Healthcare Deals Abound in Lower Middle Market

Private equity’s love affair with healthcare is alive and well. “The healthcare market has been as robust over the last year as it has ever been and there’s lot of interesting deals in the space,” says Justin Ishbia, a founding partner with Shore Capital, a healthcare private equity firm.  

The healthcare industry saw an unprecedented number of deals in 2017 and is on target to do even better in 2018. Healthcare M&A activity rose  27% to $332 billion in 2017, according to Bain & Company, and it continues to be a compelling area of investment for private equity firms.

The industry dynamics are hard to argue. Healthcare is a $3.3 trillion market, which is extremely appealing. The U.S. has a growing aging population in need of care, and many verticals within healthcare are still highly fragmented. To that end, private equity investors are looking for ways to consolidate the market and provide more affordable care with better user experiences and outcomes — all while turning a profit for their limited partners.

“The market has been as robust over the last year as it has ever been and there’s lot of interesting deals in the healthcare market,” says Justin Ishbia, a founding partner with Shore Capital, a healthcare private equity firm.  

However, given the dynamics, it can be difficult for private equity firms to win deals. Competition is strong and strategic acquirers remain extremely active. Look no further than the slew of deals that are announced in the space almost daily. Brand-name firms like Johnson & Johnson and CVS Health are always in the mix. It’s hard to forget CVS’ $69 billion deal to acquire Aetna at the very end of 2017.

Difficult to win deals yes, but not impossible. In the lower middle market in particular, private equity firms are managing to stay pretty busy. One area they are finding particularly interesting is in the consumerism of medicine. “People want to book appointments online, get text messages, and see doctors when they are off, not in the middle of the day when it works for doctors,” says Ishbia. “The idea of consumer healthcare is more prevalent and you will continue to see a consolidation in the industry of practices that are making changes to put patients first.”

Verticals that are viewed as ripe for consolidation include dermatology, dental, physician practice management offices, and ophthalmology. Consolidation among gastroenterology, urologists, and allergists is also on the rise. “It’s a very competitive market out there and I don’t see that changing anytime soon. There are only so many businesses and we want to partner with best-in-class. If you consolidate correctly, larger firms will pay a premium for large scale practice management groups,” says Ishbia.

Jay Reynolds, a principal with The Riverside Company, says, “What it has come down to is that sole practitioner providers don’t have the ability to run their practices as efficiently as larger groups. Today’s doctors don’t want to spend their time working on billing and scheduling. They want to offload it to a management services organization. Additionally, newly minted dentists and physicians graduate with significant debt today and don’t have the ability to buy a practice, and therefore seek employment in group practice settings. These reasons are why consolidation is so compelling today.”

In addition to the consolidation of practice management business, health tech continues to be a hot area. “It’s a self-fulling prophecy. The more dollars you have, the better technology you can afford and the more market share you can win. The providers with better technology gain more market share. There will be outsized winners here,” says Ishbia.

Consumers want technology to make healthcare delivery easier. “You are seeing more consumer engagement when there is technology being used. Technology like scheduling and telehealth apps are in high demand,” says Reynolds.