Private Equity’s Medical Practice Consolidation Curve. Where Different Specialties Lie.

By Eric YetterPublished On: May 25, 2021

The Consolidation Curve

We think about private equity-backed consolidations as part of a lifecycle. Like most business cycles, it starts out with pioneering that accelerates through further adoption. A period of high activity persists until supply is diminished or interest changes. Finally, a maintenance period follows at a lower, more predictable activity level.

Where Specialties Lie

Most industries have experienced consolidation at different times. Within healthcare services, ambulatory surgery centers and hospitals have been consolidating for decades. Their consolidation is in a more stable maintenance phase. In contrast, urology practices are in the early part of this consolidation lifecycle. A small number of pioneering practices have joined financial sponsors and made their early acquisitions.

Deal Volume and Size Implications

Generally, most transactions are completed as specialties move through the Geographic Expansion and Network Building phases of the curve. Dermatology and Ophthalmology have been in those phases the last several years.

Number of Deals by Specialty

Geographic Expansion

Consolidation speed and timing can and will vary by geography. This is driven by the traditional supply and demand characteristics of a given market. Of course, consolidation can only occur if there are interested buyers. Private equity firms use many factors to determine their most desirable markets and the speed of their growth and expansion. As markets are chosen, buyers first look for large “platform” practices they can build around with smaller “add-on” practices. Some markets develop earlier in the consolidation curve and some later, as shown on the ophthalmology map below depicting yearly growth and opportunity markets.

Network Building

Dermatology and ophthalmology are each in the Network Building phase – characterized by many deals with a decreasing average deal size. That is because most large platform practices have chosen their financial partners and are now pursuing small and medium add-on acquisitions.

As those deals continue, average deal size continues to decrease. For example, as ophthalmology transitioned from the “Geographic Expansion” phase to the “Network Building” phase, acquisition activity became more heavily weighted towards 1-4 physician “add-on” practices.

Private Equity Buyer Proliferation

The total number of private equity platforms (firms with an active investment in the specialty) also tracks with the consolidation lifecycle stage. The number of participating investors grows as the specialty moves through the consolidation curve. Ophthalmology and dermatology currently have the most platforms, though PE firms may be entering other specialties more regularly.

Number of Private Equity Firms Actively Investing

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Eric Yetter

FOCUS Managing Director and Healthcare Team Leader

Direct: 615-477-4741

Eric Yetter is an investment banker focused on healthcare. His practice includes healthcare provider services, home health and hospice, and behavioral health. Mr. Yetter has completed a variety of healthcare transactions, many with private equity firms and PE-backed companies. His past clients include leading physician groups, healthcare facilities, and institutional healthcare investors. Mr. Yetter founded Physicians First in 2016, recognizing the emerging need for investment banking and advisory services for owners of physician practices, surgery centers and clinical businesses. The next four years saw record levels of physician-owner M&A activity and Physicians First became one of the nation’s most active advisors for transactions between private equity firms and medical practices. In 2021, Mr. Yetter agreed to merge Physicians First with FOCUS and lead the firm’s healthcare team. Mr. Yetter also has healthcare operating and investing experience. He was an early executive at Covenant Physician Partners (previously Covenant Surgical Partners), an acquirer and operator of ambulatory surgery centers and physician practices. The company built and operated an outsourced laboratory, an anesthesia business, and a revenue cycle management company. Covenant has grown into a major player in healthcare services and is currently backed by private equity firm KKR. Prior to Covenant, Mr. Yetter held operating roles at Volkswagen Group of America and Brainlab, Inc., an image guided surgery company. While at Brainlab, Mr. Yetter worked with leading neurosurgeons and hospitals to implement cutting edge technology and improve patient outcomes. Mr. Yetter is a licensed attorney (currently inactive) and earned JD and BS degrees from Vanderbilt University, graduating with high honors. He is a FINRA licensed investment banker.