As interest rates and the cost of financing are anticipated to drop, the second half of 2024 is expected to increase private equity (PE) deal volumes. This deal volume will grow slowly and cautiously for physician practice management (PPM) groups. While many PPMs slated for sales in the last year have struggled to find buyers, general partners have grown in interest and readiness to make strategic investments in PPM groups.
Although the market appears to be heading in the right direction, subtle yet significant changes create unique challenges for sponsors. Here, the Kirby Bates team will take a closer look at the key challenges — and will describe how having the right leadership in place can set sponsors up for successful exits.
Three Challenges For PE-Backed PPMs to Prepare For
While PPMs will face dozens of challenges as their valuation multiples compress, three are uniquely critical.
1. As Incentives Diminish, Physician Retention is Vital for PPM’s Value
The valuation multiples of physician practice management groups (PPMs) are slowly deflating. While this will likely lead to an increase in PPM deal volume over time, it also presents challenges for physician retention. This is largely due to the fact that the financial incentives healthcare PE investors have used to motivate and retain physicians in the past are losing their appeal.
“For example, investors have long offered physicians a “second bite” or a chance to hold equity in the business if it does well. However, with lower valuations and longer holding periods, these promises are becoming less attractive to physicians, if available at all,” observes Dan Cresco, Kirby Bates Associates Vice President of Executive Search.
This seriously diminishes a PPM’s ability to retain leading physicians and forces them to turn to new (and costly) hires. In turn, making these expensive hires can cause an investment’s EBITDA to rapidly degrade, making exits increasingly difficult.
Sponsors should be mindful of what acquisitions mean for physicians in PPMs. Crucially, sponsors should have a strategy to persuade physicians to stay when lucrative options for equity aren’t on the table. Leadership’s role in this is essential.
Leaders’ ability to communicate a clear and achievable outcome is paramount for getting seasoned physicians on board with the PPM’s new strategic direction. Therefore, sponsors should thoroughly review the practice’s leadership during their due diligence process and determine if they can improve outcomes and win over physicians.
2. For Successful PPM Exits, Begin With the End in Mind
Regarding PE deal volumes in the healthcare sector, PPMs are beginning to take a backseat to managed services, pharma, and healthcare IT. PPM deal volumes are expected to regain momentum, although the landscape has shifted over the last year. While the trends of more modest valuation multiples and longer holding periods don’t inherently make PPM deals less worthwhile, they do demand an even greater level of preparation and due diligence.
Sponsors need to have very clear plans for reaching their exit point. Once again, leadership is vital for getting there for two key reasons. First, the sector is not stagnant. Technological changes, regulatory hurdles, and medical advances will all demand that PPMs adapt.
Cresco remarks, “PPMs need leaders who can be flexible and adapt to those changes while still driving top-line growth. If a group’s EBITDA has a severe falloff from failing to keep up, the exit horizon will lengthen rapidly. However, leaders who know the nuances of the healthcare sector and private equity-backed PPMs will understand what strategic buyers seek. The right leadership can position PPMs for competitive exits, even when deal values aren’t as lucrative as they once were.”
Second, sponsors have a goal to exit. When they exit, who’s going to buy? What will their strategy be focused on? There’s no way to be certain. Again, leadership makes all the difference.
3. Leaders Need to Understand the Past and The Future
Healthcare delivery is entering a new paradigm. Technology, age, accessibility, regulation, and countless other factors drive this fundamental shift in how the healthcare sector operates. However, that change isn’t complete.
For the next 5-10 years, PPMs will employ physicians and providers with distinctly different backgrounds. Some physicians are used to pen-and-paper operations. Others have never known anything but Epic and are their organization’s strongest advocates for further automation and technology adoptions.
Physician teams with such disparate backgrounds are not always easy to manage. It can be challenging to gain their respect and to build mindshare with them. However, great leaders can accomplish those things. Leaders with experience with physicians across specialties and in different stages of their careers can understand what matters to their multigenerational team.
“As the industry shifts, leaders in PE-backed physician practices must understand when to preserve what needs to be preserved and embrace what deserves to be changed. Only then will they be able to leverage a team’s full capability to drive turnarounds and add value,” concludes Cresco.
Private-Equity Backed PPMs Need World-Class Leadership. Let’s Help You Find It.
PPMs are unlike any other private equity investment. Traditional PE leadership competencies won’t get PPMs to the point at which an exit is viable. Leaders in private-equity-backed PPMs need to live and breathe the healthcare economy. Only then can they drive sustainable changes that support their sponsor’s exit strategy.
Where do you find leaders who can do that? Not by posting a job and hoping for the best.
To find leaders who can drive rapid changes, adapt to the unparalleled complexity of the healthcare sector, and arrive at your exit horizon, turn to Kirby Bates Associates. Our healthcare executive search team’s exclusive focus on the healthcare industry enables us to find talent and vet their fitness for your PPM faster and more accurately than any other executive search firm.
To experience the difference that specialization makes, get in touch with our team today.