The PE time bomb — Provident's Abe M'Bodj on where investment in GI is headed in 2019

While three private equity firms have invested in gastroenterology to date, several analysts believe more deals are on the way in 2019. 

Here, Provident Healthcare Partners Senior Analyst Abe M'Bodj analyzed the current state of the market and offered insights into what the rest of the year could look like as well as how all PE firms can coexist.

Note: Responses were edited for style and clarity.

Question: Several analysts believed the beginning of 2019 would further ramp up PE investment in GI firms. Why haven't there been any deals closing in 2019?

Abe M'Bodj: While the activity did ramp up at the end of 2018, the [Southlake-based] Texas Digestive Disease Consultants and Atlanta Gastroenterology Associates deals were transaction processes that were ongoing for a fairly significant amount of time.

As you might imagine, these transactions are complex and on average take about nine months to a year or more to complete. The vast majority of GI practices that are currently exploring the market had their interest sparked by the TDDC and AGA transactions. With those transactions just complete, we expect to see a much larger pickup in activity during the latter half of 2019 and in the beginning half of 2020.

There are many GI groups that now would like to create their own PE platforms. This has also changed the competitive dynamics of the market, whereas historically [Miami-based] Gastro Health had been the only partnership option.

Provident is currently aware of at least 12 ongoing transactions in the GI market of varying size. Not all of those transactions will ultimately get completed, but several will, and as they do, the market will continue to see increasingly more activity.

Q: What's a trend you expect to see more of this coming quarter?

AM: At the beginning of the second quarter of 2019, Birmingham, Ala.-based Southeast Gastro announced its partnership with Gastro Health. Provident served as exclusive financial adviser to Southeast Gastro.

This was Gastro Health's first out-of-state acquisition, making it the first GI PE platform to complete a sizeable partnership in a new market post-PE investment. Southeast Gastro will be leveraging the resources of Gastro Health to continue growing throughout the state of Alabama as the group becomes a regional platform for expansion.

During the second and third quarter, we expect to see some of the other platforms that exist, in addition to Gastro Health, potentially complete other large out-of-state acquisitions that will serve as regional platforms for growth.

Q: Looking back at the last two to three years, is there anything there that you believe emerged and will be a big trend moving forward?

AM: As GI groups have continued to seek new avenues for growth, a big trend has been to add ancillary service lines and enter into strategic partnership relationships within their endoscopy centers.

With respect to ancillaries, most GI groups have expanded their offerings to include anesthesia, pathology, imaging, pharmacy and infusion services. Adding various ancillaries allows a GI practice to handle a broader spectrum of care and provide more coordinated and convenient care for patients.

For groups that have begun to evaluate PE partnerships, these ancillaries have been an attractive aspect of their respective practices. As GI groups continue to look for additional ways to grow, adding additional ancillary service lines will continue to be a successful strategy to increase profitability and provide better-quality care for patients.

Within GI endoscopy centers, it has also become common for practices to introduce a health system joint-venture partner. Historically, GI groups have partnered with ASC management companies such as [Nashville, Tenn.-based] AmSurg in their centers, but the recent trend of partnering with a health system has become an attractive alternative.

Through these relationships, GI practices can gain access to powerful referral networks and additional contracting leverage with payers. As groups continue to realize the benefits of a strategic joint-venture partner in their endoscopy centers, they will continue to leverage this model to benefit their endoscopy centers.

Q: How do you see the different PE partnerships coexisting? Of the existing deals, they tend to all have their own regional markets. Do you ever anticipate a time where a group would try to establish a presence in a competitor's market?

AM: As a result of the different PE-backed organizations within GI, the mergers and acquisitions market has become extremely competitive, which has enabled us to drive attractive valuations and create more favorable transaction structures on behalf of our GI clients.

For groups that have the capability to become a PE platform themselves, they also benefit from fierce competition among PE firms who are having to now compete with the established GI platforms — Gastro Health, The GI Alliance and United Digestive. While the current platforms do presently have their own markets, within these markets there are several large ongoing transactions. It is very likely that in the near future, some of these groups will be competing directly with each other within their respective states, or with an entirely new PE platform.

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