Eyes on Private Equity
Eyes on Private Equity
January 30, 2020
6 min read
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Private equity ‘will not go away,’ lessons from the non-physician

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While the debate is ongoing within many practices about what is the best route for growth in the individual practice, private equity remains an option. In the Open Your Eyes to Private Equity panels, consultants, investors and industry experts weighed in, giving perspective on their roles in this ever-changing area.

Shareef Mahdavi
President, SM2 Strategic

I’m not wildly for or opposed to private equity. It is happening and it’s not going away and provides a new option for the future of your practice.

Shareef Mahdavi
Shareef Mahdavi

The models will change and evolve because the buyers are rapidly getting smart about eyecare service delivery. I’ve been tracking this for 4 years and I’m already seeing a shift in the market from a sellers’ market to a buyers’ market as the PE firms get a better handle on what they’re buying.

First, I advise getting a professional banker to represent you. Even if you think you are a good negotiator, you are not when it comes to this type of transaction. The process is very intense and there is an emotional component to selling one’s practice that does not show up on the spreadsheet or in the bank account. You have to deal with it.

You have to ensure that this is right for you and even more than the money, it’s the culture. What is going to happen to the culture of your practice after the transition matters most. Maintaining alignment of interests between you and your capital partner is a close second. Say to yourself, ‘We are going to control what we can control in this process to keep making our practice better.’

If you make the right changes before pursuing private equity, you’re likely going to create greater value that will translate if and when you decide to sell. For every $50,000 you can bring to your profit line, that is worth $250,000 to $500,000 in transaction value. This is where the small dollars become big dollars when it comes time to sell.

Get good advice to explore options and decide your best course of action. PE is a good option for some practices and a poor one for others; for sure the PE model will not go away. It’s been around for decades and just new in ophthalmology. So far we’ve seen about 2% to 5% of ophthalmology practices consolidated; history says this will reach 20% to 30% max.

Jim Mazzo
Global president of ophthalmic devices, Carl Zeiss Meditec

Jim Mazzo
Jim Mazzo

This is my 40th year in the industry and what I enjoy most is the collaborative effort between industry, clinicians and ophthalmologists working together to develop new technologies. Maintaining these efforts through consolidations will be important in ensuring we are bringing the right technologies to you and your patients.

I don’t want that to ever be interrupted. The interaction between physicians and companies have created advancements in technologies that have changed eye care. At the end of the day, you help people see better and there’s nothing more rewarding than that.

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Candace S. Simerson, FASOA, COE, CMPE
Founder and president, iCandy Consulting LLC

Candace S. Simerson, FASOA, COE, CMPE
Candace S. Simerson

When we are asked ‘Why ophthalmology?’ for the next round of private equity investment, all of us in ophthalmology would say ‘Why not?’ It’s a great place to be.

In general, ophthalmology is a very fragmented market with small practices that serve as opportunity for PE to consolidate. Additionally, this area offers a lot of ancillary businesses. You’ll have surgery centers, optical, retail, cash pay, etc. These different varieties set ophthalmology apart from other medical practices.

There’s increasing demand with the aging population and new technologies.

Ophthalmology has great marketability. The general population doesn’t want to hear about most medical conditions, but we have LASIK, cataract surgery and cosmetic procedures that are a part of everyday life. These all give us great visibility.

There’s an opportunity to drive efficiencies while not being dependent on hospital systems, both of which are attractive to PE investors.

There are still a lot of options for practices, but it depends on what your goals are for your practice. What are you looking for? Do you want to grow? Stay status quo? Only you and your partners can truly answer those questions.

Doug Fisher
Executive in residence, InterWest Partners

Doug Fisher
Doug Fisher

There are always factors beyond the price when considering these moves. As a venture capitalist, that’s a lot of what we do. Oftentimes when companies take funding, they aren’t taking it at the highest price because there are so many other factors.

When you look at a PE offer, there are non-competes, how long do you have to work, how hard do you have to work. All of that is on the table and all of it is a trade-off. At the end of the day, it’s about finding the right partner. At the end of the day, if you disagree about where you are going, it won’t succeed.

