Private Equity-Backed Specialty Physician Platforms – Where do we go from here?
Over the past five years there has been a tremendous amount of private equity investment in specialty physician groups. Seemingly every middle market sponsor with an interest in healthcare has sought or bought a specialty physician practice, be it in dermatology, dental, or ophthalmology, with the intent of building a platform by executing a “roll-up” strategy. Notably, many of these investments, through prodigious amounts of work, have succeeded in creating regional platforms of scale, with strong leadership and meaningful infrastructure.
However, this success has resulted in what some consider a cluttered market. Take, for example, the dermatology sector, where private equity is heavily invested. Presently, there are no fewer than 15 sponsor-backed, mid-sized dermatology platforms. With rival platforms competing for talent (both providers and administrators), acquisition opportunities, and market share, and given the fact that several of these companies are now nearing the end of the traditional five-year horizon that most private equity groups set for investments, a natural question to ask is: “How much longer do we think it will take before we start to see regional platform consolidation?” The answer is nuanced. In specialties that are recent arrivals to the “platform game,” such as gastroenterology and ophthalmology, it feels like we are perhaps eighteen months away from larger consolidation events. However, in more mature specialties like dermatology, it is increasingly likely that we’ll see meaningful platform consolidation in the next six to twelve months.
Consolidation is by no means the only possible outcome for regional specialty physician platforms. To this point, a large portion of investment in the sector has come from middle market PE firms. As several of these assets reach “scale,” and hit the market, another tier of private equity investors become candidates for buyers. PE firms that need to deploy significantly more capital to opportunities, given the size of their funds, are likely to carefully evaluate many of the specialty physician platforms we expect to come to market in the next twelve months. For those groups who love the original investment thesis around demographics, increased leverage with payors, and economies of scale, but were constrained by check size, this anticipated wave of deals could represent the opportunity to invest in an attractive space.
We’re excited to see how these dynamics play out, as sponsors consider strategic alternatives for their investments in the specialty physician space. The next six to twelve months should be active and interesting to those who’ve followed the histories of these platforms.
We’re here to help
Working with financial sponsors and specialty physician practices as they evaluate strategic alternatives for their businesses represents a significant portion of our work in the healthcare space. As a healthcare investment bank, MHT is extraordinarily active in the market, recently completing anesthesiology, dermatology, hospitalist, and emergency physician deals. We would love to be a resource for you as you consider the rapidly evolving healthcare landscape and the implications for your business.