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  • Private Equity Investment

    The ophthalmology practice I work at has sold out to a private equity group. The PE firm has purchased up several other ophthalmology groups and has increased revenue at each practice ~6-12%. The expectation on these shares is 8% growth annually. The long term vision for this PE group is essentially bundling together a large footprint of ophthalmology practices and selling the EBITA value at multiple times what they had purchased it for. The sale will probably happen in 3-5 yrs. And the assumption is that at the time of the sale, my shares will be worth considerably more as the new buyer will presumably pay a premium for this new entity.

    There was recently a capital call and the option to purchase additional shares.

    I have spoken with an attorney at the Health Care Group who wasn’t overly helpful in trying to assess the value of the shares, and partially because PE is new to Ophtho.

    And I understand that without numbers/P+L sheet it’s difficult to give advice, but has anyone been through a PE buyout before? How had your shares appreciated? Any additional thoughts on investing more money into this through the capital call?

    Thanks!

  • #2
    My opinion is that PE will expedite the downfall of medicine.  They only care about money.

    Comment


    • #3
      And just what we need, more non docs telling us how to practice.

      Comment


      • #4
        A great way to increase the value of the practice is to increase the productivity of the physicians and decrease their compensation.  This requires getting full control of the practice of course.  After that, diverting money away from working physicians and into the pockets of the private equity group is the main goal here.  It's great if you are nearing retirement and have some equity.  If you are young, prepare to see your share of the pie whittled away more and more over time.  As a doctor, you aren't going to out "wall street" Wall Street.  The sales pitch is always going to paint a picture of how it benefits the physicians, LOL...

        Comment


        • #5
          Anything for profit is about lining the pockets of the shareholders at the end of the line. Bottom line, everything is about efficiency and getting those most out of the system.

          At least nonprofits have a stated goal if patient care delivery as the primary driver over profits. At the same time those entities squeeze the worker too because of that said mission and lower efficiencies within a nonprofit itself.

          Op, there's no way to give an answer on how successful an investment would be of a management company. Even the best management company can fail on a new venture it has done successfully completed time over again. As an investor of the pe form, make sure you know well the players in the group as you're in the hook for all those capital calls or they will feast on buying you out low.

          Comment


          • #6
            @ Miss Bonnie MD

            you have been fairly negative recently This is the world we live in where firms (PE/Corporations/Jeff Bezos etc) will look at businesses and try to just own it for maximizing profits using leverage/higher capital/enterprise level resources. This in the background of a highly competitive world where everyone wants to be rich, or rather, rich want to keep getting richer.

            To OP - I have no personal investment experience, but without P&L/cashflow statements it is very difficult to value stake. I can tell you when that happens you need domain expertise. I have taken 'flyers' on some investments on ecommerce business because I knew where it will go rather than pure numbers (early stage businesses with limited books).

            Hope someone chimes in with more experience as I'd be interested to learn it.

            Comment


            • #7
              That 'vision' that the PE shop stated is the only one around (with a slight variation) between selling to another PE shop or an IPO.
              PE shops usually utilize a fair amount of leverage (i.e. debt) to juice the overall returns. Given they are doing a capital call (and appears surprisingly optional), my questions would be (in no particular order): a. use of capital (dividend out to owners, acquisitions, debt service, etc.) by general manager? b. Management fees (if general manager is getting say 3% of combined entity revenue understand the number and determine if they are providing that value)? Stay away from the call to pay bills/management fees, reduce leverage (last one, specifically b/c the PE will then re-leverage it)?  Paydays from a successful PE are few and far in number, relative to the number of 'dreams' sold.

              A good friend of mine is a finance guy at a business purchased by a PE shop (non-medical), but the punch line still applies. He joined the company in 2000, in 2004 a PE shop bought the large (100+ million in revenue) company with the intent to combine several similar businesses and to take the combined entity to an IPO. The PE team used a fair amount (4x) of leverage. My friend still works for the company 18 years later and there is zero hope of IPO now, so the PE firm is running company efficiently though partially due to the leverage, the overall business is slowly declining.

              Comment


              • #8




                A great way to increase the value of the practice is to increase the productivity of the physicians and decrease their compensation.  This requires getting full control of the practice of course.  After that, diverting money away from working physicians and into the pockets of the private equity group is the main goal here.  It’s great if you are nearing retirement and have some equity.  If you are young, prepare to see your share of the pie whittled away more and more over time.  As a doctor, you aren’t going to out “wall street” Wall Street.  The sales pitch is always going to paint a picture of how it benefits the physicians, LOL…
                Click to expand...


                Exactly. If you've ever been part of a practice thats trying to look good on the balance sheet its always the same. Deferred maintenance, downgrade staff (rn to lvn to ma), cut staff, decrease pay, etc....which looks amazing on paper all the while the practice starts to die a (albeit) slow death.

