Amidst a global pandemic, 2020 saw private equity firms continue to flood the Eye Care sector with attractive alternatives for private practice physicians. Now, more than ever, ophthalmologists and optometrists are considering a partnership with Private Equity due to attractive valuations and relief from significant external forces. Success stories such as Eyecare Partners, Eyecare Services Partners, and MyEyeDr. have created a domino effect in the industry for private practices. In under five years there have been more than 30 platform investments in 40 states by Private Equity, a number that continues to grow. This is even more impressive when compared to Dermatology, a specialty which has been consolidating for over 10 years and has a similar number (~30) of platform investments.
Eye Care remains one of the most fragmented specialties within healthcare with nearly 60 percent of physicians practicing in groups with less than 10 providers. Physicians are faced with two options: growing their practice organically or partnering with an existing Private Equity backed platform and reaping the benefits of scale in the proven Private Equity growth model. As the U.S. population continues to age, the demand for Eye Care services will only increase. Given favorable tailwinds, we see consolidation continuing to occur at a rapid pace for years to come.
Ophthalmology Private Equity Landscape
Why Now?
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.
Ophthalmologists per 100k People
Projections of Age Related Eye Disease Prevalence (in millions)
Source: Statista, Projected prevalence of vision problems United States by type 2034, Statista, Number of eye care professionals in U.S.
The Private Equity Strategy
Private Equity funds are sourced from high net-worth individuals and financial institutions. These firms use their funds to invest in privately held companies with the intention of creating a successful partnership that leads to substantial growth and an eventual return on investment (ROI) with a sale to a bigger private equity firm who will look to build even further on that growth. Every step of the Private Equity journey the investing partner does not only provide capital, but also highly experienced, board level executives who deliver expertise and operational support to achieve attractive levels of sustainable growth. Within the Eye Care vertical, some of the primary goals of Private Equity include gaining payor leverage, capturing ancillary services in-house, and centralizing infrastructure and operations to grow the business exponentially. The end result is an organization that grows with the help of multiple hands over time, and physician shareholders who get to participate in multiple “bites of the apple” throughout their careers.
Private Equity Value Creation
Gaining Payer Leverage
Capturing In-House Ancillary Services
Centralizing Infrastructure and Operations
Resulting In
Sustaining Organic Growth
How are Independent Physicians Impacted?
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 a harder and harder time producing at the same level 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. We expect this heightened level of transaction activity to continue into the future if not further accelerate. With the market for “Platform” acquisitions largely saturated, independent physicians and groups of all sizes are now drawing the eye of Private Equity.
Source: American Academy of Ophthalmology, Private Equity in Ophthalmology and Optometry
COVID
While COVID-19 presented an unexpected bump in the road for Eye Care consolidation, transaction activity has largely returned to pre-COVID-19 levels. At the same time, we have not seen a significant impact on transaction valuation, with many seasoned investors understanding and approaching COVID-19 as a one-time event. While the effects of the pandemic have yet to be fully realized, COVID-19 was, in a lot of ways, an example of the benefits a private equity partnership can provide. The pandemic added to an already expansive list of stressors and headaches independent practices face. Groups with scale, experienced operators, and leverage with external parties were able to adapt equity at significantly accelerated rates. In the end, COVID-19 may be the final straw pushing many groups to transact that have historically be on the precipice. With an increase in interested practices, platforms in the space will continue to invest significantly into consolidation strategies. Dynamics behind deals are not expected to change and consolidators have not used COVID-19 as a value hedge, with valuations across the board continue to remain steady and attractive.
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 firms look 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. A competitive process is critical in receiving the optimal go-forward partnership and economic outcome. Working with an advisor allows you to drive value internally with an external, experienced force doing the same every step of the way.
What Happens After The Transaction?
Typically, the biggest question Eye Care professionals consider is what happens after a transaction is consummated? Generally speaking, the answer is fairly straightforward doctors continue to practice “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 shareholders face is at an economic level. A liquidity event is experienced and this usually coincides with shareholders rolling over a portion of their proceeds as equity in the new enterprise. This is a result of the fact that Private Equity firms want to maintain alignment with the physicians that they have invested in, with a shared goal of a “second bite of the apple” when the platform ultimately experiences a second sale 3–7 years down the road. 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 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 businesses that acknowledge traditional approaches to efficiency and synergy while integrating clinical approaches that only a physician owner can provide. 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 investment – while benefiting from the outcomes experienced healthcare operators are able to provide.
Physician Growth Partners is a firm that recognizes and prioritizes the importance of clinically focused outcomes, first and foremost. The groups that allow us to advise them will attest to the fact that we always emphasize partnership over economics. When the highest level of care is delivered, financial success will always follow.
Physician Growth Partners
Physician Growth Partners is a firm that recognizes and prioritizes the importance of clinically focused outcomes, first and foremost. The groups that allow us to advise them will attest to the fact that we always emphasize partnership over economics. When the highest level of care is delivered, financial success will always follow.
