Abe M’Bodj: How will PE respond to recession? (Interview)


Abe M’Bodj: How will PE respond to recession? (Interview)

Abe M’Bodj: How will PE respond to recession? (Interview)
There’s a lot of noise about recession right now. Inflation is high. Job losses are on the horizon. Public markets are brutal. Abe M’Bodj, VP at Westcove Partners an investment bank helps us listen to the signal from the noise.
What I was curious about was the mindset of private equity companies during an economic downturn. Would they continue to invest in GI or hold-off? Or, would they accelerate their investments? (there’s a lot of “dry powder” available).
Talking about gastroenterology specifically, what would happen with upcoming exits? Would they continue to get pre-downturn valuations? What about bankers who gave debt in these transactions? How about the GI practices that didn’t transact?
If there were a crystal ball, what can we expect in the coming months with PE in GI?
This is one of those interviews that unpacks a lot of information and converts that into deeper insights. Listen or watch closely.
The ‘R’ word
What exactly is recession anyways?
“That’s like a textbook outcome of what to expect when you are printing money”
Where does private equity get its money from?
“The longest weekly decline in the stock market since the tech-bubble burst in 2000 was seen in the last month”
What would a PE firm be worried about at the moment
“Healthcare services are a great area for PE investments” 
…will likely see a secondary transaction next year
If Gastro Health were to exit at the peak of the recession, would they get the same valuation?
“10% of 14,000 GIs  are part of PE-backed organizations
“A lot of the slower-moving groups will be acquired by the larger ones”
“Where is GI in terms of PE right now”?
Crystal ball on upcoming announcements in GI?

The Transcribed Interview:
Praveen Suthrum: Abe, it’s really nice to see you again. Welcome back to The Scope Forward Show.
Abe M’Bodj: Likewise. Thank you for having me. For me, it’s good to be back again.
Praveen Suthrum: I want to introduce you to our audience. So Abe M’Bodj is currently a Vice President with Westcove Partners, an investment banking firm that specializes in working with healthcare entrepreneurs and has unique experience advising physician practices and more specifically, GI practices through private equity and or strategic M and A transactions. So Abe this is going to be such a useful conversation for people who are listening, because I’m going to start with the R word, which is recession. So are we in recession? Is this supposed to be recession?
Abe M’Bodj: I have to check the exact I think the specific definition of recession is two consecutive quarters with shrinking or negative GDP growth.  I don’t know if we’ve met the technical definition for a recession yet, but it definitely feels like economic activity is declining, maybe a little bit. I know everyone’s sort of waiting on some updated inflation numbers and data, but I think as a result of some of the kind of monetary and fiscal policies of the last year to pump a lot of money into the economy, you certainly had inflation pick up, which has caused a lot of prices to increase. Gas, grocery store, used goods, all sorts of items have kind of increased in price. And so it’s caused consumers to pull back a little bit on spending and definitely slow down economic activity. And then there’s been obviously a lot of talk of rate increases, which is also hampered a bit of activity as well, which has a direct impact on private equity and their investments into various various companies and organizations. But I don’t know if we’ve hit the technical definition of recession yet, but activities definitely slowed down from an economic standpoint. I think from a deal standpoint, just kind of seeing transactions on a day to day basis. There’s still quite a bit of activity in the market. Private equity firms are still deploying a lot of capital, partially because you look back at prior economic slowdowns or prior true recessions in the same span of time. I was actually looking at this a little bit earlier today. From 2011 to now, the amount of private equity capital that’s available from deployment has increased from about 1.1 trillion to about $2.9 trillion across the industry. So as you think about sure that there may be a little bit of slowdown rates may be increasing, which makes it more expensive to deploy capital and finance deals. There’s also so much more dry powder, as we call it, or capital available for investment in the industry that you’re still going to see quite a bit of activity because the funds have to find ways to put that money to work.
Praveen Suthrum: Okay. So you packed a lot of information in that response. So I want to break that down a little bit. So let’s start with the basics. So we don’t know whether we’re in recession or not, but it smells like one. Technically, we don’t know yet. But if you were to explain to an eight year old what exactly is the problem with recession environment, how would you say it. Like costs are going up, inflation is high. That means that everything is more expensive. But then you’re also saying there is more capital available. But I would think that there’s less money available. But I want to hear from you. How would you explain it? In very simple terms.
