Blayne Rush, president of Ambulatory Alliances, shares six thoughts on the future of private equity groups investing in ambulatory surgery centers.
1. Private equity groups may offer higher prices than hospitals and management companies. Mr. Rush believes that as management companies and hospitals continue to acquire and partner with ASCs, the ASC industry will also see increased interest from private equity groups and financial investors. Historically, ASC management companies and hospitals have competed to offer competitive prices for surgery centers — a competition that may be challenged by private equity groups. "I believe that now and in the future, financial buyers — that is, private equity groups — will outpace all of them as far as price paid," Mr. Rush says.
He says the reason for this higher price can be linked to a few factors. According to Mr. Rush, private equity groups are typically paid on a "two-and-twenty" basis, in which they receive 2 percent of their payment on the amount earned under management and 20 percent of the gain in the value of the fund. Funds are typically set up with a 10-year fund life and six-year investment duration, but if the group does not deploy the money, they are forced to repay the 2 percent management fee.
In many cases, that money has already been spent by the time the group is asked to repay the funds, so groups will be looking for new investment opportunities, Mr. Rush says. "If you get the private equity group into a bidding or auction process, sometimes they'll think, 'If I give half a point more, I'll get the deal versus staying at the bid I'm at right now and not getting the deal,'" he says. "If they have no other deals on the table, they'll give another half point to get that one." This may give the group more motivation than a hospital that seeks to acquire the ASC for strategic purposes.
2. Private equity groups may not understand out-of-network pricing. Surgery centers can also benefit from investment by private equity groups if the groups lack experience in the ASC industry, Mr. Rush says. "They're financial buyers, and they don't have as much industry experience," he says. "They may not understand in-network and out-of-network issues in the way that strategic buyers do."
He says private equity groups may look at a surgery center with a significant amount of out-of-network revenue and value the center based on its out-of-network, rather than adjusting the price as an ASC management company would. "Those sellers can make a significant amount of money when that transaction happens," he says.
3. As the ASC market gets more press, private equity deals will increase in popularity. Mr. Rush says he predicts private equity deals will increase in popularity as the surgery center market gains more attention. "The ASC market is maturing, and there are more people hearing and knowing about it," he says. "Private equity groups are on the prowl to find more areas to deploy that capital they have."
He says that private equity groups have previously purchased or backed management companies, but they may be looking to expand their reach in the ASC industry by pursuing surgery center clusters or even standalone surgery centers. "I think there are more funds out there and more people looking to invest," he says.
4. Surgery center chains will see more action than standalone facilities. Mr. Rush predicts that private equity groups will mostly be looking to invest in clusters of surgery centers or smaller management companies that own 3-4 centers. "Those owners that have multiple centers are in a better position to be involved in a private equity group transaction," he says. However, once the larger clusters of chains have been exhausted, private equity groups may start looking at deals from $1 million to $1.5 million EBITDA. "They may want to buy one surgery center and create a platform and then add to it," he says. "In other words, they'll buy a one- or two-center package and then look to buy a center here or there to add to that package."
5. Strong management teams will be essential. Since private equity groups have financial expertise — but not necessarily ASC management expertise — they will be looking for surgery centers with strong management teams, Mr. Rush says. "They will want surgery centers that have a management team in place that they can turn to and leverage and expand," he says.
In some cases, the private equity group may prop up an executive with ambulatory healthcare experience and use them for insight as they buy platforms. In cases where the surgery center does not have a strong management team, the group may look to buy a larger management company for the use of its management team.
6. Turnaround centers will not be of interest to private equity groups. Mr. Rush says while stand-alone surgery centers may be able to attract private equity groups, turnaround centers will most likely not be of interest to investors. "These guys want a well-run, well-oiled machine," he says. "They don't want to buy into a situation where they need to roll up their sleeves and fix it, because that's not what they do." Under-performing ASCs will be more attractive to ASC management companies, which have the expertise to enter the ASC and make changes to increase profitability, outcomes and physician satisfaction.
Learn more about Ambulatory Alliances.
