Several leaders joined Becker’s on an Oct. 16 panel at the 31st Annual Business and Operations of ASCs Meeting in Chicago to discuss how ASCs can evaluate private equity interest and how to distinguish a strong long-term partner from a risky one.
Alignment and experience: Where the green flags begin
The panelists agreed the first green flag is philosophical and operational alignment, a partner that understands healthcare and the ASC’s trajectory, not just the numbers.
“They understand the nature of your business and they understand what your growth potential is,” Fawn Esser, BSN, director of Franklin, Wis.-based The Surgery Center said. “Are they on the same page with what you want to accomplish?”
Vijay Bachani, president and chief growth officer at Roslyn Heights-based New York Bariatric Group cautioned that not all investors in the space bring true healthcare expertise.
“There’s a lot of private equity firms out there that have raised a ton of capital, and a lot of them do not have adequate health care experience,” he said. “Healthcare is a different animal.”
He encouraged leaders to go beyond pitch decks and speak directly with portfolio companies.
“I would highly encourage anyone that’s thinking about private equity to talk to their former portfolio companies,” he said. “One great data point is COVID. How did these private equity companies react? Were they a good supportive partner? Did they freak out?”
He noted that when one of his organization’s largest payers kicked them out of network, their investor “didn’t freak out” and instead used relationships “to actually get us back in network.”
Stephen Rosenbaum, CEO of Atlanta-based Alliance Spine and Pain Centers said an experienced healthcare banker is another crucial green flag.
“Your banker’s going to know what kind of reputation they have,” he said. “If you’re going into this without a banker, you need to stop and get a banker.”
When deal structure becomes a red flag
While valuation is central to any transaction, the panelists said the “how” behind the number often matters more than the multiple itself. “Multiple is just part of the equation,” Mr. Bachani said. “It’s [earnings before interest, taxes, depreciation and amortization] times multiple.”
Mr. Rosenbaum pointed to capital structure as one of the clearest signals of whether an investor is focused on sustainable growth or short-term financial engineering. “Some private equity investors believe that piling on more debt will somehow push management to perform better,” he said. “I would be very wary of that mindset.”
Dividend recapitalizations drew particular scrutiny. Mr. Bachani said leverage “under five or three to four” is generally reasonable, but “if they want to do five, six, seven, that’s kind of pushing it,” especially when volumes shift or payer issues arise.
His group negotiated a veto right on dividend recaps, which proved critical when their sponsor wanted to pursue one.
“For us, having that veto right was essential. A dividend recap couldn’t go forward unless we signed off,” he said.
Mr. Rosenbaum added it’s common for recaps to channel substantial proceeds back to private equity investors while physicians with rollover equity receive nothing — despite the company taking on additional debt in the process.
He also warned physicians to be prepared for a complex fee “waterfall” as deals approach closing. “There are a lot of hands stuck out,” he said, emphasizing the need for early transparency from the banker about what founders and physicians will actually receive.
Culture, autonomy and service line decisions
For administrators, cultural fit and clinical autonomy are often the first pressure points when evaluating an investor. Ms. Esser said she pays close attention to how potential partners approach service lines — specifically, whether they plan to invest in growth or prioritize cost-cutting.
“You can tell from the basic question of whether you’re infusing capital into growing services, or looking to scale back so revenue looks higher,” she said.
Her center’s experience during COVID highlighted why service line diversity matters. When orthopedic volumes dropped, another line allowed the ASC to continue operations.
When investor goals conflict with clinical or operational needs, Ms. Esser said well-defined escalation paths and governance protections become critical.
“You have to go through a chain of people before you find someone that understands the need or the process,” she said, noting the ability to involve a president or medical director is often essential.
Governance, alignment and the ‘second bite’
Panelists agreed strong physician alignment and clear governance structures heavily influence how private equity interacts with the clinical enterprise.
Mr. Rosenbaum described a model wherein physicians invest in individual ASC limited liability companies, while the private equity-backed MSO board includes himself, the founding physician, an independent physician and the PE firm. The board primarily interfaces with the executive team.
“We have our medical staff meeting next week, no private equity folks come to that,” he said. “They’re better off interacting with me and my CFO.”
Mr. Bachani said his organization took a more hands-on approach by creating a loan program that allowed all physicians to invest and by holding annual shareholder meetings to review performance and strategy. “They knew the most important assets they had were the physicians,” he said.
Ms. Esser, whose center partnered with a national ASC operator rather than private equity, said the underlying goal is similar. “[They] want to be involved on the physician and leadership side, but as long as you’re doing well, they’re hands off,” she said.
All three leaders agreed that once a PE sponsor is in place, control over future sales diminishes significantly. “The first bite, you’re making a choice. The second one, those red and green flags are a little bit out of your hands,” Ms. Esser said.
Mr. Rosenbaum noted that strategic buyers typically win the “second bite” because they can capture substantial synergies and cost efficiencies.
Transparency, regulation and the road ahead
Mr. Bachani said transparency early in negotiations is non-negotiable. “The lack of transparency would be the red flag,” he said.
He expects private equity activity in ASCs to continue growing, driven by reimbursement disparities between hospitals and outpatient settings and continued migration of procedures.
Ms. Esser said regulatory scrutiny remains uncertain. “Whether the government gets involved and starts to regulate or demand transparency — I wish I could say,” she said.
The bottom line
Despite concerns about leverage, recaps and future control, panelists agreed private equity can be a strong ASC partner if leaders rigorously assess alignment, structure and transparency.
“There needs to be a real alignment in terms of what the strategy is,” Mr. Bachani said. “And it’s got to be something that all parties believe.”
