What Makes a Specialty Physician Practice Attractive to Private Equity Groups
2017 has been yet another active year for private equity (“PE”) investment in an array of specialty physician groups. Specialties like dermatology, dentistry and emergency medicine have remained at the forefront of PE investment, while others like orthopedics are increasingly emerging as key future investment opportunities for PE. There are a number of traits that make these practices and their specialties conducive to the PE investment model.
Chief among those reasons is the opportunity for value creation by combining several smaller practices into a single platform in a strategy commonly referred to as a “roll-up.” Core to a successful roll-up strategy is a fragmented market with ample partnership opportunities, which certain physician specialties provide in spades. For instance, dermatology is a highly fragmented market place with 73% of ~ 14,000 practices employing less than 5 dermatologists and 29% employing only one.1 Moreover, Advanced Dermatology & Cosmetic Surgery and Forefront Dermatology, the two largest players in the space, account for only 2.3% of the specialty’s market share in aggregate.2 Physician practices achieve cost reductions through the consolidation of core administrative functions like finance, accounting, human resources and compliance. Physician practices may also gain greater negotiating power with payors once a practice has amassed a high density in a certain geography, leading to better contract terms.
Certain physicians’ groups also provide the opportunity to launch new services and products that can create new cash flow streams for the practice. These ancillary services can be everything from cosmetic products or pathology lab services at a dermatology practice to surgical procedures provided through an ambulatory surgery center or orthotics sales at an orthopedic practice. The successful introduction and execution of these product lines leads to increased profitability of the overall practice and an increased diversity of revenue, both traits that private equity firms value highly.
On a practice level, several business characteristics undoubtedly garner outsized interest from private equity firms. A platform investment is primarily defined by its scale and infrastructure to support future growth. Typically, ideal platform candidates will be practices with multiple physicians and extenders, a robust back-office infrastructure, a strong management team and in-network contracts with all major commercial payors. These attributes will allow the private equity partner to execute on a strategy of acquiring and integrating several other smaller practices in an efficient manner, creating revenue and cost synergies. Notably, some physicians prefer to join multi-physician sites granting them quicker access to income, an established infrastructure and fewer administrative responsibilities.
Ultimately, specialty physician groups will garner significant interest from the PE world for the foreseeable future as the sector continues to be ideal for private equity value creation.
1 “Market Profile of U.S. Dermatologists.” us.imshealth.com/Marketing/GTMN/Market-Profile-of-Dermatologists.pdf.
2 Oliver, Kelsey. “Dermatologists: Market Research Report.” Dermatologists Market Research | IBISWorld, IBISWorld, 24 Oct. 2017, www.ibisworld.com/industry-trends/specialized-market-research-reports/life-sciences/health-practitioners/dermatologists.html.