While investment in the physician practice management sector is not new, a targeted focus on urology gained traction during 2020 with more than 6 transactions (compared to 4 in 2019). Thus far in 2021 we have already seen 3 additional transactions announced. As more platform investments are made, urologists in private practice have more options than ever when evaluating a partnership with private equity.
The urology industry shares a number of characteristics with other physician specialties that have experienced a successful consolidation wave over the years. There is a significant level of fragmentation coupled by an imbalance between provider supply and demand, creating a significant opportunity for market consolidation. Value is created through revenue and cost synergies driven by scale, expansion of service offering, leverage with an increasingly complex payor environment, and operational efficiencies that perpetuate improvements in clinical care delivery. The attractive dynamics of the urology industry will drive a continuation of consolidation in the near term as private equity groups enter the space looking to capitalize on the robust opportunity.
Consolidation to Date
Unlike specialties that were part of the “first wave” of private equity investment, urology continues to be highly fragmented with only a few consolidators currently operating across the country. The current urology landscape includes six private equity backed urology groups, along with one oncology focused network. The majority of the active platforms have deployed a national MSO strategy as they look to expand into new states and geographies nationwide. The national approach presents a strong contrast to consolidation within the dermatology and eye care sectors, where the focus historically had been developing a local or regional platform. Whether pursuing a regional or national strategy, the objective is the same – share best practices with high quality, clinically excellent groups, while benefiting from economies of scale. If you are operating in a market alongside a PE backed urology group, it is only a matter of time before you will come into contact either as a potential add-on acquisition or a competitor in close geographic proximity. Simultaneously, healthcare private equity groups will continue to seek large, scaled urology platforms that could serve as initial platform investments. Whether a group is a scaled urology platform drawing the interest of private equity right off the bat as a platform or a smaller group that is a great fit for an add on acquisition in the region, independent Urology groups maintain their options in regards to partnership selection. It is important to note that this opportunity will not exist forever as consolidation will lead to saturation in certain markets, and in turn prevent the ability for other players to enter.
Urology Private Equity Landscape
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 either a larger private equity firm or strategic partner who will look to continue to accelerate the growth of the platform. Generally speaking, a private equity fund is looking to return a 3-5x return on equity on any given investment. Reputable and experienced healthcare private equity firms seek to empower the platform by providing capital and supplementing the team with experienced management, board level executives, and other relationships to achieve attractive levels of sustainable growth. Within the Urology vertical, some of the primary goals of private equity include gaining enough scale to begin negotiating with payors, capturing ancillary services in-house and centralizing infrastructure and operations to grow the business exponentially. Successful organizations result in physician shareholders having the ability to participate in multiple “bites of the apple” throughout their careers, while continuing to lead with quality of care.
Creating Value After the Transaction
The most successful healthcare private equity firms do not look to interfere with clinical practices. The private equity partner will look to drive growth, create efficiencies, alleviate the administrative burden of the physician owner, and put experienced human capital in place to achieve a successful, sustainable strategy. For shareholders, the biggest change is associated with receiving a liquidity event while resetting your compensation closer to market level for an associate provider. However, 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. Private equity firms want to maintain strong alignment with the group that they have invested in, which is why they seek to have the founding owners typically invest between 20% to 40% of the purchase price into equity. This results in a shared goal of growing the organization and achieving a “second bite of the apple” within a 3-7 year timeline. Private equity groups seek to generate a 3-5x return on capital in a subsequent transaction.
What to Look For in a Partner, and Why an Advisor is Important
Every private equity fund views the world from a different lens relative to motivation, strategy, expertise, etc. While the partnership is not forever, a practice will still work very closely with their private equity partner for several years. Having a strong professional relationship and like minded strategy is imperative for the success of the private equity partnership. 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 urology 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 physician partner 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 is able to 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 in regard to both deal terms and economics.
Private Equity Value Creation
Gaining Payer Leverage
Capturing In-House Ancillary Services
Centralizing Infrastructure and Operations
Sustaining Organic Growth
What Happens Next?
The consolidation within urology 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 urology platform is positioned accordingly. For those that choose to go down the path, it is absolutely imperative that partnership, not simply economics, is the first priority. 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.
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 focused on client education and executing transactions that maximize cultural fit alongside economics. Our belief is when transactions are focused around fit, odds of a successful long-term partnership are maximized.