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John B. Pinto
President, J. Pinto & Associates Inc.

John B. Pinto
John B. Pinto

Take refuge in the fact that everything you need to learn about private equity, and especially the private equity go/no-go decision, you learned in medical school.

In medical school, you learned how to collaborate with specialists and memorized that you shouldn’t diagnose until you have all the facts. If you’re stuck on the diagnosis, you refer the patient to someone who has more experience. And until the diagnosis is clear, you should not take irreversible action.

So as momentous as partnering with PE can be, you already know how to proceed. Gather the facts and let the facts make the PE decision for you. Will the payment you receive in a PE deal take you over your financial finish line? If not, is the transaction reversible (or can you leave and work elsewhere) should you find your post-transaction earnings insufficient to pay for your retirement? How will it feel having to collaborate with (or report to) a corporate owner?

You don’t have to go it alone. Talk to colleagues who have already partnered with the PE firm you are in discussions with. Hire advisers. If your practice is large engage an investment banker.

A final point: A lot has been said at this table about how your PE partner will impose on you a variety of practice improvements to cut costs and improve revenue and operations. These improvements are sometimes difficult for practice owners to impose on themselves, which is one way that PE firms add value – as a source of external discipline. But if you and your partners can voluntarily muster the same level of business discipline that would be imposed by a PE firm, the resulting boost in profits can be a lot higher over the years than a PE buy-out, and still leave you in control.

Chuck Hess
Vice president, Bausch + Lomb surgical

Chuck Hess
Chuck Hess

I asked Dr. Lindstrom recently what should be thinking about when we approach PE groups. He said, ‘Think of them as your biggest and most important customers.’ Right now, we focus on opportunities with IDNs, GPOs, hospital systems, so this fits nicely into our model of delivering value to a large customer.

These PE organizations are now buying other types of practices – optometric, optical, surgery centers – which aligns to our broad portfolio of Bausch + Lomb products. We are excited about how all of these things align with how we want to help doctors treat patients, which is with the best possible care and the best possible outcomes.

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Shayan Masoudpour
Vice president, Chicago Pacific Founders

Shayan Masoudpour
Shayan Masoudpour

What we are looking for from a private equity investment perspective is a mid-size practice or platform with strong clinical leadership who are like-minded. You want physicians who are all excited for the next chapter rather than those who want to sunset their careers.

We look for scale and a healthy mix of providers – a diverse group of ophthalmologists and optometrists. For the last few years, we have seen optometry play a bigger role in ophthalmology practices by providing leverage to ophthalmologists. We are looking for clinical leaders who have the foresight to lean into these and other industry trends to reach the next level of growth.

We also seek to confirm that the financials are in order and that the earnings and collections we would expect based upon the practice’s provider mix are there. Clinical due diligence is another focus area that helps ensure that we’re partnering with the right types of clinicians – physicians who prioritize excellent patient outcomes, utilize properly and who haven’t been excluded from any payers or panels.

Lastly, we look to include the younger ophthalmologists in the process. In all of our acquisition processes, we collaborate with the target’s senior ophthalmologists to jointly put our arms around the younger ophthalmologists. Ideally, we want the younger physicians to receive a piece of equity and become partners at closing, or alternatively, we prescriptively lay out the path to partnership for them at that time. PE firms are looking for that next generation of leadership. It’s critical to ensure they’re aligned, informed, and incentivized for the next round of growth.

James Momtazee
Former head of health care industry team, Kohlberg Kravis Roberts, Co.

James Momtazee
James Momtazee

We all know the basic math. Effectively, you create earnings by taking a pay cut and then those earnings get capitalized. And it works until it doesn’t work. Inevitably, at some point, it doesn’t work unless you find a way to make the fundamental enterprise more profitable. ...

To some extent, there’s been a realization that the arbitrage in this business is not viable long-term. Eventually, the second or third or fourth owner has to clean up the mess created by these short holds. Unless there is something fundamental that you bring to the table that makes the practice more profitable, it is a bit of a shell game.