The past several years have seen private equity’s tremendous impact on dermatology practices, surgery centers, labs, and aesthetic businesses. We view this consolidation cycle as beginning in 2011 with Audax Group’s recapitalization of Dr. Matt Leavitt’s large Florida practice, which had already been extensively developed on its own. Years 2012 through 2014 saw limited investment activity with other early adopters, notably Candescent Partners and Prairie Capital, acquiring their own platforms in 2012 and 2013, respectively.
Acquisition activity accelerated tremendously in 2015 when five new private equity firms entered the market – momentum that has continued until today. At the same time, existing investors made key add-on acquisitions and partnered with platform practices in new geographies.
In 2018, seven new firms entered the market. Many others are actively working on their first deals or looking for the right opportunity.
PLATFORM-GROWTH AND MARKET DEVELOPMENT
The predominant private equity acquisition strategy is best defined as “Platform-Growth”. Executing this strategy with success requires the acquisition of a large platform practice or practices which act as a foundation. Those platforms are expanded through add-on acquisitions of medium and small practices within a geographic region.
We consider platform acquisitions the key driver of market expansion, and a primary indicator of future investment in medium and small practices in a geographic area. A platform practice is defined by a variety of factors, determined in part by the buyer’s preferences. But we know from our experience across different healthcare verticals that physician count per practice is the best analytical indicator … and platform practices generally consist of five or more physicians.
Dermatology consolidation shifted from early pioneering to expansion in the 2015-2016 timeframe. As pioneering proved successful, participating PE firms sought to grow while new ones started to invest. You can see the impact on two key market fundamentals in the graph below:
- Acquisition volume increases dramatically as acquired platforms seek add-ons and as existing and new management companies acquire platforms in new geographies
- The average number of physicians in acquired practices begins to drop substantially reflecting the new combination of platform practice and add-on practice investment
As a result, PhysiciansFirst predicts that the strong transaction volume experienced in 2017 and 2018 will accelerate even more dramatically in 2019. That increase will be driven by continued platform acquisitions along with the small and medium practice investments that follow. Essentially, momentum builds and accelerates behind each platform practice acquisition. Even single-physician practices are enjoying attractive opportunities in the right markets.
This is a market that has vast potential. PhysiciansFirst believes that dermatology practices are less than eight percent consolidated, an assumption backed by data from Bain & Co. Excellent supply and demand fundamentals, an abundance of cash, new geographies, and dermatology’s relative independence from the hospital suggest that private equity will remain interested.
Today’s higher risks and costs of practicing medicine, compelling financial components, and a more physician-friendly model have dermatologists’ attention as well. For those reasons, we expect many more transaction announcements this year.
This article is an excerpt from our New, Comprehensive 40-Page White Paper: The Physician Sellers Guide to Private Equity Firms Investing in Dermatology.
This White Paper contains:
- A thorough analysis of platform growth and market development
- A guide to private equity's platform management company structure
- Maps of consolidation saturation across the United States
- A comprehensive profile of each of the 27 firms actively investing in dermatology, including their regional presence and practice partnerships
- Our four key expectations for future development
Click the link below to download a copy now.
CONTACT PHYSICIANSFIRST HEALTHCARE PARTNERS
Want to learn more? Contact our Leadership at PhysiciansFirst Healthcare Partners, read our blog or listen to our podcasts for more information about practice and surgery center acquisitions. We’re one of the few investment banks devoted entirely to physicians.
PERSONALIZED VALUATION CONSULTATION
Physicians interested in understanding what elements drive private equity transaction prices and seeking a shorthand estimate of what buyers are likely to offer for their practice and post-sale preferences should contact me directly with no obligation. See contact info below.