Abe M’Bodj: Yeah. So I think in terms of what a recession is, it’s a general again, decrease in economic output or GDP, meaning the value of goods and services in the economy is decreasing. And so when I say how inflation is impacting that as normal day, everyday people like ourselves go to the grocery store or go to fill your car, the gas pump, the price of those things are increasing. And so I’m in Southern California, so gas is easily well over $6 gallon. Many gas stations here. You go to the gas station. And that cause you to think twice about going to that nice dinner you wanted to go to or that elective procedure in relative health care that you may want to have on a micro level. Like these things don’t seem to be correlated, but there is a general correlation with the level of inflation and consumer price increases and the level of consumer spending that goes into the economy. So circling back to what that means for an eight year old, I guess people are spending less money than they have otherwise in the past several years due to the overall state of the economy. So that’s what everyone sort of dealing with you thinking right now. Okay. But just looking back on the COVID period when the pandemic began, people already were spending less money. Right. Thats like a recession. You would think that. But you also had a lot of government subsidization, which has led in some ways to great resignation. A lot of kind of unemployment funding was out there. There was a lot of subsidies that were increasing the level of funding those programs are providing. For the first time in history, you had direct deposits into the bank accounts of Americans to actually kind of subsidize lifestyle. And while some of that was meant to stave off economic hardship. Like you look at, for example, I’m doing a lot of work in plastic surgery right now. Plastic surgery businesses saw some of the greatest increases that they’ve seen historically in terms of their revenue, like throughout COVID. Why was that? Because a lot of people got stimulus checks and used that for elective services. I think that now we’re getting to a point where there’s a bit of equal, like a hangover of all of the money that’s sort of been pumped into the economy through that period. And on one hand, I always kind of joke about this with people, but we pumped a lot of money, trillions of dollars into the economy. And then we woke up one day and we’re confused how prices increased and inflation picked up. And that’s like textbook outcome of what you should expect when you’re printing money and putting it into the economy. So that’s sort of how we got here. So I think common sense would have said that there was a slowdown during COVID. That really wasn’t the case because there was so much money being put into people’s pockets. And I think now that economic reality is setting in maybe a year and a half, 18 months later, you’re seeing that slow down happened a bit later.
Praveen Suthrum: Very well explained. So is the government printing more money now?
Abe M’Bodj: They slowed down a little bit, and that’s kind of part of government policy, in terms of the central bank, in terms of looking at raising interest rates, like by default, them raising interest rates is them buying back money that’s essentially in the economy through open market operations and government programs. So they haven’t been printing as much lately, but we obviously did just print quite a bit over the last couple of years.
Praveen Suthrum: Okay. So now moving on to private equity, which is the crux of this interview of this conversation. So you said that the amount of dry powder or the amount of capital to invest has increased substantially in the last few years, almost maybe over a trillion dollars. You said even more. It’s more than a trillion dollars. Yeah. So where is this money coming from?
Abe M’Bodj: It’s typically institutional investors. So pension funds, endowment funds, ultra high net worth individuals, accredited investors like state pension plans, like California state pension plan is one of the largest investors toppers. So very large endowment funds and investors that have tens of hundreds of millions of dollars to put to work at any given time. And I think what’s caused such a great deal of inflow of capital into private equity has been the outsize returns they’ve been able to generate relative to some of some of the alternatives of these groups, which are mutual funds in public markets and in some cases, hedge funds. And so the success that private equity has not just in healthcare, but kind of across the board, has caused those institutional investors to allocate more and more of their portfolios into kind of these private market investments. And so I think, as I mentioned, as I was looking today, I want to say from 2011 to 2021, it’s increased from about $1.1 trillion in active like capital that was available for deployment to about 2.9 trillion. So quite a bit of increase in capital.
