Oral Surgery/Dentistry Private Equity – White Paper
Dating back to the late 1990s with the inception of Aspen Dental, the dental industry has been a long-time point of interest for private equity investors. With recent interest continuing to grow in a variety of healthcare specialties, attention has been geared towards specialty dental practices such as endodontics, periodontics, and oral & maxillofacial surgery.
While there are nuances in the Dental Services Organization (“DSO”) model, it shares many qualities with the established Medical Services Organization (“MSO”) model created for specialties such as dermatology, eye care, orthopedics, urology and more. Private equity firms continue to refine their strategy using these organizations to offer a wide breadth of services tailored to the needs of their partner practices with the understanding that each practice will have unique needs at various growth stages.
Activity within the broader physician practice management (“PPM”) space has been at all time highs in recent years, with general and specialty dentistry remaining a key component of overall deal flow. In 2021, transactions within dental subspecialties gained steam by way of both tuck-in partnerships from established platforms, and newly established entities like U.S. Endodontics Partners, which is backed by Quad-C Management, and Specialty1 Partners, formed by VSS.
These platforms introduce a new focus that goes beyond the scope of incumbent general dentistry strategies formed in early stages of consolidation. The attractive qualities of specialty dentistry, in addition to its highly fragmented landscape, make the space a priority for continued PE investment in the near term. Private equity firms are looking to create value through revenue and cost efficiencies driven by the growth of geographic scale, expansion of service offerings, operational efficiencies and negotiating enhanced reimbursement rates with commercial payors.
Consolidation Landscape to Date
With dentistry being one of the first specialties to garner investment from private equity, there remains a sustained interest in the space due to market fragmentation and attractive economies of scale opportunities. Currently, there are more than 50 private equity-backed dental platforms with a variety of groups pursuing a regional, national, or mixed strategy. Groups that are specialty-only focused are in the minority, allowing private practices the luxury of joining an established organization or forging a new platform with a private equity group. As the market continues to consolidate, and new platforms continue to form, the window to ‘control your destiny’ in specialty dentistry will narrow.
Recently, two private equity-backed platforms focused on Oral Surgery realized a second bite. U.S. Oral Surgery Management, originally formed by RiverGlade Capital in 2018, partnered with Oak Hill Capital in November 2021; followed by BlackRock Long Term Private Capital’s acquisition of Paradigm Oral Health in September 2022. While these transactions represent successful liquidity events for their partner providers, the opportunity remains to enter a platform at the ground floor. Private equity maintains interest in forming new platforms, indicated by the inception of Specialty1 Partners in late 2021 and Beacon Oral Specialists in December 2020.
Whether a practice is scaled and has the operating infrastructure to garner direct private equity attention for a platform or is a local group seeking to join a large consolidator, there are plenty of options to choose from among the universe of investment partners. Market trends and further platform scaling will begin closing the window for practices to choose the path that keeps themselves in the driver seat for go-forward strategy.
Oral Surgery/Dental PE Platforms Across the United States
The Private Equity Strategy
Private equity investors in the PPM space create value through a variety of methods, but many similarities can be found across each subspecialty. From inception, firms will use funds to invest into quality practices with a developed infrastructure and scale. Once established, groups will look to capitalize on their growth strategy on a regional or national scale. Commonly utilized levers of growth include cost savings with medical suppliers, acquisitive and de novo expansion, payor negotiations and service line expansion in tandem with provider recruitment. Across the board, funds will look to return 3 to 5x on equity for platform investments.
Many of the firms currently invested into PPM have interest within multiple specialty verticals, allowing for refined strategies in growing platforms as time goes on. With experienced operators, management and executive level connections, practice’s have the resources to address their needs and drive growth into the future. Many times, these executives are current or former physicians, so a focus on clinical autonomy and quality of care are at the forefront of each decision made.
In a successful platform investment, physician shareholders will experience multiple “bites of the apple,” each representing a liquidity event and an inflection point for further platform growth. By empowering physicians with a strong equity component, alignment between investors and providers will continue to strengthen the platform.
Creating Value after the Transaction
Value creation can come from a variety of sources, but successful investors understand that interfering with the clinical side of the practice is not one of them. Allowing providers to maintain their clinical autonomy, while capital partners key in on back-office efficiencies and operational initiatives, is a sign of a successful partner. In addition, there are a handful of resources that practices can utilize to strengthen their recruiting component, both from a provider level and staff and administrative level. These tasks can be labor intensive for physician-owners and are commonly alleviated after a transaction is closed.
The goal of a capital partner is to provide support where it is needed and maintain the status quo of the clinical operations. The biggest component of change that will come for shareholders in a post-transaction environment will be a switch of compensation model to be in line with the current market. With this change, owners will likely get compensated at lower amounts than before, but there are different mechanics that may be negotiated in your go-forward compensation structure to achieve “income repair,” and eventually approach pre-transaction compensation levels. In addition to this, the equity received in a transaction will become liquid at the second bite, and shareholders will have the opportunity to realize more income.
To maintain alignment with founding owners, private equity firms typically look to have 20-40% of the transaction purchase price allocated to equity. This allows for shareholders to maintain a common interest in growing the platform at the local and national level, with the opportunity to achieve liquidity in the 3 to 7 years following the inception of the platform.
Private Equity Value Creation
Gaining Payer Leverage
Capturing In-House Ancillary Services
Centralizing Infrastructure and Operations
Sustaining Organic Growth
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, its imperative for practices to be diligent in ensuring it’s the right fit 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.
While many specialty dental groups may initially feel they can navigate a transaction without an advisor, those that have gone through the process with an experienced and reputable firm in their corner will be quick to highlight the significant value add from both an economic, partnership and educational perspective. Ensuring that each shareholder is prepared and fully understands the dynamics within a transaction is crucial for the future success of the business.
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 their economics and transaction terms. A transaction process also allows the urology group to interview multiple private equity partners and choose the group that presents the best ‘fit’.
Even if a group is approached by a buyer or have a buyer in mind, it is essential to run a process considering the practice has one opportunity to choose the right private equity partner, supplemented by the value a process drives regarding both deal terms and economics.
The consolidation within specialty dentistry continues to accelerate exponentially. Whether a practice outwardly desires private equity partnership, questions the rationale and effectiveness, or downright disagrees with private equity, it is essential to get educated to ensure your platform is positioned accordingly.
For those that choose to go down the path, it is imperative that partnership, not simply economics, is the first goal. The role of an advisor 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, transaction dynamics, or activity in your market, please utilize the information below to contact the PGP team and schedule a discussion.
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.
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