Shore Capital, Riverside and LLR are investing in veterinarians, opthamologists and dentists


Matthew Gilson

The healthcare industry remains a very hot place for investment. The U.S. healthcare M&A market began 2018 with almost $39 billion worth of deals announced in January — the strongest start in over a decade, according to Morgan Stanley. Many of the healthcare companies garnering attention from strategic acquirers and private equity firms have a few things in common: they are in subsectors where there is room for consolidation; they take pressure off hospitals; and most aim to give patients more specialized treatment, which is believed to lower the cost of care and improve outcomes.

“As consumers, we are all used to having access to almost any product or service on our phone in minutes,” says Justin Ishbia, founder of Shore Capital Partners (pictured with his 5-year-old yellow lab Sheffield). “As healthcare becomes more retail-focused, we believe that the winners in healthcare are those who adapt to the demands of consumers, and those who rely solely on traditional models will be left behind. The traditional models are no longer working, and there is room to deliver high-quality care at a lower cost and build better retail-like models that treat patients like valued customers, while also reducing costs by taking advantage of economies of scale. This is happening in a variety of niches within healthcare.” 

Here are six sub-sectors that are garnering interest from both private equity firms and strategic acquirers:

1. Dental
Private equity firms are in hot pursuit of dental practices. The dental market is highly fragmented, with only 16 percent of dental practices rolled up, according to Harris Williams & Co. To take advantage of economies of scale, private equity firms are actively buying up practices all over the U.S.

For example, in 2015, Chicago-based lower middle-market private equity firm Sheridan Capital Partners made an initial investment in Smile Doctors, a Texas-based provider of orthodontic services. Since that investment, Smile Doctors has made 20 add-on acquisitions, including more than 10 in 2017. Smile Doctors grew from 12 clinics in Texas and Georgia to more than 90 clinics across 11 states and had projected earnings of $35 million in 2017. It is now the largest orthodontic dental organization in the U.S. In 2017, through a recapitalization, Linden Capital joined as lead investor, while Sheridan and management rolled over equity.

Delivering high-quality clinical care and operating a small business successfully is challenging for doctors, which is why companies that are built like Smile Doctors are becoming more common, says Fritz Buerger, lead William Blair banker on the Smile Doctors transaction. “Doctors typically have no formal business training. Joining a larger corporate entity enables healthcare professionals to focus on caring for patients while offloading many of the administrative elements of running a small practice. It’s more productive for everyone,” says Buerger.

Smile Doctors and other consolidators hire significant corporate staff, such as human resources, information technology, marketing and finance professionals who can assist with back-office tasks such as recruiting, patient scheduling and billing. “The result is that organizations with more corporate support can deliver a more patient-friendly experience,” Buerger says. “Clinic staff isn’t distracted by administrative tasks and instead can focus all their efforts on the patient. And that’s important because individuals today expect to be treated like customers. People are very attentive to poor service, like long wait times or unfriendly receptionists.”

Dental practices are also of particular interest because the industry has experienced consistent, stable growth. The industry isn’t affected much by economic up and down cycles because people view oral care as important, regardless of what the economy is doing. “Dental is also appealing because the market is fragmented with a lot of small practice owners seeking to sell – and private equity groups can provide liquidity to these individuals while helping them optimize their practice,” says Buerger. “This change is going on in many other sectors such as eye care, dermatology and animal health.”

2. Home care
The hospital setting is the most expensive place for patients to receive care, and sometimes it’s not the best place to receive care. With the growing public acceptance of the cost and health benefits of home healthcare, private equity firms and strategic acquirers see home healthcare as a growing line of business–so much so that even insurance companies are buying home health companies. While they will generate extra revenue from the deal, the real appeal is controlling their patient network by keeping them out of the hospital. At the end of 2017, insurance giant Humana (NYSE: HUM) acquired a 40 percent stake in Kindred at Home, the largest home healthcare provider in the nation. The acquisition will allow Humana to better manage its Medicare Advantage population, preventing unnecessary hospitalizations.

Additionally, according to Zion Market Research, the home healthcare market is expected to grow to $391.4 billion globally by 2021.

“Facility-based care is expensive,” says John McKernan, a principal with the Riverside Co. “And it can be hard for elderly and low-income people to get around, and it can lead to them neglecting their care and then their issues become more acute and more expensive to treat. We are actively looking to buy companies that keep people out of the hospital setting.”

Riverside bought ComForCare Health Care Holdings in 2017. The home care company is a franchisor of ComeForCare Home Care and At Your Side Home Care. With 196 locations in 34 states and three Canadian provinces, ComForCare franchisees provide non-medical and private-duty nursing services to elderly, physically handicapped and injured people in their homes. Riverside expects to invest in sales and marketing while pursuing strategic add-on acquisitions to consolidate the marketplace.

