By Anastasia Gnezditskaia
Private equity investment in healthcare remains strong with healthy multiples. That said, PE firms are revealing a shifting interest in different specialties.
The most recent monthly data on healthcare private equity deals shows high interest in the dental segment, particularly orthodontics. About 18%, or nearly 1 in 5 private equity deals involved a dental practice last month.
Examples include AEGIS Dental Network acquired by BoradcastMed, which is sponsored by 424 Capital; Berro Orthodontics was bought by Bond Orthodontic Partners (sponsored by BPOC); Legler Orthodontics sold to Smile Doctors (backed by Thomas H. Lee Partners).
Other specialties such as digital health, as well as revenue cycle management and OB/GYN were also deal-heavy categories.
In light of these shifting interests, we asked private equity analysts and practitioners about what they see as “hot” specialties for private equity investment in the next six months. Among those mentioned were primary care, behavioral health and cardiology.
Behavioral health
“We believe behavioral health and primary care private equity deals will be very hot over the next 6-12 months. Many physicians and healthcare leaders are recognizing that well-structured private equity deals and strategic partnerships can create stability, provide resources for growth, and preserve autonomy for private practices,” said Hayes Woollen, co-founder and general partner at Confluence Healthcare Partners.
One factor behind the rising interest in behavioral health is demographics. The number of people suffering from behavioral health issues is on the rise. The pandemic unleashed high level of new mental health needs, with anxiety and depression rates in the US having increased from 11% in 2019 to 42% in December 2020, according to the U.S. Centers for Disease Control and Prevention. About 44 million people in the US (more than 1 in 10) are suffering from some form of mental health issue.
There is also a supply/demand imbalance in the behavioral health arena. “There is no provision of behavioral health services in some areas of the country,” said PitchBook healthcare research analyst Rebecca Springer. This applies to the treatment of obesity, autism, and other related health conditions. Even if these services are becoming more common in some areas of the country, “demand is still higher than supply in many others,” she said.
That said, in some specialty services such as autism, multiples were too high last year, so the sector is seeing some pullback, Springer noted. Overall, interest in behavioral health remains strong, but not as much as a year or two ago.
Private equity investors are interested in pursuing capital-efficient companies, such as autism providers or outpatient mental health companies.
Primary care
“We would imagine primary care and cardiology provider groups should be at or near the top. That is what we are seeing,” said Jonathan Bluth, managing director, healthcare & life sciences at Brown Gibbons Lang & Company.
Primary care is seeing some turnaround in terms of private equity interest. This area “was not attractive for private equity investment traditionally, because margins were low and it was hard to get good returns,” said Springer. Nevertheless, this area is gaining momentum because primary care physicians drive referrals for specialty care and as such they decide on 45% of US healthcare spending. They therefore have an outsized influence on other areas of healthcare. Those acquiring primary care physician practices aim to control the gateway to other specialists and influence decisions that affect patients’ later-stage treatment.
In addition, Medicare Advantage as reimbursed by CMS, “could be a high margin business if you know how to do it correctly,” said Springer. Additionally, the ascendance of value-based care with programs like Medicare is intended to make physicians accountable for some or all of the cost of their patients’ care. That puts primary care practices at center stage. Value-based care models aim to link doctors’ pay to patients’ health, rather than the number of treatments or tests they perform. In this model, primary care doctors become the focal point of patients’ treatment trajectory, which drives private equity interest.
As a result, the country’s once least-lucrative practice area is currently turning into a hot spot, and the numbers confirm it. US-based companies focused on primary care raised about $16 billion from investors in 2021, according to numbers quoted by Bloomberg. That marks an increase four times greater than the amount invested in 2020 and a dramatic rise from just $15 million reported in 2010.
Cardiology
This specialty as well as oncology, is also drawing the attention of private equity. The primary rationale behind this is that these are “high-spend areas,” Springer said.
In terms of cardiology, heart disease is an increasing problem, while treatment is expensive. There is also a working reimbursement model, and the demand for cardiovascular and cardiology services is forecast to increase in the future. This is driven by an aging population, higher obesity levels, the continued shift from the inpatient to the outpatient treatment models, as well as a transition from a fee-for-service model to value-based payment.
While cardiology has gone through several phases of hospital-led consolidation, private equity firms have stepped into this specialty fairly recently. In fact, the industry saw its first major private equity acquisition deal in 2019, when Comvest Partners and Athyrium Capital Management acquired Sunset Cardiology, through its multispecialty portfolio company, IMC Health Medical Centers.
Apart from these newly evolving “hot” sectors, there are segments that continue to be popular with private equity firms, particularly dentistry. This remains an active space, yet the focus of attention is no longer so much on standard dental practices, but on specialties such as orthodontics, Springer said.
