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April 19, 2018

Why Private Equity is Turning Its Attention to Gastroenterology

MHT Partners  | Healthcare Investment Bank

M&A activity between physician practices and private equity investors has evolved meaningfully over the last several years. Coming out of the Great Recession, investors pursued consolidation, administrative optimization, and networking improvements in specialties such as dentistry, dermatology, physical therapy, and anesthesiology. Today, having written the playbook for successful partnerships with physician practices, investors have begun identifying the next wave of attractive specialties in healthcare services to implement proven investment strategies.

Recently, gastroenterology and endoscopy (collectively “GI”) has emerged as an area of interest for private equity investors focused on U.S. healthcare services. Gastroenterologists nationwide are receiving calls from investors, and it is easy to see why: the rationale for investment in GI is underpinned by a strong market, macroeconomic factors, industry trends, and local considerations.

As is true across the private equity investment landscape, financial markets continue to provide attractive sources of capital to investors, driving competition for attractive opportunities. Favorable debt terms (e.g., low interest rates for high-performing businesses) support strong overall investor demand. Furthermore, private equity “dry powder” – the amount of dedicated funds that private equity investors are committed to deploy – continues to grow. Many firms also face looming investment deadlines as a result of fund structures that require the timely deployment of capital in order to meet investor commitments.

At the macroeconomic level, GI services are poised for growth. A high incidence of colorectal disease in the U.S. drives patient volume to GI specialists focused on screening, preventative care, and treatment, and over the last two decades, patient flow has been augmented by the nationwide increase in chronic conditions such as diabetes, obesity, and high blood pressure. As the population ages, demand for GI services will far outpace other areas of the economy.

Additionally, GI stands to benefit from attractive industry dynamics, such as the widespread adoption of physician-controlled endoscopy centers. Endoscopy centers and ambulatory surgery centers (“ASCs”) expand the breadth of physician control over the procedure, the delivery of care, and ancillary services, in addition to keeping patients out of more costly hospital facilities. The gamut of procedures approved by the Centers for Medicare & Medicaid Services (“CMS”) for outpatient care settings favors GI, as does the fact that the specialty operates as an important provider of preventative care.

GI service providers are fragmented as well. A handful of regional groups compete with many smaller local practices. GI businesses of scale (50+ physicians) exist in many large metro areas, though few industry players are able to achieve leverage with payors at the national level. Large practices will benefit from local consolidation, while smaller independent practices will benefit from a centralized administrative infrastructure that lowers cost.

Audax Private Equity initiated the first notable private equity investment in GI by establishing a partnership with Florida-based Gastro Health in March 2016. More recently, Dallas-based behemoth Texas Digestive Disease Consultants (“TDDC”) announced it was seeking a strategic partner. Washington Gastroenterology, the 2018 merger of four GI leaders in the Seattle area, exemplifies GI practices realizing the benefits of local scale. MHT Partners believes that these bellwether transactions, increasing awareness among gastroenterologists in regard to their strategic options, and the factors described above will combine to drive attractive M&A opportunities for GI practices in the near future.

If you’ll be at Digestive Disease Week in Washington, DC June 2-5 and would like to arrange a meeting please email Alex Sauter (asauter@mhtpartners.com).

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