“There’s a need for a wide distributed care network as baby boomers start to age and fewer children live near their parents. Most seniors want to live the best possible life they can at home as independently as possible,” says Stephen Rice, a principal with Riverside.

As a complimentary business, in February, Riverside acquired CarePatrol as an add-on acquisition to its ComForCare platform. CarePatrol franchisees provide senior living advisory and placement services to seniors and their families.

“When the time is right CarePatrol can work with ComForCare patients to help plan their next steps,” says Rice.

3. Pet care
It may seem somewhat of a stretch to include pet care as a subsector of healthcare, but maybe not so much when you consider that people are increasingly demanding the same level of care for their pets as for themselves. And many of the same trends prevalent in medical practices for humans are present in the practices for pets. The sector is benefiting from consistent growth, as pet owners have more disposable income and spend more than ever before on their pets. Additionally, more people than ever before are pet owners today. Approximately 68 percent of U.S. households own a pet; that’s up from just 33 percent in 2000, according to IBIS World Report.

Add to those tailwinds that there is no reimbursement risk, and it’s a highly fragmented industry and it’s no wonder private equity firms are clamoring to get into the space.

According to Harris Williams, only 9 percent of the veterinary market is consolidated. That’s compared to 33 percent in optical, which is still considered ripe with consolidation opportunities. There is an aging population of veterinarians who want to sell out of their practices and an increasing number of new veterinarians with high student debt and an increased desire to work as veterinarians, but not necessarily do the administrative work of owning a practice.

“It’s one of the best healthcare sectors, especially in the middle market. New vets are buying businesses at the rate they used to, and at the same time you have millennials spending more on their pets,” says Ishbia. “Pets are also benefiting from advances in human medicine. Vets have learned from human advances how to keep pets alive longer with medications and procedures, which is driving longer animal life and more spend in the industry.”

The veterinary services market is a $39 billion market when you consider everything from boarding and grooming to hospital visits, according to Shore Capital.

To take advantage of the opportunity in the market, Shore Capital partner Mike Cooper led the purchases of dozens of vet practices to form Southern Veterinary Partners and Midwest Veterinary Partners. Southern Veterinary now has 47 locations, while Midwest Veterinary has 29 locations. “Southern Veterinary started out as three locations in Alabama and we acquired 41 locations. Each location has about $1.5 million to 2.5 million in revenue per year. As a consolidated group, we can buy supplies at a better cost, offer more consumer-focused care with later hours and manage the offices more efficiently letting the doctors focus on their patients’ needs,” says Ishbia.

Shore Capital plans to keep buying practices through its two platforms.

Shore isn’t the only one interested in the pet care space. In December, KKR & Co. (NYSE: KKR) acquired PetVet Care Centers from Ontario Teachers’ Pension Plan, L Catterton. PetVet is an acquirer and operator of general practice and specialty veterinary hospitals for companion animals. Perhaps as a testament to strength of the pet care industry, when Ares Management (NYSE: ARES) sold Nation Veterinary Associates (NVA) to Omers Private Equity recently, it only sold a minority stake in the business. NVA is the largest independent owner-operator of veterinary hospitals, pet boarding and daycare centers in the United States, Australia, Canada and New Zealand.

4. Pharmaceuticals
Coatings is becoming an increasingly interesting place for investors. In March, TA Associates completed the purchase of Ideal Cures Private Ltd., a supplier of ready-to-use coating products for tablets and capsules. Founded in 1999 in India, Ideal Cures’ products are used to provide aesthetic coatings for swallowability and taste masking. They also aid in brand recognition, authentication and differentiation.

The coating industry is fairly large, about $800 million to $1 billion in size, and TA Associates believes that the trend is to outsource the production of ready-to-use, fully-formulated coatings, which is driven by companies seeking innovative solutions that reduce processing time and a company’s carbon footprint.

“As the need for healthcare grows globally so does the need in the pharma industry. The addressable market is growing,” says Dhiraj Poddar, a director with TA Associates. “A lot of coating was done in-house in the past, but the market is shifting toward the outsourcing model because it’s more efficient.”

TA expects to expand the geography of the business. It’s a significant player in India now, but will look to expand globally through acquisitions.

Coating companies continue to attract buyer interest. Axalta Coating Systems Ltd. (NYSE: AXTA) purchased Netherlands distributor Geeraets Autolak; Audax Private Equity-backed Innovative Chemical Products (ICP) bought adhesives maker Fomo Products Inc.; and PPG (NYSE: PPG) acquired MetoKote Corp.