Praveen Suthrum: Yeah. So that’s about $1.8 trillion increase in capital. Yeah, that’s a lot of money. So, again, I just want to break that down as well. So the institutional investors, or let’s call them limited partners, as they’re called. These are endowment funds from universities such as University of Michigan or Harvard or wherever. And so they’re giving money, then there are insurance companies, they’re giving money, then there are ultra high net worth individuals. They made a lot of money in the market. So they’ve given money. And so lot of dry powder has been supplied to private equity. Now, this capital is already there. The agreements between the limited partners and the PE companies or firms are already there and they are executed. So they’ve committed to investing that money and giving back returns. So this money has to, so PE has an agenda now to complete the deployment or whatever agenda that they’re in right now. Now, my question, I want to begin with one question from the limited partners point of view. So now that everybody is going to pull back in the current environment, either the generation of market returns will slow down, it possibly will slow down. We don’t know how long, but I’m assuming based on whatever I’m finding out, the slowdown is here for a while, this correction is here for a while. So if that happens, then my understanding would be that they will not supply more money into the market. Is that a correct understanding or No?
Abe M’Bodj: I can see a scenario where, because you’ve got to separate call it the market from what I would call the private market. So you got public market and private market. Public market doing horrible. I saw a stat last month that it was the longest weekly decline of the stock market since the tech bubble had burst in 2000. So decline was greater than 08 or 09. But the weekly extent in the timeline of the decline was actually longer in the last few weeks than it had been in historical slowdowns in the stock market. And so the general stock market is driven by fear, greed, emotion, that’s all part of the investment. And to some extent, the private markets are too. But these investors are thinking about investments over a much longer time horison, right? Five to seven years, call it the average private equity investment. And I think if I’m sitting there as the head of an endowment or a pension fund and we’re entering a world of potential low returns in the public markets, on one hand, you could make the argument that you’re going to see more capital allocated to alternative investment strategies, of which private equity is one of them to find creative ways to get that return out of the market, even though maybe the return, albeit it’s fair, maybe the return could be a bit less over the coming five years than it has been over the last ten to fifteen. But if it’s still exceeding if you think of it like their competition, competition being public markets as we are wondering, you still may see a greater degree of capital allocation into private equity. And we’re actually talking about this as a team. Earlier this week we were curious to see some of the recent fundraising numbers. They haven’t come out yet, but one article I read today was about every year for the last several years has been a record fundraising for private equity. And when is that going to slow down a little bit? And all indications point to kind of continuing. But I think in the backdrop of as an investor, if your alternatives are getting poor, you’re going to allocate more capital private equity. So I can see them continue to raise a fair amount of money.
Praveen Suthrum: So let’s talk about that a little bit more by getting to the level of the PE firm itself. Let’s say somebody who is heading a private equity firm. What would they be thinking right now? Because let’s consider what must be happening to typical portfolio. Let’s set aside health care for the moment. But in general, in the industry, most employers. So layoffs are on the horizon, if not already. And in the tech space, there is a hiring freeze across the board. It seems to be all the big tech firms they hired excessively, assuming the whole world will go digital during the COVID period, which is true from a long term standpoint. But now they have excess people and they don’t know what to do with them. So either there are lay offs, like from Netflix, laid off people. There are other firms that are either laying off or holding back on the hiring. So if they were part of the portfolio and some of them would be so then your portfolio is not hiring much anymore. So there is lesser economic activity in your portfolio companies, which means that the exit that you were expecting within a three to seven or a five to seven year horizon may or may not happen at the level that you’re expecting. You may have a return, you may not find a buyer. I mean, a whole variety of possibilities. What would the PE firm be worried about at the current moment? And then please also add in the angle of lenders and bankers because they have a huge role to play in the investment activity when they’re giving debt.
