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The Big Story: Private equity investors sharpen focus on specialty healthcare

“Investors’ interest in physician practices began years ago, starting in areas such as urgent care, dermatology and anesthesia. Healthcare’s recession resilience is attractive to investors. Physician practices historically have been fragmented and often inefficient, creating additional opportunities for private equity firms to step in.”

What It Means for You

“Sharpen” may be the key word in that headline.

The big story above, along with others asking, “Will the healthcare labor shortage fuel more consolidation?” suggest that investment by PE firms in specialty physician practices – and  the rollup that follows – will continue at a good clip.

Sure, the overall numbers are down a bit from last year, but that’s more of the market finding equilibrium than a reflection of a smaller appetite.

Just last week our Health Services team mingled with active PE investors at a small gathering in Chicago and heard, clearly, that everyone is excited by physician and specialty practices.

But that’s not the whole story, of course. So, what’s really going on?

    1. Waiting on D.C. Many elements of healthcare delivery are up in the air. Specialties ravaged by the pandemic but kept afloat by relief funds – think SNFs, for example – are finding that the way forward is uncertain. Investors are cautiously optimistic, but still taking a beat to see what Congress decides on overall funding and where CMS lands on reimbursement. While this is a slightly different angle than physician and specialty practices, it’s an indicator that investment strategies can and do shift rapidly in the face of regulatory or legislative confusion.
    2. Healthcare “Stocks” and “Bonds.” With the uncertainty around care delivery, healthcare PE firms remain bullish on the category. If they are waiting for care delivery opportunities to become more clear, they are turning to ancillary services that offer operations, staffing, marketing, revenue cycle and even consulting services. With a steady need to support healthcare delivery, these companies are seen as solid, if unspectacular investments. One analogy we heard was that if care delivery organizations are “stocks,” then ancillary services are “bonds.”
    3. Culture and retention matter, part 1. Investors want to know how disruptive their acquisition of a company or practice might be, especially when the healthcare workforce is so fragile. Wisely, they want to find investments where that disruption is minimized. Evaluating culture and likely retention is therefore becoming a priority during due diligence. A company with a strong culture that aligns with the investor’s approach and mission has a much better chance of smooth integration – something that hasn’t always been the case when it comes to PE in healthcare. Investors are looking at whether they can partner with the organization, deliver the benefits of scale, expertise and reach, while offering those within the organization a sense of security and connection. If not, the risk of a drop in morale and mass exodus rises. That, in turn leaves the acquired organization hollowed out and the investor with significant recruitment costs.
    4. Culture and retention matter, part 2. Looking at cultural fit applies to both halves of the equation. For better or worse, the conversations about consolidation and private equity taking place in the media and the halls of government have upped the ante when it comes to acquisitions and partnerships. But in many ways, it is for the better. Physicians are taking a close look at who they partner with and asking wise questions about the value of those partnerships they may not have asked before. Growth and efficiency are often key reasons a physician practice looks to sell – and a PE firm looks to acquire. Yet the integration of practices into the larger network isn’t always as seamless as either party would like. So, today, physicians and other owners are taking a look at what they’ll actually be able to accomplish and setting that against the potential disruption in terms of culture and integration. They’ll sell to the investor who offers the right fit. Quick note on that for investors: Make sure you know what people are saying about you. Groups you’re considering investing in are searching you online. The results that come up will affect the path forward even before the first conversation.

Overall, the desire to partner is still strong. But at the same time there is a better understanding of the risks and benefits, leading to a sharper focus on alignment so that the whole thing goes well the first time.

There’s urgency, yet care.

PE firms are evaluating potential acquisitions for fit and potential, yes. But those practices and companies are evaluating PE firms on their track record with similar partnerships. That means both parties need to know what they’re about. Each half of the equation needs to know their own story so they can find the best partner to work with during the next chapter.

This piece was originally published over the weekend in our Sunday Quick Think newsletter. Fill out the form to get that in your inbox every week.

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