• Eric J. Yetter

Private Equity Firms Explained


Private equity firms are showing increased interest in physician-owned assets including medical practices. This article dives deeper into how PE firms operate and what they hope to accomplish.


What are Private Equity Firms?


With the healthcare trend turning toward lower-cost services and specialization, physician-owners of profitable and successful ambulatory surgery centers (ASCs) and medical practices will soon be approached by buyers looking to acquire their assets. One type of interested buyer is the private equity firm.


What do Private Equity Firms do?


At their core, PE firms follow four steps to earn their money:

  • Raise money from Limited Partners (LPs)

  • Source, diligence, and close deals to acquire companies, adding them to their portfolio

  • Improve operations and grow those portfolio companies through investment and additional acquisitions

  • Sell those portfolio companies at a profit

Raising Capital


In order to acquire companies, PE firms need money. The first step is to raise funds through capital commitments from external financial sources (Limited Partners or LPs). Typically, these LPs are comprised of pension and retirement funds, endowments, insurance companies, and wealthy individuals. They are required to commit a significant amount of capital in order to gain access to the PE portfolio. Ideally, PE firms look to secure a handful of LPs that each commit millions of dollars. Generally, PE firms want “big players” supplying large chunks of capital, rather than a long line of small investors that will require a lot more hand-holding to service.


Additionally, about 1-5% of total capital is also raised internally from the firm’s own partners.


Sourcing, Diligence, and Closing Deals


Now that the PE firm has money to work with, it can start analyzing potential target companies for acquisition. They typically have areas of interest and expertise where they are comfortable and excited about investing. For example, a particular PE firm might be interested in healthcare services.


Prospective deals come from a number of sources – investment bankers, referrals, and direct outreach. Investment banks typically run an auction process consisting of multiple rounds where various PE firms place bids for the company. With every round, certain firms will drop out, get rejected, or advance, until only the best deals remain.


Many PE firms work hard at staying ahead of the curve by gathering prospective client contact information and creating proprietary databases. Additionally, managers establish personal relationships with key leaders in certain industries to gain access to special knowledge and earn a head start over the competition. PE firms also build and maintain these strong relationships with advisers and bankers.


After a potential deal is sourced and under letter of intent, the investment team at the PE firm conducts an extensive due diligence process that assesses the company including its finances and operations, strategy, management team, risk factors, and future sale potential.


If everything looks good, transaction documents are drafted and circulated among the parties. This last step requires negotiations between the parties and their respective lawyers and advisers. Once completed, the deal will transact with funds being released and equity traded.


Improving Operations and Growth


In order to gain a return on their investment, PE firms look at improving operations and growing their portfolio companies. Rather than taking a direct role, such as stepping in as CEO or COO, PE firms typically occupy a seat on the board of managers to provide advice and support relating to day-to-day operations, strategy, and financial management. They will often build a management team to accelerate the company’s growth.


The PE firm’s involvement depends heavily on how large of a stake the firm has in the company. If the firm takes a sizeable percentage of the equity, they will likely take a more active stance on managing the newly acquired company. Typically, the smaller the stake, the smaller the role of the PE firm.


Selling Portfolio Companies


The ultimate objective of PE firms is to exit opportunities at a profit. They aim to sell off their stakes in companies after 3-10 years, depending on the larger market, strategic circumstances, and the firm's own strategy. To maximize the value of their portfolio companies, PE firms look to grow revenue and profit through strategic decisions during the holding period.


Typically exits occur via an initial public offering (IPO) for the company, sale to a larger operating company, or sale to a larger private equity firm.


PE Firms vs. Hedge Funds


While on the surface, PE firms and hedge funds can look similar, they are distinct in the kinds of investments the two firms make. Hedge funds typically invest in public company securities and can take short or long positions. Most of the time, they do not acquire a controlling interest and play little or no role in operating the companies they invest in.

On the other hand, PE firms act more like venture capital firms in that they work directly with companies and have a longer-term outlook. PE firms usually seek controlling interests in businesses that they acquire and aim to grow them over time.


PE Firms vs. Venture Capital


PE firms are sometimes confused with venture capital firms because both look to invest in companies and exit later by selling those investments. However, there are major differences between the two including the type and size of company, capital invested, and percentage of ownership acquired.


PE firms generally acquire mature companies to increase their overall value. Venture capital firms look to invest in earlier stage companies with high growth potential.


For more information on selling your practice and Physicians First's investment banking solutions for deals with private equity, download our industry reports here.

This post is for informational purposes only and does not constitute an offer, invitation, solicitation, or recommendation to buy, sell, subscribe for, or issue any securities. While the information provided herein is believed to be accurate and reliable, 127 Capital, LLC (“Physicians First”) and Ashland Securities, LLC make no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person. Certain Principals of Physicians First are registered representatives of Ashland Securities, LLC Member FINRA, SIPC. Physicians First and Ashland Securities, LLC are separate and unaffiliated entities. Securities and Investment Banking Services are offered through Ashland Securities, LLC.


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Securities Products and Investment Banking Services are offered through Ashland Securities, LLC. Supervised by the Home Office, located at 80 S.W. 8th Street, Suite 2000 Miami, Florida 33130. Phone Number 305-279-3176. Member FINRA SIPC. Please refer to BrokerCheck for more information about Ashland Securities, LLC. Physicians First and Ashland Securities, LLC are separate and unaffiliated entities.