Why Private Equity Firms Like Dentists, Veterinarians, and Opthalmologists

The healthcare industry remains a very hot place for investment. The U.S. healthcare M&A market began 2018 with almost $39 billion worth of deals announced in January — the strongest start in over a decade, according to Morgan Stanley. Many of the healthcare companies garnering attention from strategic acquirers and private equity firms have a few things in common: they are in subsectors where there is room for consolidation; they take pressure off hospitals; and most aim to give patients more specialized treatment, which is believed to lower the cost of care and improve outcomes.

“As consumers, we are all used to having access to almost any product or service on our phone in minutes,” says Justin Ishbia, founder of Shore Capital Partners. “As healthcare becomes more retail-focused, we believe that the winners in healthcare are those who adapt to the demands of consumers, and those who rely solely on traditional models will be left behind. The traditional models are no longer working, and there is room to deliver high-quality care at a lower cost and build better retail-like models that treat patients like valued customers, while also reducing costs by taking advantage of economies of scale. This is happening in a variety of niches within healthcare.”

The six sub-sectors that are garnering interest from both private equity firms and strategic acquirers are dental, home care, pharmaceuticals, vision care, pet care, and revenue cycle management.

1. Dental
Private equity firms are in hot pursuit of dental practices. The dental market is highly fragmented, with only 16 percent of dental practices rolled up, according to Harris Williams & Co. To take advantage of economies of scale, private equity firms are actively buying up practices all over the U.S.

For example, in 2015, Chicago-based lower middle-market private equity firm Sheridan Capital Partners made an initial investment in Smile Doctors, a Texas-based provider of orthodontic services. Since that investment, Smile Doctors has made 20 add-on acquisitions, including more than 10 in 2017. Smile Doctors grew from 12 clinics in Texas and Georgia to more than 90 clinics across 11 states and had projected earnings of $35 million in 2017. It is now the largest orthodontic dental organization in the U.S. In 2017, through a recapitalization, Linden Capital joined as lead investor, while Sheridan and management rolled over equity.

Delivering high-quality clinical care and operating a small business successfully is challenging for doctors, which is why companies that are built like Smile Doctors are becoming more common, says Fritz Buerger, lead William Blair banker on the Smile Doctors transaction. “Doctors typically have no formal business training. Joining a larger corporate entity enables healthcare professionals to focus on caring for patients while offloading many of the administrative elements of running a small practice. It’s more productive for everyone,” says Buerger.

Smile Doctors and other consolidators hire significant corporate staff, such as human resources, information technology, marketing and finance professionals who can assist with back-office tasks such as recruiting, patient scheduling and billing. “The result is that organizations with more corporate support can deliver a more patient-friendly experience,” Buerger says. “Clinic staff isn’t distracted by administrative tasks and instead can focus all their efforts on the patient. And that’s important because individuals today expect to be treated like customers. People are very attentive to poor service, like long wait times or unfriendly receptionists.”

Dental practices are also of particular interest because the industry has experienced consistent, stable growth. The industry isn’t affected much by economic up and down cycles because people view oral care as important, regardless of what the economy is doing. “Dental is also appealing because the market is fragmented with a lot of small practice owners seeking to sell – and private equity groups can provide liquidity to these individuals while helping them optimize their practice,” says Buerger. “This change is going on in many other sectors such as eye care, dermatology and animal health.”

To read about the other five sub-sectors, home care, pharmaceuticals, vision care, pet care, and revenue cycle management, click HERE.

Written by: Danielle Fugazy, Mergers & Acquisitions