Private Equity Investment in Ophthalmology? Here to Stay?

If you’re well-into your career, you might remember the private equity investment boom and bust of the 1990s. But if you’re on the younger side, you won’t—so here’s some quick background:

Ophthalmology and private equity investment have a rocky history. In the 1990s, a new wave of practice consolidation coupled with a skyrocketing economy caused private equity investment in ophthalmology practices to surge. Unfortunately, a lot of the ventures failed. Why? Many of the purchases were all stock and no cash (in other words, high risk). Many were underfunded, and minority ownership led to a lack of effective operational control, says Gary Markowitz, MD, who spoke about private equity at AAO 2017. A late 1990s economic downturn, plus poor management decisions, led to poor returns for equity partners and physician partners. As a result, PE interest dried up.

Private Equity? Is It Here to Stay?

Market forces are once again moving private equity investment into ophthalmology practices, but today’s PE transactions are different from those taking place in the 90s. “There are many more companies, and they have much more financing behind them than back in the 90s, says attorney Mark Abruzzo, another AAO 2017 presenter.

Some experts feel private equity investment in ophthalmology is here to stay, while others take a different view. “I don’t like business and medicine and I never did,” says Abruzzo. He still favors the physician-owned, physician-led models where doctors consolidate on their own rather than allowing themselves to be acquired by a big business. But that approach takes a lot of capital that a lot of folks don’t have, so PE may be the answer. But PE partnerships can be very expensive and emotionally draining to unwind. They’re not for every physician or practice, and they require careful planning. Here, we’ll give you a glimpse into the opportunities and risks of private equity partnerships.

Let’s Make A Deal!

PE investors typically target medium and large—but not too large—practices that are dominant in their markets. But that doesn’t mean solo practitioners and small practices are left out of the loop. If you’re solo, don’t assume that PE investors aren’t interested, says attorney Caroline Patterson, who co-presented alongside Abruzzo. In certain cases, if the practice is attractive, it could serve as a platform practice, she adds. Robert Wiggins Jr., MD, another AAO 2017 presenter, gives this example of the phases of growth that an acquired solo practice might go through:

Phase 1: PE firm acquires solo practice as a partner for growth

Phase 2: Practice now has money to add subspecialties and new facility

Phase 3: Practice adds ASC and retinal merger

Phase 4: Practice adds satellite offices

Here’s what most PE investors are looking for in a practice:

• Practices with ancillary services
• Practices with surgery centers
• High growth potential
• Sustainable business model
• Strong local brand

Private Equity Flip? Or Flop?

As the 1990s private equity investment bubble illustrated, most private equity firms are looking for five to seven year investments—not long-term growth—so some of their business practices could be detrimental to a practice’s future. Today, many private equity investment firms are still “flippers,” but a new buy-and-hold model is emerging that could be attractive to multiple generations of physician owners in a practice, notes Abruzzo.

Flippers “are people who are looking to make a big profit. Not a little bit of profit. They want to double their money in 5 years,” says Abruzzo. This narrow focus can be a big concern when it comes to your philosophy of practice, strategic plan, and even patient care. And that’s not all: there’s a lot of uncertainty when it comes to flippers because you don’t know who the future owners are going to be, or even if there’s going to be someone to flip the practice to at all. “The problem I have with the flippers [is] what’s the market going to be in 5 years to buy?” asks Abruzzo. “I think there are too many flippers and it’s going to be a buyer’s market.”

Buy-and-Hold is Different

In contrast, buy-and-hold investors usually recognize that positive change and organic, sustainable growth take time. That goes a long way in avoiding operational conflicts and power struggles between the providers and corporate owners. Depending on the investor, the acquired practice could also benefit from alliances or collaboration with other businesses in the buy-and-hold investor’s portfolio. And in an uncertain time, a buy-and-hold investor could serve as a sort of “safe harbor” for market fluctuations. If reimbursement takes a dive, a strong financial partner—one that’s not just using your practice as a vehicle for profit—will allow time to adapt. “The holders, there’s something about them more settling for me,” Abruzzo says.