PE will return. The question is, 'When?' — Edgemont's Luke Mitchell explores post-COVID-19 market

Before COVID-19, physician practices were closing deals with private equity firms at all-time high valuations. The virus and global shutdown derailed the PE market in the short term. Firms and sellers will need to accept significant changes to get deals back on track.

The form these deals could take will be unconventional by nature, but the amount of capital the firms are sitting on will lead firms to get deals done, albeit on an adjusted timeline, said Edgemont partner and managing director Luke Mitchell.

"Deal activity is going to slow down meaningfully," Mr. Mitchell said. "Seller valuation expectations do not just adjust overnight, and somebody who thought they were sitting on a $100 million business three months ago isn't going to sell their business for half of that."

Mr. Mitchell expects firms to be flexible when it comes to approaching new deals. He expects some specialty practices may be more open to accepting unconventional deal structures with terms that'll make up for lost valuation, but that the majority will be unwilling, at first, to adjust their expectations of the market.

"[Office-based specialties] are only sellers in certain circumstances," Mr. Mitchell said. "They always have the option of continuing to run their business, and … can also practice really late in life. They are not going to hand those businesses over at a five-times valuation."

Mr. Mitchell expects many clinician groups will wait out the re-opening period and build their valuation back up over the coming months.

For deals that do close, the structure will look to minimize the damage done to valuations over the last two months. Some deals may even alter the ownership structure to give the clinician groups a bigger slice of the minority ownership pie and keep them involved in the practice longer. Clinician owners who take these deals "bet on themselves," in efforts to increase their valuation and sell more ownership percentages in the future. Buyers looking for an advantage in competitive specialties will be aggressive by looking past or “stepping over” the short term volume losses from the pandemic, knowing most businesses will return to normal volumes.

The gastroenterology market
While the last two months have been devastating to gastroenterology practices, colonoscopy demand and procedure volume will remain similar and return to pre-COVID-19 levels because of the nature of the procedures. "The number of people getting colonoscopies isn't going to change year over year," Mr. Mitchell said.

Investment into the GI space continued in 2020 before grinding to a halt at the emergence of COVID-19. Miami-based Gastro Health made a pair of acquisitions in Florida and another out-of-state acquisition in Virginia to kick off the year; Dallas-based GI Alliance expanded its presence in its home market of Texas; and Webster Equity Partners established a new platform by partnering with Memphis, Tenn.-based Gastro One. Then the deals stopped.

While established platforms in the space have funds to spend, and a greater pool of clinicians are interested in exploring what a deal would look like, several firms believe deal activity is going to take time to recover.

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