Abe M’Bodj: You touched on a good point. Like with a lot of companies that have had sell offs or layoffs recently and a lot of the companies that have the largest sell offs in the stock market, there’s been a huge shift in the market. Generally this is across public market and private market. When I say this from really you think of high flying growth stocks, technology, which usually is a big component of that two more value oriented, cash flow driven profitability type business models and the businesses that are susceptible to layoffs at this point are the companies tend to be technology companies that have really over hired, probably weren’t profitable to begin with or had marginal profitability, and so they couldn’t really sustain their workforce and their valuations. A lot of cases were just driven on kind of continued revenue growth. And now that you’re seeing that slow for several companies use Netflix as an example, that is causing these organizations, after rethink their call structures and profiles and causing their investors to rethink it. It’s really the same within the private market as well. There are certain segments of the healthcare economy. I would not put GI in this category because those deals tend to be more profitability driven. But there are segments that were historically trading on revenue multiples or pretty high valuations that have certainly come down because the market is not as favorable to just growth at any cost at this point in time. So I think as you sit at the head of a portfolio and looking at the investments that you’ve made within that portfolio, whether in health care, otherwise, you’re trying to understand what are the cost structures of my investments. How will ultimately the market evaluate these investments upon exit? I think some of these businesses that may have historically been valued upon revenue multiple growth multiple are now trying to think through how they pivot themselves towards profitability. And I would say the urgency to show profitability from investors or outside parties is greater than it has been over perhaps the last couple of years. And so as you think about that, as a portfolio operator, that may include layoffs or redefining the strategy or spinning off and profitable or segments of the business or businesses that maybe haven’t developed in the way that you would have liked. But I think for companies that are still, and this is why healthcare services tends to be a really great area for private equity investment. Businesses that are stable, have stable cash flow, profitable and continuing to grow, can thrive in this sort of environment. Especially as you look at something like a physician practice, which is a bit more resistant to kind of overall price changes. Right. A GI practice is somewhat impacted by inflation, but not really right. Payer rates don’t necessarily change with the price of gas or the consumer price index. So you’re a little resistant to some of those outside changes, which is why it is still a pretty good area to see that you’re continuously investment appetite for those portfolio companies to exit for other buyers is definitely strong. You had a large deal last year with Gastro Health being exited by Audax Group and trading to OMERS, another very large private equity firm. There’s several of these other platforms I’m certain are going to explore exits in the near future. My guest, GI alliance, will likely see a secondary transaction in the next year or so, as well as some of the others are going to start to explore it. So again, just circling back, if you’re in that position or you have a strong company with strong cash flows, you don’t have to change how you’re thinking about the investment a whole lot as it relates to health care. If you’re in an area of health care where it’s more of a growth oriented play and you’re thinking about how do you exit into the current market, then you’ve got to think a little bit more about what that strategy looks like in your time horizon, because I think it is changing a lot for a lot of people.
Praveen Suthrum: What are the bankers thinking?
Abe M’Bodj: Well, I guess to back up. So from a lender perspective, rates are increasing. So that impacts things in a couple of ways. One, from a banker standpoint, you know that if we tend to work on the sell side, so working with the organizations that are bringing on private equity capital or seeking to be acquired or some type of investment partner. So you know that with rates increase historically and potentially can’t have an impact on valuations. Right. And so as a private equity firm is going through their model and building that out and they’re making their assumptions on their entry investment and what the cost of that capital is going to be from a financing standpoint, the plug in that model, that is the interest rate on their debt gets a bit more expensive. And so as that filters through and ultimately will come back that they can definitely pay a little bit less for their investment. Again, though, going back to the comment around how much capital has been raised. We’ve seen such competition for these as a banker, which is a good thing for us. We’ve seen such competition for our clients in these transaction processes from various private equity firms as well as larger health care strategic organizations that we haven’t seen that impact of that financing actually impact valuations really at all or as much as expected. In fact, we’re pretty consistently exceeding kind of valuation expectations that we set at the outset of the process through the transaction process. So we haven’t seen that yet. It’s definitely a possibility. I will say groups are definitely and this is getting back to lenders. Whereas during COVID there were a lot of businesses that were impacted negatively throughout the course of COVID, whether that was and Phil have in some cases like trouble staffing, like it’s a staffing type of organization, staffing caregivers and providers, and in some instances, nurses in a lot of instances has become more challenging. So that was definitely a struggle for some of those organizations. You were able to make adjustments to the finance or really any business that saw like a downturn as a result of COVID. We were able to explain a lot of that stuff away with investors and lenders and be honest truth that some of that has come back and some of it hasn’t. So there are certain things that people had bought off on that didn’t come to fruition, both lenders and investors. Again, as a banker, our job is to ensure that, ensure we get our clients credit for those things. But the reality is some of those adjustments that people make to EBITDA or revenue or whatever it may be have come to fruition. Some of them haven’t. And the key thing that you focus on in the process is like showing a trend back to normalization. I think that now in the current environment, people are there’s not as much appetite for those types of adjustments. So whereas maybe twelve to eighteen months ago you could get away with some of those things, right now you really can’t. And so people are pretty heavily diligent saying those types of adjustments to the quality range. So I guess to answer a question from a lender perspective, it’s definitely getting a bit more stringent in terms of underwriting requirements.