Related Articles on ASC Transactions and Valuation:
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1. Private equity groups may offer higher prices than hospitals and management companies. Mr. Rush believes that as management companies and hospitals continue to acquire and partner with ASCs, the ASC industry will also see increased interest from private equity groups and financial investors. Historically, ASC management companies and hospitals have competed to offer competitive prices for surgery centers — a competition that may be challenged by private equity groups. "I believe that now and in the future, financial buyers — that is, private equity groups — will outpace all of them as far as price paid," Mr. Rush says.
He says the reason for this higher price can be linked to a few factors. According to Mr. Rush, private equity groups are typically paid on a "two-and-twenty" basis, in which they receive 2 percent of their payment on the amount earned under management and 20 percent of the gain in the value of the fund. Funds are typically set up with a 10-year fund life and six-year investment duration, but if the group does not deploy the money, they are forced to repay the 2 percent management fee.
In many cases, that money has already been spent by the time the group is asked to repay the funds, so groups will be looking for new investment opportunities, Mr. Rush says. "If you get the private equity group into a bidding or auction process, sometimes they'll think, 'If I give half a point more, I'll get the deal versus staying at the bid I'm at right now and not getting the deal,'" he says. "If they have no other deals on the table, they'll give another half point to get that one." This may give the group more motivation than a hospital that seeks to acquire the ASC for strategic purposes.
2. Private equity groups may not understand out-of-network pricing. Surgery centers can also benefit from investment by private equity groups if the groups lack experience in the ASC industry, Mr. Rush says. "They're financial buyers, and they don't have as much industry experience," he says. "They may not understand in-network and out-of-network issues in the way that strategic buyers do."
He says private equity groups may look at a surgery center with a significant amount of out-of-network revenue and value the center based on its out-of-network, rather than adjusting the price as an ASC management company would. "Those sellers can make a significant amount of money when that transaction happens," he says.
3. As the ASC market gets more press, private equity deals will increase in popularity. Mr. Rush says he predicts private equity deals will increase in popularity as the surgery center market gains more attention. "The ASC market is maturing, and there are more people hearing and knowing about it," he says. "Private equity groups are on the prowl to find more areas to deploy that capital they have."
He says that private equity groups have previously purchased or backed management companies, but they may be looking to expand their reach in the ASC industry by pursuing surgery center clusters or even standalone surgery centers. "I think there are more funds out there and more people looking to invest," he says.
4. Surgery center chains will see more action than standalone facilities. Mr. Rush predicts that private equity groups will mostly be looking to invest in clusters of surgery centers or smaller management companies that own 3-4 centers. "Those owners that have multiple centers are in a better position to be involved in a private equity group transaction," he says. However, once the larger clusters of chains have been exhausted, private equity groups may start looking at deals from $1 million to $1.5 million EBITDA. "They may want to buy one surgery center and create a platform and then add to it," he says. "In other words, they'll buy a one- or two-center package and then look to buy a center here or there to add to that package."
5. Strong management teams will be essential. Since private equity groups have financial expertise — but not necessarily ASC management expertise — they will be looking for surgery centers with strong management teams, Mr. Rush says. "They will want surgery centers that have a management team in place that they can turn to and leverage and expand," he says.
In some cases, the private equity group may prop up an executive with ambulatory healthcare experience and use them for insight as they buy platforms. In cases where the surgery center does not have a strong management team, the group may look to buy a larger management company for the use of its management team.
6. Turnaround centers will not be of interest to private equity groups. Mr. Rush says while stand-alone surgery centers may be able to attract private equity groups, turnaround centers will most likely not be of interest to investors. "These guys want a well-run, well-oiled machine," he says. "They don't want to buy into a situation where they need to roll up their sleeves and fix it, because that's not what they do." Under-performing ASCs will be more attractive to ASC management companies, which have the expertise to enter the ASC and make changes to increase profitability, outcomes and physician satisfaction.
Learn more about Ambulatory Alliances.
Related Articles on ASC Transactions and Valuation:
New Virginia Surgery Center Planned by Community Memorial HealthCenter
Surgical Management Professionals Purchases Interest in Ohio Surgery Center
Committee Formed to Examine North Carolina's CON Laws