PE and beyond PE: Who wants to invest in your GI practice?
There are a few GI investment models brewing. Some of these are beyond private equity (PE).
Read on for insights on what’s underway.
The story so far with private equity and GI
In March 2016, Audax Capital’s investment in Gastro Health triggered private equity investment in gastroenterology.
After a lull of about 2.5 years, there were two more PE deals.
In October 2018, Waud Capital and Texas Digestive Disease Consultants created The GI Alliance (TGIA).
In November 2018, Frazier Healthcare Partners bought Atlanta Gastroenterology Associates to form United Digestive. Both The GI Alliance and United Digestive have been referred to practice management companies.
In April 2019, Gastro Health made its first out-of-state acquisition in Southeast Gastro.
In May 2019, we saw the announcement of a $130M GI deal. Regional GI, Main Line Gastroenterology Associates, Digestive Disease Associates took investment from Amulet Capital to create the 7th largest deal in the US.
What does it all mean?
Think of these practice management companies as platforms created with the specific intent of acquiring assets of other GI practices and centralizing administrative and technology operations. Growth is created both organically (better reimbursements, contracting, cost control) and inorganically (acquisition of other GI practices).
The practice management companies create management teams that are responsible for executing on the investment thesis set forth by the PE fund.
In the beginning, most practice management companies will tend to expand regionally. For example, TGIA will expand in Texas and Louisiana. Gastro Health first expanded in Florida.
According to Abe M’Bodj of Provident Healthcare Partners, there are about 12 ongoing transactions including acquisition deals. In 2019 and 2020, we will see regional hubs of practice management companies. They will be the first-movers (high risk, high reward). They will be led by PE funds who would’ve accomplished similar deals in other specialties.
Just as with dermatology and ophthalmology, we will see many PE-backed GI practice management companies emerge in different parts of the country. After most big GI groups are taken, the market will open up cross-regionally. At that point, PE funds (and their platforms) will scout around for healthy GI practices wherever they might be located.
When most of the market is taken (that is, whoever wants to sell has sold), it’ll possibly be a 5-7 year window. That’ll time itself with recapitalizing the original practice management companies with other PE funds.
For example, Audax Group invested in Advanced Dermatology & Cosmetic Surgery (ADCS) in 2011. They built it up and exited their investment in 2016 – a 5 year horizon. If they time their GI investments similarly, then we’d see a spur of M&A activity around 2021. One deal leading to another.
Investment models beyond PE
Companies such as Amsurg (now merged with Envision Healthcare) might consider competing with PE funds to create GI platform companies. As you may well know, the company already co-invests with gastroenterologists to build surgery centers. HCA, Surgery Partners, SCA, Physicians Endoscopy (interestingly, Kelso, a PE firm, owns the company) and USPI are other big ASC players.
Taking investments from Amsurg or co-investing with them to create a GI platform company will likely be a different model than PE led models.
A PE led model might mean selling 80% and converting 20% into stock in the new platform entity. A company-owned model might reflect a typical ASC investment model (where majority, say 51%, is owned by the company) in a smaller regional entity.
This is also referred to as a Management Services Organization (MSO) model. The management company makes money by supplying business services and in some cases, by owning or co-owning assets of the practice. They negotiate on insurance contracts and supplies for members.
An MSO announcement could also be in the works. A management company and one or more GI groups could join forces to create and extend the model as an alternative to PE.
It’s also possible that there might be other investors (other types of companies, asset management firms, family offices etc.) who might compete with PE funds for the right investments. Investment models in these acquisitions may drastically vary.
While no one’s talking about it as yet, industry outsiders (e.g. technology or insurance companies) might venture into GI through an acquisition.
Expect the unexpected.
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By Praveen Suthrum, President & Co-Founder, NextServices.
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