Praveen Suthrum: If Gastro Health were to exit now or in the coming months, and let’s say we’re in peak recession, would they get the same valuation that they got? First of all, would they find the buyer? And second of all, would they get a similar multiple as they did last year?
Abe M’Bodj: This current environment wouldn’t impact their ability to exit if it was six months later. I don’t think it’s going to be the case for some of these large organizations that are exploring exits. The reason being, again, it’s a fast growing but profitable organization and they’ve kind of established themselves within the market. So there’s very strong economic fundamentals behind those investments. That’s different than a technology investment that could grow a lot and has shown and demonstrated the opportunity to grow quite a bit. But I think they’re in kind of a different category where there still would be a fair amount of appetite. You’re seeing a kind of across physician practice management. There’s been several pretty high profile exits over the last call it six months, not just in GI, but in other specialties. I think you’re still seeing that appetite. And then even I can say there’s still a lot of appetite for private equity firms to find platforms within various areas of physician practice. And we can talk specifically about where GI is at. I think it’s tougher to find a platform investment outside of one of the larger groups that’s already been created as the platform, as a second bite of the Apple. But I’m doing a lot of work in the Cardiology space right now and there’s insane valuations are being paid for these organizations because of the market opportunity exists irrespective of the kind of outside market. Even higher than they were at the peak of some of the GI activities. So you definitely have a lot of appetite from investors to find assets in these spaces. But to your question, I don’t think would impact. Let’s say Gastro health was transacting right now, I don’t think they would be being impacted in their transaction.
Praveen Suthrum: So you’re saying even the valuation would be the same?
Abe M’Bodj: Valuation would be the same, yes.
Praveen Suthrum: Okay, so now talking about second bites of some of the other platforms that got their start in 2018 and after. So one would expect just adding five years to that, so one would expect that they would be exiting next year. So we would see second bites next year, which means that the groundwork for that should have begun already. That would be my take. What’s your take? Is that going to change or based on what you just said? I’m assuming you’d say that no, they’ll find the exit and they’ll find at the valuation that they would normally find.
Abe M’Bodj: The groundwork has definitely been laid. I suspect with a pretty high degree of confidence. Some of them are exploring exits at the current time. However, I think it’s fair to say there’s been varying degrees of success amongst the platforms that have been created in the market. And so the ones that I would place on the spectrum of more successful relative to others, like they’re in good position to exit. The ones that I would place on the farther end of the spectrum in terms of having a successful transaction, they’re probably going to have to hold on to the assets quite a bit longer. My actual suspicion is that you’ll start to see those organizations get acquired by the ones that do have successful exits with their next partner. But the challenge right now in the GI space, I don’t want to say it’s a challenge, but these platforms, namely like Gastro Health and GI alliance and One GI has had so much success in such a short amount of time and in partnering with so many groups. I’ve seen a report the other day that 10% of the 14,000 gastroenterologists in the country are part of these private equity backed organizations. But these groups have had such success that there’s really not entryway for a new platform to come into the space. So you’re pretty set. Like if a new GI group wanted to go and find a platform investment, it would be pretty hard. Look at the current state of the market, but what you do have is this kind of captive pool of investors or buyers that now have intense competition for assets or groups that come available in the market and even for relatively smaller transaction opportunities. So not impossible for sub 10 doctor group to be trading at a double digit multiple because there’s such intense competition to partner with those groups for these larger groups to have a successful outcome within their transactions. But I think that the groups that are I don’t have to say who they are. People know who the more successful groups are. People know who the less successful groups are. I think those groups will have an easy time exiting and the other groups will probably spend a bit more time in the market finding their way. Ultimately, I suspect a lot of the slower growing groups will probably be acquired by some of the other larger ones. And that’s like not unprecedented across physician practice management. For example, one of the largest OBGYN providers is a company called Unified Women’s Healthcare. Unified Women’s Healthcare was a portfolio company of Ares Management wasn’t his from 2013 until very late in 2020. And they did a recapitalization with another private equity firm called Atlas Partners. With Atlas Partners, they actually went and bought the second or third largest OBGYN platform company called Women’s Health USA and brought them into their organization. So it’s not unprecedented for you to start to see some of these larger platforms combined and grow with one another.
