What Veterinarians should know about private equity
When I graduated from veterinary school, I knew a lot about medicine and almost nothing about business. Thus, it was a pretty steep learning curve opening and running first one, and then two 24/7 multispecialty hospitals. The second steep learning curve occurred when we received cold calls from private equity firms wanting to purchase our practices. I did not know what private equity was or how this money works.
However, to understand the changes occurring in the veterinary industry, you must understand private equity (PE). This segment of finance has an outsized influence on many parts of our economy and is impacting our profession in many ways. At least half of the groups owning more than 15 veterinary practices have PE investment.
What is Private Equity?
Private equity is money from funds and investors used to directly invest or buyout companies. The money is from individuals who are wealthy enough to be considered “accredited” or from institutional investors that invest for others. These individuals or investors have money they want to grow but are looking for an alternative to stocks, bonds, real estate, etc. PE firms have a short-term horizon and are often looking to buy businesses, improve them with investments in needed equipment, improve their operations, and increase their net profit margin.
PE funds generate revenue through management fees, annual profits from the business, and then profit in a sale. Management fees can be 1.5-2% of all revenue. The ultimate goal is to maximize the return on that initial investment and re-sell the business for a profit within 5 to 7 years.
Is the time line true for veterinary medicine?
I’ve had a couple people question whether the short timeline was accurate in the veterinary space. I decided to investigate. Listed below are previous PE investments in veterinary groups with the time period between investment and sale. The average private equity investment was for 3.75 years, shorter than what I predicted.
Prior Private Equity “Timeline Flips” in Veterinary Medicine*
| Name | Founding Date | Private Equity | Date In | Date Out | PE investment time | Current Owner |
| Brightheart | 2007 | Unified Growth Partners
Caltius Mezzanine LLR Partners
|
UGP
CM LLR (2008) |
2011 (sold to VCA) | 4 | MARS |
| NVA | 1996 | Summit Partners
Ares and OMERS |
2007
2014 |
2014
2019 |
7 | JAB |
| Compassion First | 2014 | Quad-C | 2014 | 2019 | 5 | JAB |
| Innovetive PetCare | 2015 | Prospect Partners | 2015 | 2019 | 4 | Metalwork Capital |
| BluePearl | 2008 | Summit Partners | 2014 | 2015 | 1 | MARS |
| Healthy Pet | 1997 | Caltius Mezzanine
Allied Capital |
2003
2005 |
2005
2007 (sold to VCA) |
2
2 |
MARS |
| Average PE involvement | 3.75 years |
*Specific investment data and dates for The Pet Practice, Inc, National Petcare Centers, Inc. and Pet’s Choice could not be easily found.
Which current veterinary groups have private equity investment?
These are the larger veterinary groups with PE involvement and the date of their private equity investments. This date can be used to look at a potential window when the companies may be changing hands. While private equity is the controlling shareholder in most of these veterinary groups, a few have private equity in minority shareholder positions.
| Name | Founding Date | Private Equity | Date of PE investment |
| MedVet | 1988 | Stonehenge Partners
Skynight Capital Fund Goldman Sachs Merchant |
2015
2015 2019 |
| VetCor | 1996 | Oak Hill
Harvest Partners Cressy and Company |
2018
2015 2010 |
| Southern Veterinary Partners | 2014 | Shore Capital Partners | 2014 |
| American Veterinary Group | 2015 | Latticework Capital | 2015 |
| Community Vet Partners | 2009 | Cortec Group | 2015 |
| Heartland Veterinary Partners | 2016 | Tyree and D-Angelo Partners
Gryphon Investment |
2016
2019 |
| Pathway Veterinary Alliance | 2003 | Morgan Stanley | 2016 |
| Thrive | 2014 | Morgan Stanley | 2016 |
| Veterinary Practice Partners | 2011 | Pamlico Capital | 2016 |
| Alliance | 2016 | ZBS Capital | 2016 |
| Amerivet | 2017 | Imperial Capital | 2017 |
| PetVet Care Centers | 2012 | KKR | 2017 |
| Mission Veterinary Partners | 2017 | Shore Capital Partners | 2017 |
| Wellhaven PetHealth | 2017 | Capricorn | 2017 |
| People Pets and Vets | 1992 | Cressey and Company | 2018 |
| SAGE Veterinary Centers | 1992 | Chicago Pacific Founders | 2018 |
| Ethos Vet Health | 2015 | Brown Brothers Harriman | 2019 |
| BlueRiver | 2019 | Partners Group | 2019 |
Why am I nervous about Private Equity?
Private equity is poorly regulated and its impact in many industries has been to make money for fund managers and fund investors while decreasing value for employees and communities.
Impact on the Retail Sector
Bain Capital, KKR (which currently owns PetVet Care Centers) and Vornado Real Estate Trust bought Toys R Us in 2005 using a small amount of capital and a large amount of debt. While the private equity firms were paid management fees and early profits, the payment on the debt hamstrung the company and eventually led to bankruptcy in 2018. The three PE firms made more money from advisory fees than they lost in the bankruptcy but the 30,000 employees who lost their jobs originally received no severance pay. Only after much effort and a lawsuit by worker backed groups were funds provided.
