Private Equity and the Search for Success

Private EquityPrivate Equity is one of the main buyers in the current healthcare market.  However, it is important for potential sellers to understand what makes a business stand out in the market,  what investors are looking for in 2017 and what makes PE turn their heads to new sectors.  The Ambulatory M&A Advisor digs deep into the minds of Private Equity leaders in the industry and takes a look at what they consider when looking into the current market for investments.

Standing Out Above the Crowd

Everyone knows that first impressions are always important.  However, to Private Equity investors, standing out and creating an excellent first impression is key and is one of the main factors involved in the successful beginnings of a Private Equity and seller relationship.

Michael Langdon, Managing Director, Frontenac says there are many factors, but in no particular order, he thinks it is about the underlying demand for a product or service, the potential growth opportunity, likelihood of that growth materializing given a company’s scale and market position, and how served or under served that particular market is.

“Also important to understand is the relative fragmentation in a given space, because some of these business spaces are more consolidated than others.  Other frequent considerations are how much diversity of payers exists and compliance is paramount.  How regulated is a space and how compliant is the target?  How professionally run is the business?  There are a lot of businesses out there that don’t emphasize compliance at the level a private equity owned company would need to.  Making sure that compliance is integrated into not only operations but also the company’s culture is essential to having a professionally run and potentially scaleable enterprise,” Langdon says.

Aaron Handler, Co-Founder and Partner of Elm Creek Partners discusses the current aspects that make ASCs stick out to Private Equity investors.

According to Handler. what Private Equity wants to see in an ASC, or in a broader context a multi-unit consumer facing healthcare services model, is some of the key criteria looked for in a business and one of them being leading unit economics.

These types of economics are measured by patient volume, revenue, and profitability among other KPIs.  When searching the modern market, Private Equity wants to see really top notch unit economics, compelling provider relationships in the local markets, an industry leading compliance and regulatory program, and a good billing and collections department. As in any investment, a strong management team is also a boon for interest in the selling business.

Justin Ishbia, Managing Partner with Shore Capital Partners says that when he thinks about what makes a business stand out to Private Equity, he tends to take a look at the bigger picture  and healthcare as an ever-growing sector as a whole.

“I think knowing that healthcare is a growing sector and there are a lot of macroeconomic trends tends to be favorable.  Also, healthcare founders and providers have a specific skill set in taking great care of patients.  Oftentimes, they may have the desire to have a partner or partners who have a skill set that is something different from their background.  On the business side, this is attractive,” Ishbia says.

“This is a really nice opportunity where one plus one can equal three.  Doctors that went to Medical School or Dental School probably did not get into the business to run a very large organization, they did it because it was about taking care of patients.  Oftentimes, they get to a certain size where they realize in order to take care of so many patients, I need help with the business side to keep the quality of care high for the patients.”

At this point, Ishbia adds that physician owners then have the desire to turn to look for a partner that has a passion about the business side, HR, IT systems and finance.  Together they are able to help scale the company, and work together to provide the same high quality of care to more patients in more geographies with the business, Ishbia says.

Current Markets of Interest

The markets are ever-changing and so is the attention of Private Equity as these investors watch the current shifts in value.  As discussed in a recent Advisor article, one of the main areas of current interest with Private Equity is the area of Behavioral Health.

Langdon says that he thinks Behavioral Health clearly continues to be a growth area for all constituencies in the space.

“Many years ago, behavioral health was not viewed as an attractive investment area, and was not actually seen as truly “healthcare” by many people in the overall investment community.  With that said, I think that has changed very dramatically.  A lot of the behavioral services have been increasingly covered via insurance companies.  Therefore, there is a rising demand for behavioral health services, a recognition that the market has traditionally been underserved, and a requirement that health insurance companies do not use more restrictive requirements when reimbursing for mental health and substance abuse related claims than they do with medical related claims.  Insurance companies are forced to treat those same patients as they would any other kind of medical related claim,” Langdon says.

Although it is an area in healthcare that does not fall under the traditional sectors Ishbia feels that it is important to note that one of the areas that is most attractive to Private Equity is actually the veterinary space.  According to Ishbia, there is a lot of interest in that medicine which is healthcare lite because you are not dealing with reimbursement from the government or commercial payers.

“I think other interesting areas right now are Ophthalmology, Dermatology, and Urgent Care.  Those are areas that a lot of people have interest in; I would say there is an overarching theme of the consumerism of healthcare.  I think patients now want to have access to care at times that are convenient to them.  I think there is a paradigm shift from 30 years ago where patients went to see physicians when it was convenient to the physician.  I think in this day and technology, people want to be seen after hours and the trend in healthcare has drastically changed.  Forward thinking and initiative driven physicians are meeting that demand in this environment,” Ishbia says.

Langdon says there continues to be a lot of capital-efficient consolidation strategies around areas that may not be as sensitive to reimbursement concerns.  Examples could be Dental businesses, Physical Therapy businesses, Dermatology businesses, Optical Services, etc.

“Many of those can be less exposed to reimbursement issues.  Several of them are viewed as more of a retail experience relative to one that is subject to more operational and reimbursement complexities.  Across many outpatient businesses there are a lot of consolidation strategies going on in these sectors and I think that Behavioral Health is at an early phase of consolidation and professionalization,” Langdon says.

As far as what attracts attention from one sector to another, Langdon says that Private Equity always seems to pay attention to fragmented spaces with strong growth opportunities and capital-efficient ways to drive that growth, and those dynamics have fueled valuations that full by any reasonable standard – too high for many, but deals are getting done because others see them as a safe place to have capital invested should the economy falter.

“Behavioral health is at the early stages of such a journey – the space is fragmented, there is huge patient need and an obviously underserved population, and there are big growth sectors in the end that be pursued aggressively in a capital efficient manner if armed with the right professional management leadership,” Langdon says.

Ishbia says that when considering shifts in sectors the changes are based on a lot of factors, but investors are always looking out for what is best for the patient.

“I think the patients need change, they desire change.  I believe that private equity strives to follow those trends and meet their needs.  At the end of the day, everything starts with a patient and their needs.  We are big believers that good medicine is good for the business.  If you take care of the patients the right way with a long-term view, everything else will work out,” Ishbia says.

“I think other things that causes changes is the government.  They can change the rules and change the rates either to encourage more development in an area or to keep it more in check.  If rates change or when rules of usage changes, it makes certain areas more appealing.  I think as a whole overarching theme, you want to provide high quality healthcare in settings that are cost effective.  So, if you can do a procedure in a hospital or you can do it in a more cost effective ASC, it’s the same quality and the same outcome with no more risk to the patient.  We think that doing it in the lower cost of care setting with the high quality will end up being the outcome that wins.”

If you would like to learn more about the concepts covered in this article, want to sell your business or discuss how Ambulatory Alliances, LLC might be able to help you out, contact Blayne Rush, (469)-385-7792, or

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