The past several years have seen private equity’s tremendous impact on ophthalmology practices and surgery centers. We view this consolidation cycle as beginning in December 2012 with Candescent Partners’ recapitalization of Koch Eye Associates. Years 2013 through 2016 saw limited investment activity with other early adopters, notably Varsity Healthcare Partners and The Cortec Group, acquiring their own platforms in 2014 and 2016, respectively.
Acquisition activity accelerated tremendously in 2017 when eight new private equity firms entered the market – a much greater and more rapid influx than our parallel experience in dermatology. At the same time, existing investors made key add-on acquisitions and partnered with platform practices in new geographies.
That momentum has continued into 2018. Eight new firms entered the market through October, and others are actively working on 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 and ASCs 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. Our market analysis simplifies this and considers the acquisition of practices with five or more physicians. We feel this is a strong indicator of overall platform acquisition activity. As can be seen in the graphic below, platform acquisitions have increased by 238% in the last 22 months. As a result, we believe demand for medium and small practices will see a corresponding demand surge in the near term.
An additional factor driving demand for medium and small practices is the “Participation” strategy being followed by some private equity firms. They seek to acquire strong practices with less regard to geography.
As a result, PhysiciansFirst predicts that the strong transaction volume experienced in 2017 and 2018 year-to-date 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.
At the same time, much of the country is virtually or completely untouched by private equity. States like Texas, California, and most of the Mountain West are notably underrepresented thus far. We expect these areas to see increased activity throughout the remainder of 2018 into 2019.
Furthermore, long-standing strategic acquirers and health systems seem to be feeling out their place in this new marketplace. Health systems are bound by fair market value constraints and carry different strengths and weaknesses. Traditional partnerships with ASC management companies typically involved minority or small majority acquisitions combined with a go-forward management fee. By contrast, most private equity transactions are for 100% of the functional ownership (usually accomplished through acquisition of the non-clinical assets) with some kind of equity rollover. Many physicians are attracted to PE’s often higher purchase price and the opportunity for equity “upside” that a younger company can offer.
For now, it appears that strategic acquirers like Amsurg and USPI offer an excellent option for groups seeking to retain some ownership and control. For example, selling an ownership interest in the ASC but not the practice, or selling less than 100% of both entities. At this time, strategic acquirers likely have more powerful tools to drive increased reimbursement and positive operational change. But, PE firms are catching up quickly.
At the end of the day, this is a market with vast potential. PhysiciansFirst believes that ophthalmology practices are less than five percent consolidated. Excellent supply and demand fundamentals, an abundance of cash, and ophthalmology’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 ophthalmologists’ attention as well. For those reasons, we expect many more transaction announcements this year coupled with increased activity in 2019.
This article is an excerpt from our New, Comprehensive 31-Page White Paper: The Physician Seller's Guide to Private Equity Firms Investing in Ophthalmology.
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 20 firms actively investing in ophthalmology, including their regional presence and practice partnerships
- Our five key expectations for future development
Click the link below to download a copy now.
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