The deal days of summer — Edgemont's Luke Mitchell on the past, present & future of GI PE investment

At the halfway point of the year, private equity investment is still making inroads into gastroenterology. But summer is heating up and with it could come a swell of investment, if momentum continues as planned.

Here, Luke Mitchell, of investment bank Edgemont Partners, opines on the latest GI PE deals, what's in store for investment in the specialty and how the market got to this point.

Note: Responses were edited for style and clarity. 

Question: What is the current state of the GI PE market?

Luke Mitchell: The market for GI practices is strong. The appetite from investors for high-quality gastroenterology practices of scale continues to be very strong.

There are a lot of sizable groups out there that are evaluating their options, [and while] not all of them check all the boxes an investors requires, I think a lot of them will transact and you'll start to see the pace for add-on acquisitions for the existing platforms increase dramatically throughout 2019-20.

Q: How many more deals can we expect in 2019?

LM: I'd say there could be four to five deals to close out this year. There are also a couple big processes that are kicking off just now. I think those will most likely be 2020 transactions.

Q: Why was there such a delay between deals after Audax invested in [Miami-based] Gastro Health in 2016?

LM: It's a couple things. Audax was early in the game. When Audax makes a move in physician investment, a lot of other investors take notice. They were also early in a lot of the other physician practice investments, like dermatology.

There've been so many private equity groups that have had success in specialty physician plays. In dermatology, ophthalmology and dental and I think naturally, they look to other sectors where the same value-creation opportunities exist, and where their investment theses or playbook would work well. GI was a pretty natural extension.

Q: Across the nation it seems these PE groups are targeting their own standalone regions. Why is this?

LM: Investors find geographic density a compelling proposition. You get a lot better leverage out of your cost. As you gain regional density, it gives you more clout with payers, who tend to be regionally focused.

It also allows you — as you're acquiring smaller, less sophisticated practices — to get the benefit of all the ancillary services that the platform already offers, but which the add-ons do not. That's been the primary rationale and will continue to be one of the key things for all of these investments.

Q: Will there come a time when two PE groups look to invest in the same market?

LM: They'll start bumping into each other at some point. I know there are a couple other groups in Texas that are pursuing transactions, so you could theoretically have several Texas-based platforms. But there's still a tremendous amount of white space. Even having two or three platforms in the same state will not impede their ability to be successful.

For example, in dermatology there are five different PE-backed dermatology platforms in Florida. If you look at dental there are multiple states that have multiple PE-backed platforms. Each one of these platforms has a slightly different model, slightly different approach, slightly different market position. Just because they're in the same market doesn't mean they're competing head-to-head. They're most likely serving different patient bases.

Q: Through this most recent deal, Amulet Capital Partners merged three practices in its investment. Are deal formats like this common?

LM: You will see it occasionally. A lot of physician practices really believe in the benefits of scale. A lot of them have a competitor who they're friendly with and respect. They've never been able to merge historically, and they need an outside party to come in and bring capital and get the integration done.

I also think a lot of the GI groups out there, even if they're a good size, are somewhat subscale in the view of private equity. So combining a few groups from the get-go allows the GI groups to better invest in post-close integration and infrastructure and to expand their senior management teams.

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