                I agree many offices are so poorly run its mind boggling (poor scheduling/billing, too much and too varied inventory, waste, etc...), but PE type groups never do that kind of tidying up since theyre not trying to help you, theyre helping themselves.

                Comment


                • #9




                  There was recently a capital call and the option to purchase additional shares.
                  Click to expand...


                  I'd ask what the funding will be used for (more practices?), what % of the shares you'd be able to purchase, what boards or information you'd have access too as a share holder, which type of shares exist, and which you'd be able to purchase.

                   

                  How we may feel about PE benefiting/harming medicine aside, you should first consider if you think they'll continue to earn money... if you think the model has potential, then it may be worth the investment. (Next you have more a risk tolerance decision, and a morality one if you're so inclined, but start with the technical financial decision.)




                  The PE firm has purchased up several other ophthalmology groups and has increased revenue at each practice ~6-12%.
                  Click to expand...


                  That doesn't seem like much to me...

                   




                  The expectation on these shares is 8% growth annually.
                  Click to expand...


                  Well, at least 8%. Don't forget PE often uses leverage (borrowed money), so their return is an order of magnitude higher. Would yours be? Would that impact your risk tolerance?




                  The sale will probably happen in 3-5 yrs. And the assumption is that at the time of the sale, my shares will be worth considerably more as the new buyer will presumably pay a premium for this new entity.
                  Click to expand...


                  Yeah, blah blah blah "well sell in 3-5 years"... that's common and boring to hear that line. It may be true, but it's a pretty good useless sentance to give someone too. Yes, I'd hope your shares appreciate, but would you receive any income/dividends in the mean time?

                   




                  And I understand that without numbers/P+L sheet it’s difficult to give advice, but has anyone been through a PE buyout before? How had your shares appreciated? Any additional thoughts on investing more money into this through the capital call?
                  Click to expand...


                  Are there plans for a yearly Section 409a valuation? Has this been done already? Can/will they share this with you?

                  Comment


                  • #10




                    @ Miss Bonnie MD

                    you have been fairly negative recently ???? This is the world we live in where firms (PE/Corporations/Jeff Bezos etc) will look at businesses and try to just own it for maximizing profits using leverage/higher capital/enterprise level resources. This in the background of a highly competitive world where everyone wants to be rich, or rather, rich want to keep getting richer.

                    To OP – I have no personal investment experience, but without P&L/cashflow statements it is very difficult to value stake. I can tell you when that happens you need domain expertise. I have taken ‘flyers’ on some investments on ecommerce business because I knew where it will go rather than pure numbers (early stage businesses with limited books).

                    Hope someone chimes in with more experience as I’d be interested to learn it.
                    Click to expand...


                    There is nothing positive about PE ... as a derm it is ruining our specialty.

                    Comment


                    • #11



                      Yeah, blah blah blah “well sell in 3-5 years”… that’s common and boring to hear that line. It may be true, but it’s a pretty good useless sentance to give someone too. Yes, I’d hope your shares appreciate, but would you receive any income/dividends in the mean time?


                      Yup, the standard sales pitch.  Strictly for the suckers.  This is the part of the dog-and-pony show for the new grads and clinical staff physicians who are not that savvy.

                      Comment


                      • #12
                        I would vote no for buying shares with an anticipated 8% return.

                        Thats really pathetic for the risk you're taking with an entity you have no control over.

                        Keep in mind that with all this private equity involvement in Ophthalmology, that someone is going to get left holding the bag with a practice that's worth a fraction of what they thought it was worth and eventually the buying and selling of practices will stop. Don't be that guy left holding the bag.

                        When you look behind the curtain of these deals the amounts of leverage are insane and most of these private equity firms are planning on not 8% returns, but 800% returns.

                        Example:

                        Let's say you have a well run Opthalmology practice and are busy with multiple docs and a profitable optical shop and your yearly EBITA is 6 million.

                        Your going to sell your practice to a private equity firm at 5x multiple or 30 million

                        The private equity company then uses 3 million of their own money to pay you for your well run practice, and they go to the bank to get a loan for 27 million.

                        They plan to come in and “manage your practice” because they have lots of “ business expertise” that you could never have because you’re a doctor and you're too busy seeing patients and “doctoring”

                        (They really have no intention of doing anything with your practice to help manage or run the day to day business)

                        Now a few years have passed by and they've hired some fresh out of college administrators to take the place of your administrator staff with 20+years experience because they can pay them half of what your experienced person was making and after some other tweaks and cracks of the whip they've gotten the EBITA up to 7 million

                        Now it's time to flip the practice, so the private equity company finds another larger entity willing to pay a 7 times multiple of the now 7 million EBITA (49 million)

                        Sweet. So now after paying back the 27 million dollar loan that was taken out from the bank, the private equity company has turned a 3 million dollar investment into 22 million dollars in 3 years. Yikes!