Praveen Suthrum: Yeah, very interesting. So now if you look over the shoulders of some other specialties that are ahead in the PE game, how has it played out once these large platforms started acquiring more and started exiting, there’s been a second bite or maybe even a third bite and some. So when those transactions have happened, have they gone multi specialty, have they gone across the board or what is the norm or is there so much room for growth even within specialties that are the transactions just making these companies larger and larger within a single specialty? What have you observed?
Abe M’Bodj: It varies a bit by specialty. I would say for most of the specialties over the course of the last ten years, they’ve all gone through 2nd, 3rd transactions and it’s all been still kind of single specialty with a couple of exceptions. But where sort of the area the playbook came from for multi site investment in position practice was really the model of dental practice management. And many of the dental spaces is so fragmented and there’s so much room for growth that even the largest dental organizations out there in the market, their number one way of still growing today is by partnering with solar practices and solar practitioners. That is different than what you’ll find in the GI market. It’s very fragmented, but it’s not as fragmented as called densely. So I don’t think it would go on forever like it is in dental. Now, what you saw with some of the outsourced, maybe hospital based service type physician practice management businesses, those grew and I’m talking like anesthesia radiology emergency medicine. Those did ultimately end up combining. And you had the creation of the Envision Healthcare, which I know ultimately had some trouble as well as Team Healthcare. But those ultimately became, I think when Team was taken private, it was $18 billion transaction. When Envision was taken private, it was about eleven or $10 billion transactions. So those became extremely large organizations. And then as you think about the Ophthalmology and just going along the timeline here, like pain management, ophthalmology dermatology, most of those businesses have gone to their second bite of the Apple. None of them have started to change specialties quite a bit. All that I would say on the Ophthalmology side, you start to see some of those kind of blend on the more optical side, which is kind of interesting. So continuing to get into the consumer angle on that piece and you’ve continued to see that grow. And then on the women’s health side, interestingly circling back to the Unified example I gave. That’s an example where you’re starting to see a crossing of specialties in a way. So like Unified, shortly after they had bought Women’s Health USA, they also acquired CCRM, which was one of the largest fertility, private equity backed organizations. I think it was 500 or $700 million transaction. So it’s fairly large. And so that’s an example of them. You could view fertility as like an ancillary service of women and women’s health relative to pure OBGYN services, but that’s an example of them kind of crossing into a different specialty. So I don’t know where it ends with GI, just going back to GI, I don’t know where it ends specifically. There’s been some talk of integration amongst Urology platforms and moving into other areas. But I don’t think that within GI you’ll start to see mixing and specialties just yet.
Praveen Suthrum: Where is GI right now in terms of you said 10% of the gastroenterologist are under A private equity platform if you break the whole market down. I remember having this conversation with you several months ago now, but if you think of it as a pyramid at that time, I remember you saying that most of the big groups are gone. There are some still so are they exploring transactions? Have they decided not to do it? What about the middle and what about the huge base of this pyramid that all the different smaller practices have they decided? I mean, those who decided to do a transaction have done. Are people still in the middle or have they decided, hey, this is not for me.
Abe M’Bodj: I maybe over generalizing, but generally, if you’re over generalizing, but generally, if you’re a large group, call it north of 15 doctors, even north of ten, you have the opportunity to transact. Whether it was a banker called you, a private equity firm called you directly or one of the platforms in the market, you likely tried to at least figure out and get educated on whether or not a deal could make sense for your group. And I think the groups that are still independent, like have decided that it’s just not the direction they want to go. That’s completely fine. And those groups will still have the opportunity to transact. I think the challenge some of those groups may have is that the impetus to transact for some of these practices can’t be like that. They want an exit strategy for the senior partnership or the leaders within that group, because then it won’t set them up for a great transaction when they ultimately go through it. I think if these groups change their minds and want to explore transactions, it really needs to be based on some sort of change in thinking that it makes sense to become part of a large organization and join and grow. From an equity standpoint, that’s what I would call the top end of the market, top to middle. I would say that the base of the pyramid for them, the market is actually in a really exciting time because these are the groups that didn’t have a lot of options before. There was this ecosystem of private equity firms that created called sub five doctor practices, right, where there aren’t private equity firms calling them to invest in them as a platform for those shareholders. They’ve now had the opportunity to create liquidity from the practices that didn’t exist for them for the last five years while all these other large practices were doing deals. And so I think it’s an exciting time in the market from that standpoint because that is obviously creating  a lot of opportunity for those gastroenterologists, and it’s also creating a lot of opportunity for the private equity platforms that are invested in the space. Right. Because that’s where they actually create your return. You don’t create your return by going and buying 15-20 largest groups in the country create your return with what you can do after that and because you can expand within all of those markets by partnering with smaller groups. So I think the base / lower middle of that pyramid is where you’re seeing the most activity at the moment.
