Private Equity (PE) Continues Its Push Into Eye Care

Recently it was announced that 1-800-Contacts had been bought by private equity firm KKR & Co.  The deal was valued at over $3 billion.  The Seller was another PE firm, AEA Investors, who bought the firm 4 years ago (2016) from PE firm Thomas H. Lee Partners.

Large PE players continue their push into eye care.  What lessons can we learn from this?

• PE companies are usually going to consolidate their purchases for 5 years, then sell to lock in their profits. Sometimes a little sooner, sometimes a little later.
• The short term offers PE companies the ability to make a lot of money. They do so in two ways: operational profitability based on reducing expenses and increasing margins and increasing the multiplier of EBITDA based on size. The second factor is pretty much a no-brainer, the first has some easy parts and some very difficult parts.

Operational profitability: by building a larger enterprise, PE firms (and anyone else) can reduce back-office expenses.  By consolidating billing, answering the phones, marketing, and improving reimbursements from Managed Vision Care plans, they can drive more profits into the operation.  This is easily achievable.  The other part of operational profitability – increasing clinical performance, motivating staff, increasing patient satisfaction and engagement – is much more difficult and fraught with the potential for ethical issues.  For an example of PE culture going wrong, take a look at the USA Today investigation into North American Dental Group (link here).

Multiplier increase: Goldman Sachs paid a reported multiple of 17 times EBITDA to acquire MyEyeDr.  This was a shocking number to most observers!  The question was how can Goldman Sachs make any money in 5 years when they paid this multiplier for the acquisition?  The main way is by acquiring more practices and paying a lower multiplier (usually 3-5 times).  If they can acquire a large number of practices at the lower multiplier, and add them to the group with the higher multiplier, then they can lower their average multiplier cost to maybe 8 or 10, and by the time they are ready to sell, possibly increase the multiplier to 20, then they will make a lot of money despite how much they paid for the initial entry purchase.

• Dangers of EBITDA focus. The typical efforts of many PE groups are to focus on reducing expenses. If the PE group can reduce expenses while maintaining sales, then the EBITDA increases.  The problem is many PE entities destroy the morale of the practice by decreasing remuneration to staff and implementing policies that require employees to sell patients things they don’t need (see above reference to North American Dental Group).
• Biggest question: who’s next? With the model for PE being to buy practices for 5 years and then to sell them off, the big question is who is going to buy them next, and what will their support and culture look like? If you as a seller have a similar timeline, then maybe it doesn’t matter so much to you.  But what about your staff and your patients?  These are important factors to consider.

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