                        Comment


                        • #13




                          I would vote no for buying shares with an anticipated 8% return.

                          Thats really pathetic for the risk you’re taking with an entity you have no control over.

                          Keep in mind that with all this private equity involvement in Ophthalmology, that someone is going to get left holding the bag with a practice that’s worth a fraction of what they thought it was worth and eventually the buying and selling of practices will stop. Don’t be that guy left holding the bag.

                          When you look behind the curtain of these deals the amounts of leverage are insane and most of these private equity firms are planning on not 8% returns, but 800% returns.

                          Example:

                          Let’s say you have a well run Opthalmology practice and are busy with multiple docs and a profitable optical shop and your yearly EBITA is 6 million.

                          Your going to sell your practice to a private equity firm at 5x multiple or 30 million

                          The private equity company then uses 3 million of their own money to pay you for your well run practice, and they go to the bank to get a loan for 27 million.

                          They plan to come in and “manage your practice” because they have lots of “ business expertise” that you could never have because you’re a doctor and you’re too busy seeing patients and “doctoring”

                          (They really have no intention of doing anything with your practice to help manage or run the day to day business)

                          Now a few years have passed by and they’ve hired some fresh out of college administrators to take the place of your administrator staff with 20+years experience because they can pay them half of what your experienced person was making and after some other tweaks and cracks of the whip they’ve gotten the EBITA up to 7 million

                          Now it’s time to flip the practice, so the private equity company finds another larger entity willing to pay a 7 times multiple of the now 7 million EBITA (49 million)

                          Sweet. So now after paying back the 27 million dollar loan that was taken out from the bank, the private equity company has turned a 3 million dollar investment into 22 million dollars in 3 years. Yikes!
                          Click to expand...


                          I should have went to business school and started my own private equity firm.  I'm in the wrong business for making money apparently, lol

                          Comment


                          • #14
                            https://www.uow.edu.au/~bmartin/dissent/documents/health/healthsouth_crmk_medpt.html#MedParners_Collapse

                            That link takes you to documents about Physician Practice Management Companies from the late 90s and early 2000s.  These were not PE but publicly traded.  They were buying in my area orthopedic practices.  They were buying the practices with publicly traded stock.  What could go wrong?  The orthos who sold to one of them do not talk about it.  There was lots of fraud in those days in healthcare.  Google Richard Schrushy.  This is not the same but sounds mighty similar.  You get in on the ground floor and your investment will double, triple, the sky is the limit.  BTW I went to the estate auction of one of these companies executives who bankrupted.  He was living in a faux French Chateau on a golf course in Birmingham, Al.  I got a couple of nice antique bone framed lithographs for a nice price.  Incredible antiques.  This is where the money goes.

                            Comment


                            • #15







                              I would vote no for buying shares with an anticipated 8% return.

                              Thats really pathetic for the risk you’re taking with an entity you have no control over.

                              Keep in mind that with all this private equity involvement in Ophthalmology, that someone is going to get left holding the bag with a practice that’s worth a fraction of what they thought it was worth and eventually the buying and selling of practices will stop. Don’t be that guy left holding the bag.

                              When you look behind the curtain of these deals the amounts of leverage are insane and most of these private equity firms are planning on not 8% returns, but 800% returns.

                              Example:

                              Let’s say you have a well run Opthalmology practice and are busy with multiple docs and a profitable optical shop and your yearly EBITA is 6 million.

                              Your going to sell your practice to a private equity firm at 5x multiple or 30 million

                              The private equity company then uses 3 million of their own money to pay you for your well run practice, and they go to the bank to get a loan for 27 million.

                              They plan to come in and “manage your practice” because they have lots of “ business expertise” that you could never have because you’re a doctor and you’re too busy seeing patients and “doctoring”

                              (They really have no intention of doing anything with your practice to help manage or run the day to day business)

                              Now a few years have passed by and they’ve hired some fresh out of college administrators to take the place of your administrator staff with 20+years experience because they can pay them half of what your experienced person was making and after some other tweaks and cracks of the whip they’ve gotten the EBITA up to 7 million

                              Now it’s time to flip the practice, so the private equity company finds another larger entity willing to pay a 7 times multiple of the now 7 million EBITA (49 million)

                              Sweet. So now after paying back the 27 million dollar loan that was taken out from the bank, the private equity company has turned a 3 million dollar investment into 22 million dollars in 3 years. Yikes!
                              Click to expand…


                              I should have went to business school and started my own private equity firm.  I’m in the wrong business for making money apparently, lol
                              Click to expand...


                              yes.  you are a commodity and a service provider.  stop wasting time and get back to work.

                              money is not made in the practice of medicine.  technical services and insurance $ dwarf the clinical dollars.  soon even administrative $ will dwarf pay to physicians.  any monkey can do clinical work.  administration, now that's a rare skill.

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