Fall 2021 Update
Gastroenterology is quickly becoming one of the fastest moving sectors in terms of physician practice consolidation. Beginning in 2016 with Audax’s acquisition of Florida-based Gastro Health, and activity has accelerated recently with 7 newly established platforms formed since 2019 (of the 10 currently in existence). While private equity’s presence in GI has only existed for a few years now, nearly 10% of the 14,000 gastroenterologists in the United States now are partners or employed by a private equity backed platform. With combined transaction values of over a $1 billion in the GI space since 2017, the industry shows no signs of slowing down. An increasing number of gastroenterology practices around the country are seeing the value of partnering with national platforms to leverage size and scale while also investing into the platforms themselves as a way to create personal liquidity and wealth. Interestingly (as compared to other verticals such as dermatology and eye care), consolidation within gastroenterology is taking a national geographic approach as opposed to focusing on regional density with a few larger groups leading the pack, a factor that is driven by particularly strong ancillary revenue streams and increased reimbursement leverage that value scale at a greater level than other specialties.
Independent sub-specialty physicians have found partnerships with Private Equity attractive since the early 2000’s. Over the years this interest has grown into the hyperactive market we see today. Experienced leadership allows Private Equity firms to provide the operational support needed for day-to-day administrative work, enabling the physicians to spend more of their time on direct patient care, an attractive proposition for independent doctors drowning beneath a non-medical workload and having more difficulty producing at the similar levels year over year. The current macro environment, driven by low interest rates and high levels of uninvested capital, has led to a significant rise in both platform and add-on acquisitions over the last decade.
Macro trends in sub-specialty medicine and the broader economy have been supplemented by the fact that patient demand for gastroenterology services is projected to increase exponentially in the coming years. An aging population and highly fragmented industry have put pressures on independent practice owners to consolidate to combat reimbursement pressures and support a growing number of ancillary service offerings needed and demanded by patients. Additionally, as health systems consolidate nationally, additional pressures have been placed on independent practice owners to position themselves in a way to be competitive moving forward. As mentioned above, while the value of scale is a common theme in specialty physician practice consolidation, it is exponentially greater in gastroenterology.
There is no question that as each year goes by, it becomes more challenging for an independent gastroenterology group to generate the same economics unless they are consistently repositioning their value proposition, administrative capabilities, and clinical offerings while making the appropriate investments to stay on the cutting edge.
Industry dynamics coupled with an increasing number of private equity groups looking to invest into profitable physician service specialties has created a competitive dynamic for seasoned healthcare investors looking to find quality gastroenterology practices to partner with, capitalizing on a first mover advantage. These funds are looking to utilize past investment successes in other physician specialties like dermatology and ophthalmology (among others) to replicate those successes in the gastroenterology space, ultimately driving the same level of successful returns.
Consolidation Landscape to Date
*Shows markets where the platform has a presence in, does not include all locations
The Private Equity Strategy
Patient demand for Eye Care is projected to increase exponentially in the coming years. By 2029, 20 percent of the U.S. population will be over the age of 65. This shift in age demographics will result in an increase of age related eye diseases such as cataracts, glaucoma, and macular degeneration. Simultaneously, the supply of Eye Care doctors is diminishing rapidly. This increase in demand supplemented by a dwindling supply has opened the door for a solution in the form of Private Equity consolidation that is just getting started.
Finding the Right Partner
Finding the right partner can lead to an outsized second sale for a physician as private equity firms generally underwrite a 3-5x return on invested equity.
For groups that decide to go down the Private Equity path, nothing is more important than clinical and strategic fit. The successful thesis that is playing out in today’s environment requires partnerships that marry skillsets – doctors need to practice medicine and operators need to oversee the business. The end result are groups that deliver the highest level of clinical care – a goal that needs to be of the highest priority for every physician
What happens after the transaction and how does value continue to be created?
Typically, the biggest question gastroenterology professionals consider is what happens after a transaction is closed? By and large, the clinical side of the practice should remain “business as usual.” The investing partner will implement certain initiatives meant to drive the efficiency of the practice and alleviate the administrative burden of the physician owner. At a personal level, the biggest change for shareholders is the reduction in compensation associated with these transactions. That said, a unique attribute of gastroenterology that doesn’t exist in every sub-specialty is something called income repair. When valuing your practice for a potential sale, compensation is reduced to market-level rates (in turn creating EBITDA), but continued ownership and involvement in the productivity of ancillary services provides the opportunity for shareholder physicians compensation to grow as the practice profit grows post-transaction. Said differently, selling physicians still participate directly in the ongoing growth of their business given they are still participating in a percentage of the profits on a go-forward basis.
While there is a change in salary, a liquidity event will coincide with shareholders rolling over a portion of their proceeds as equity in the new enterprise. Private equity groups recognize that the revenue of a practice is driven by physicians who must be incentivized to continue to drive patient visits and practice collections. Allowing, and in most cases requiring, physicians to be equity holders is the best way to align incentives and create a symbiotic relationship between PE and provider with a shared goal of a “second bite of the apple” when the platform exits in second sale in 3–7 years.
Driving Practice Value
Practice valuation is heavily dictated not only by a practice’s financials, but also by its infrastructure, growth opportunities, and reputation. Private Equity wants to partner with groups that have strong clinical leaders and an actionable strategic growth story. The purpose of an advisor is to use their experience and expertise to leverage the capabilities of the Practice and craft a story that will be appealing to the buyer universe. Simultaneously, advisors bring their relationships and industry knowledge to the table so they can drive a competitive process. These two factors are imperative in receiving an outcome that is outsized from both an economic and partnership perspective. Without a competitive process driven by someone fully dedicated to working on your behalf, it is impossible to negotiate, leverage, and ultimately receive the terms that are most important to you in the sale process. Working with an advisor allows you to drive value internally with an external, experienced force doing the same every step of the way, aligned by the fact that we only succeed if you do.
Working with Physician Growth Partners
Physician Growth Partners recognizes and prioritizes the importance of clinically focused outcomes, first and foremost. With that, we know that for those that choose to go down the private equity path, it is imperative that partnership, not simply economics, is top priority. The role of an advisor is a difference maker in not only knowing who can be trusted and who has a track record of success but 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, transaction dynamics, or activity in your market, please utilize the information below to contact the PGP team and schedule a discussion.
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