Poddar says most of the players in the market are strategic acquirers because the industry is so niche. “I don’t see too many private equity players in the space that aren’t backing a strategic acquirer because it’s such a niche industry. Still, I think you will continue to see more consolidation in the market. We hope to gain market share over time through acquisitions,” says Poddar.

5. RCM
At its most basic, revenue cycle management (RCM) is the billing, reimbursement and collection function of a healthcare system. Historically, healthcare organizations such as hospitals handled this function in house. However, as both the need to comply with government regulations and the complexity of RCM increase, more healthcare organizations are choosing to work with outside vendors. According to a report by Research and Markets, the RCM outsourcing market in the U.S. was expected to grow by 15 percent from 2016 through 2021.

The better the RCM the better the margins. Top-shelf revenue cycle management will increase cash flow, reduce the cost of collecting payments and allow for fewer denials. Hoping to catch the tailwinds in the RCM market, private equity firms have been very active in the subsector. Healthcare IT and RCM deal volume reached 164 completed transactions in 2017, up from 130 the year prior, according to Greenberg Advisors, a RCM and health IT-focused investment bank.

Riverside Partners, a Boston-based lower middle-market private equity firm that focuses on technology and healthcare deals, has invested in two RCM businesses in the past two years. They are both providers of specialized, technology-enabled RCM solutions for claims. “There is a significant opportunity for hospitals to enhance the revenue cycle function by outsourcing to specialized revenue cycle providers, especially in the area of complex claims,” says Max Osofsky, a general partner with Riverside Partners. “Every dollar of margin is important to hospitals, and accessing specialized technology and teams to address complex claims is one way hospitals can enhance reimbursement and add to their bottom line. We are building specialized revenue cycle platform that we believe will be attractive to a number of buyers in the future, including other private equity-backed strategic acquirers.”

Riverside invested in Bottom Line Systems in 2016 as well as in Medical Reimbursements of America last year. Riverside Partners is one of many pursuing a roll-up strategy in the RCM space. In 2015, TowerBrook Capital Partners launched an effort into the space and has built R1 RCM through various purchases. Additionally, strategic acquirers are interested in the space. Cognizant (Nasdaq: CTSH) announced on April 19 the completion of its purchase of Bolder Healthcare Solutions, a privately-held provider of RCM software for hospitals and physician practices.

6. Vision
Consolidation among eye care professionals continues to be a strong play for private equity firms. Despite years of consolidation it’s still a highly fragmented industry with only 33 percent of optical companies consolidated, according to Harris Williams. There are 23,000 independent optometrists and 18,000 ophthalmologists in private practice today.

“Vision, and particularly ophthalmology, has historically been an medical specialty in which there were not large regional or national platforms. Rather, the market has and continues to be served predominantly by local providers and as a result there is a high degree of fragmentation. Private equity has started to invest in the sector to create larger companies with density in a geographic market that can benefit from administrative and other economies of scale, similar to what we have seen in many other healthcare sectors,” says Andy Dixon, a managing director with Harris Williams.

In some markets, optometrists and ophthalmologists have joined together in the same clinical practice enabling them to be a single source of comprehensive eye care for consumers and increasing referral capture for medical services, such as surgery for cataracts, which are often detected in routine eye exams.

In addition, as ophthalmology groups scale within a geographic market, many have opened their own dedicated surgery centers which can be more cost-effective and generate better clinical outcomes than third-party-owned multi-purpose facilities.

In March, LLR Partners formed Eye Health America, a practice management company established to buy eye care practices located in the Southeastern U.S. As part of the initial formation, Eye Health America announced the acquisition of the Eye Associates, Clemson Eye and Piedmont Surgery Center, providers of advanced eye care and ambulatory surgery services. LLR earned Mergers & Acquisitions’ M&A Mid-Market Award for 2017 Private Equity Firm of the Year.

“Ophthalmology is a highly fragmented industry with no real national player. It’s ready for consolidation. As part of a larger entity, eye care groups can leverage a shared infrastructure, while gaining access to additional service offerings,” says Kevin Becker, a vice president with LLR. “This strategy allows the doctors to be focused on providing high quality patient care.”

LLR has been working on its eye care thesis for about two years and partnered with an ophthalmology practice CEO to identify leading eye care platforms. Part of the strategy is to consolidate doctors and acquire surgery centers that only focus on eye care.

“Having access to a captive surgery center is key. Without a surgery center, doctors are forced to compete for time blocks in shared multi-specialty centers or hospitals, oftentimes commuting back and forth to different locations, which can be inconvenient for both the doctor and the patient,” says Becker, adding that LLR has a significant pipeline of acquisition opportunities and expects to grow its platform both organically and through add-ons over the next five years.


Danielle Fugazy

Danielle Fugazy

Danielle Fugazy serves as Contributing Editor of Mergers & Acquisitions.