Praveen Suthrum: Earlier, in the conversation Abe you talked about during the pandemic transactions happened, people, the investors gave transactions a little bit slack. And you said some worked out and some did not. It did not play out as they thought it would. I think we’re talking about deferred income and the growth activity will pick up. And you said for some it did not happen. I want to talk about that for a moment. So what happens in that case? What are the risks that we are dealing with? I know you’re an investment banker, and you would say like, hey, everything is great, but I just want you to step away from that for a moment and help me understand what are the risks that we are dealing with. Risks from the PE standpoint, risks from the portfolio standpoint, from the platform standpoint, from the people who have joined the platform standpoint. And ultimately, if you’re a small practice or medium practice, that’s right in the middle, what are the risks that we are dealing with? What would go wrong?
Abe M’Bodj: The risk ultimately is that the earnings or the EBITDA that you’re basing the transaction on, right. If the deal is based on an adjusted EBITDA, just pick a number of 2 million and you as a buyer paid ten times multiple on that for 20 million. And then you fast forward there were adjustments in there maybe for code, productivity or positions were out or whatever it might have been. And fast forward at twelve months after the deal, if EBITDA is 1.5 instead of 2, what did you buy? Right. You bought something that was worth 15 for 20. That’s the ultimate risk. And then the downstream impact of that is obviously it has a negative impact on the equity value of everyone associated with the organization. What I would say is that’s actually within GI specifically and really most physician practices, that hasn’t been the case. There has been pretty strong normalization of trends post COVID. That comment I had made was somewhat related to what we’ve seen in some of the post acute space like home care providers and home help providers, where some of these businesses have had trouble staffing kind of providers and nurses into care settings. And that market has been a bit more challenging and has not come back in the same way that some of the other areas of health care have. But within the physician space, you can look at the financials and most physician practices and they’re over and above what they were pre COVID. But going back to that, the risk is that there are likely some deals that happened during COVID or shortly after where the earnings didn’t materialize. I think we actually talked about this quite a bit in our last discussion, though. The investors in the private equity firms, they did do a pretty good job of protecting themselves against that profitability or that earnings not coming back. So that’s what everyone was dealing with at that point in time. Like, how do we structure this deal in a manner that gets the practice full value? Go back to our $20 million example, you may get your 20 million. It may take ten upfront five and five over the next two years while we see volumes come back. Those types of structures are gone, nor do sellers want to accept them. But I think it’s also shifted towards just being more thoughtful around adjustments that could be made to the financials. But to answer your question, the downstream impact of that is impacting the equity valuation. If it’s a platform, obviously that could potentially get you into issues with your lenders, which could put you on the path towards bankruptcy. I don’t think anyone’s had that issue at this point. That’s a potential risk. So everyone’s being very thoughtful on that.
Praveen Suthrum: Are we going to see any announcements in Gastroenterology in the coming months, new platforms, any major announcements that you know.
Abe M’Bodj: I don’t think of any new platforms that are being created. I know we knock on wood should be announcing a deal the next couple of months with a group that’s partnering with an existing platform. So there continues to be groups that are doing transactions. If I had a Crystal ball, I don’t know anything for certain, but I would expect by the end of the year you’ll probably see another one of these very large one of the staffers platforms exit to a larger investor.
Praveen Suthrum: On that note, a fantastic insight into what’s happening in the PE world and specific to GI very insightful. I learned a lot from this conversation and thank you for being so open and candid and clear about everything. I always appreciate that once again I thoroughly end up enjoying and learning a lot every time I chat with you. So thank you thank you for coming today and sharing your perspective.
Abe M’Bodj: Thank you very much Praveen for having me. I always enjoy speaking with you and I always enjoy hearing your perspective on these things as well. You have a unique one and I always enjoy whether you’re doing these types of activities podcasts and getting this education to the stakeholders in these industries because I think it’s important and you do a good job of it, but thank you for having me.

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