Provident Healthcare Partners analyst Abe M'Bodj shared insights into the gastroenterology private equity market with Becker's ASC Review. Here, Mr. Bodj analyzes the current state of the market and offers insight into what GI practices should look for in a PE partner.
Note: Responses were edited for style and clarity.
Question: The first PE deal in the GI space took place two years ago. How do you explain the lag between the first deal and these most recent deals?
Abe M'Bodj: This is similar to other sectors of physician services where there has been significant private equity investment and consolidation. Specialties such as dermatology and ophthalmology experienced a slow ramp in PE activity before investment and consolidation became commonplace. The first PE transaction within ophthalmology was completed in 2014, and the market did not begin to see further PE investment until the last quarter of 2016, when the second transaction was completed. Following that second transaction, there were 10 additional platforms created in 2017 and another eight in 2018 for a total of 20 today. The ophthalmology sector provides a good framework for thinking about how investment in these specialties tends to evolve. Physicians tend to be skeptical about PE initially, and many practices have been waiting to see how successful Miami-based Gastro Health will be in their partnership with Audax Group. Now Gastro Health will have competition on a national basis with both Addison-based Texas Digestive Disease Consultants and Atlanta Gastroenterology Associates, and it is our expectation that several other gastroenterology practices will announces capital partnerships during the course of 2019.
Q: Several analysts predict a series of deals will close in the first half of this year, how can these many separate deals exist? Will there be any market overlap?
AM: Again, the gastroenterology market watched as Gastro Health had success with Audax Group and now several groups are looking to re-create their strategy. You could certainly see market overlap in some of the larger markets where there are several large competing groups such as Florida or Texas. You will also see standalone platforms in markets where there is already a clear market leader in a given geography who will leverage a capital partner to expand their model of care to become truly statewide or super-regional. Provident also expects the existing PE-backed groups to move into new geographies via an acquisition of a sizeable group.
Q: The latest two GI PE deals involved the creation of practice management companies. How will those management companies compete against existing practice management companies?
AM: Each of these three organizations’ goal is to be the partner of choice for gastroenterology practices around the country. These GI practice management companies will certainly compete for acquisitions of sizeable groups, and the decision on which of these practice management companies to partner with will be based on economics, cultural fit, the management structure and other factors. However, with PE activity currently confined to only three states, there is plenty of opportunity for each of these organizations to be successful in growing into multiregional providers without direct competition.
Q: Will the explosion of PE deals threaten the viability of independent practices?
AM: PE partnerships are really a way for physicians in outpatient care to continue preserving the independence of their practice while gaining access to the necessary resources to compete at scale in the modern healthcare environment. The reality of the market today is that reimbursement is ever-changing (usually for the worse), and hospitals as well as large insurance companies are taking more control over the referral patterns of patients through the creation of coordinated care networks. It is important GI practices have the necessary resources and capital to make the investments in order to be able to provide value while being included in these types of partnership arrangements or they run the risk of being marginalized entirely. That said, the sky is not falling within the practice of GI medicine. There are presently and will continue to be very successful independent practices out there in the market who do not partner with PE.
Q: What's the best case scenario for this influx of PE money? What's the worst-case scenario?
AM: Best case — Exactly what I described above is the end goal. The creation of GI practices that have the necessary scale to remain relevant in a healthcare market that is ever-changing and getting larger around them. These organizations will be best-positioned to withstand any changes in the market while allowing the physician shareholders to benefit from scale through equity appreciation.
Worst case —The partnerships don’t work for unforeseen reasons. There could be something that happens to the GI market that affects all practices such as drastic cuts to reimbursement or perhaps a change to the broader healthcare system (like a transition to a single payer).
However, these are challenges GI practices will face with or without a PE partner that could cause issues in the sector. We have very seldom had a physician transaction that we represented go poorly post-closing. The few situations where this has been the case, the sellers in the transaction were perhaps not as forthright about their motivations post-closing and incentives were not aligned with those of the PE firm.
Make no mistake, PE partnerships are about growth, and the physicians that participate in them often maintain significant ownership in the businesses going forward. However, the valuations are strong, and sometimes physicians that are less motivated post-closing can result in partnerships that do not work out for everyone involved; the best thing to do is honestly evaluate everything upfront to make a determination whether or not introducing a capital partner that will want to fuel growth in your practice makes sense on the front end.
Q: When a practice is seeking a partner, what sets different PE firms apart?
AM: When seeking a PE partner, it is important a practice understand the different types of firms out there. All PE firms bring capital to the table, that is the easy part. However, it is important to understand their approach towards working with portfolio companies; some provide a great deal of autonomy to the companies they invest in, others take a more hands-on approach.
It is important to understand what kinds of strategic relationships they have that can be brought to your organization to facilitate the growth of the business, in addition to the financial success and returns these firms have had on prior portfolio companies in healthcare. Overall it is important a practice find a PE partner that shares its vision for the growth in the organization whether that is to become a regional or national player within the GI market.