. Our process is tailored around maximizing value, while identifying and engaging investors that will be a strong cultural fit with experience in the healthcare space to ensure a successful go-forward partnership. It is essential that you partner with a healthcare private equity group that has a similar vision.
A seasoned healthcare transaction advisory team can ensure that the most attractive outcome is achieved. Through a formalized competitive marketing process, an advisor can ensure the practice maximizes the economic value of the practice. A transaction process also allows the practice to interview multiple private equity partners, in what we call reverse diligence, allowing you to choose the group that presents the best ‘fit’.
Conclusion
With notable consolidation occurring across the country, eye care practice owners should continue viewing private equity as an attractive option and we foresee heightened eye care M&A activity heading into 2025, and for the next 12-24 months.
For those that choose to go down the path, it is imperative that culture and alignment, not simply economics, is the first goal. The role of an advisor like PGP can be the difference maker not only in knowing who can be trusted and who has a track record of success, but in ensuring an economic outcome that is satisfactory when transferring the ownership of your business.
If interested in pursuing a transaction, learning about private equity, the private equity strategy, or activity in your market, please utilize the information below to schedule a discussion with the PGP team.
1Healthcare Dealflow
2 KFF Health: Private Equity Sees the Billions in Eye Care as Firms Target High-Profit Procedures. (September 2022)