Article

As I See It

You may want to think twice about private equity

Every positive has a negative, and PE is no exception.

As I conclude my long run in this space, I can appreciate the latitude my editors extended to me; they have let me opine on a wide range of topics, many of which had no connection to this magazine’s theme: management. In return, I tried very hard to follow the golden rule of publication: Don’t tick off the advertisers. Happily, the bosses were like television censors of old, letting me sneak in contraband as long as it was accompanied by a wink.

But, I feel a compunction to repay my hosts with an article that actually deals with, dare I say it, management. Specifically, I want to talk about a trend that may already be detrending — the hula hoop not spinning, the mood ring gone dull. I believe, my friends, that the consolidation of practices by private equity has peaked and that henceforth consolidations — for I believe that to be inevitable — will come by a different pathway.

If the reader was not aware, Koch Eye Associates was the first practice to sell to private equity (PE). We shopped ourselves around and were acquired by an excellent PE firm. But when it was time for the so-called “event” these folks allowed us to help facilitate a sale to a private concern rather than another PE group.

Here’s the dirt on the deals. PE firms have a buy-and-sell strategy. They hope for a three-year deal, maybe five years. Seven years is a long-term commitment. They need to get earnings of up to 2.5 times during that time so they can sell and profit.

Because they have to show a steady uptick in earnings, short-term goals trump long-term growth and long-term plans gather mothballs. For example, we used to sponsor Little League teams and such. But, we had a manager who could not quantify how $450 spent in April generated revenue by August, so the sponsorships stopped. Really. Cross my heart.

The younger doctors in the practice got nothing out of the original deal, and they were stuck in a situation where long-term planning was discouraged. Requests for equipment and facilities that would enhance the practice over the long term stalled.

We are now private, part of a portfolio of businesses that the principle acquired but never sold. Each business is intended to be kept for the long term, as evidenced by a thrilling request that sent a chill up my leg: They asked that I help develop a 30-year plan for the practice, just as I had done when I was first starting out.

Quarterly returns are no longer the be-all and end-all. We are allowed, nay encouraged, to plan for the future.

The younger doctors can invest and have a long-term stake in the practice. There is a program in place that matches the growth of their investment with the growth of the practice, whether organic or through acquisition, and linked to the original multiple. They can prosper as the business grows over their many years of practice, just as I could.

Once this model achieves national penetration, it’s hard for me to see why any medical group would go the PE route and be subjected to short-term practice management instead of long-term stability; senior partner cash-out versus all doctors having skin in the game.

And, with that prognostication, I thank my loyal readers for sticking with me through the years, and I thank my editors for letting me use words like nay, opine and prognostication.

I shall now close the word processor, depower the monitor, slip out to my boat shop, sharpen the plane and get to work doing what I want to do in retirement. Nothing I don’t have to. Cheers! OM