Ten of the fourteen largest retail bankruptcies since 2012, including Shopko, Payless and Kmart, have been at companies owned by private equity. It is estimated that PE retail purchases have led to the loss of 1.3 million jobs over the last 10 years. During the same timeframe, research from business professors at University of Chicago and Stanford revealed that there are more private equity managers who made at least $100 million annually than investment bankers, top financial executives and professional athletes combined.
Impact on Newspapers
Private equity has also hastened the demise of local newspapers around the country. Newspapers have been inexpensive due to the fall in revenue from advertising. PE and hedge funds have purchased more than 1500 local newspapers. These new fund owners then looked for efficiencies and cut staff to increase profit margin. However, newspaper reporters are needed to cover local events and issues. Without the needed number of reporters, news suffers, the papers become less attractive and circulation drops further. Because the ownership timeline is short, long term strategies to grow readership are not a focus. Similar to retail, the original issue was digital disruption. However, the nail in the coffin has been private equity involvement.
What about the Veterinary Industry?
Because private equity exists specifically to maximize return on investment, it is unclear how conflicts between patients’ best interest and profit margin are evaluated. The largest single cost in any veterinary practice is its employees. While larger entities have some economies of scale with purchase of pharmaceuticals and other goods, they still have the salary costs of employees. Thus, in order to maximize return to investors, a downward pressure on staff costs is highly likely. This can be achieved either by paying less per person or having fewer employees. It is concerning, that during 2006-2016, while consolidation was ramping up in the veterinary industry, real incomes for veterinarians fell.
Studies in other sectors have shown that private equity-owned businesses have lower employment and lower wages post buyout. This is concerning as studies in the human field have shown a direct link between higher nurse to patient ratios and quality – when there are not enough nurses, quality suffers. A study presented this year at the International Veterinary Emergency and Critical Care Symposium (IVECCS) also demonstrated a direct link between increasing adverse events and a lower number of veterinary technicians in intensive care units (ICUs).
In 2005, 76% of veterinarians would recommend our profession to a friend or family member. However, this number dropped to under half by 2015. In the recent Merck study, only 41% of veterinarians overall and only 24% of veterinarians younger than 34 would recommend pursuing a veterinary medicine in veterinary medicine. While the reasons for this are likely multifactorial, I do worry about the impact of the financialization of our profession.
More Consolidation is Coming
The next two years are likely to bring further changes and sales, given the 3.75 year average veterinary PE investment time. If you are an owner looking to sell your practice to one of these groups, I would keep some equity as well as cash to share in the “second sale”. If you are a veterinarian looking for a new job, read your contract carefully and consider legal advice so you understand what protection your salary and benefits have in a sale.
10 comments
Thanks for your work in this area. The information is helpful.
It would seem that there is a giant game of musical chairs going on with multiple practice consolidation groups looking to sell their basket of practices in the coming second wave of consolidation. The question is when that happens will all the consolidation groups find buyers or will some be left holding practices that they had little desire to be the long term owners of?
Second, if the private equity money is allowing consolidators to ignore historical financial metrics and buy practices at higher multiples than previously seen, is this the same reason that they are paying new graduates at such high rates of pay? We’re seeing vet associates get overpaid compared to historic percentages of revenue produced. When the consolidators eventually sell these practices on to the groups that will be the long term holders of the practices will those owners be willing to continue paying vets at these rates? If not then there will be a world of hurt among associate vets in the next few years.
Also, for Mars practices that are currently ‘over-paying’ associates – what is allowing them to do this? Are they achieving such savings on fixed and direct costs that they can funnel more money to payroll? Are they accepting a lower rate of profit?
It will be interesting to see what the future holds.
I have a couple of comments:
First, the wealth of the Mars and Reimann families IS a form of private equity. It might be family money we can attach to specific individuals rather than a fund into which many nameless people invest and which is controlled by a few managers, but it’s equity, and it’s private. Mars acquired Banfield in 2007, nearly 13 years ago. It didn’t flip the acquisition, but instead added to it by acquiring other veterinary entities, and it also owns complementary businesses. The Reimann’s JAB investors acquired its initial stake in NVA back in 2014, has added to it since then, and also has made other veterinary acquisitions. I submit that at some level there is long-term ownership of veterinary practices by private equity. The reasons for this might not be understood, but if it’s stable ownership, it contradicts an assertion that private equity is short-term ownership in our profession. Feel free to take issue with this.
Second, I believe there is a danger in adherence to historic metrics as a means of determining practice value when it is clear that an increasing number of acquirers feel differently and behave differently. Fifteen years ago interest rates were significantly higher than they are now. You did not see lenders put up 100% of a no-RE seven-figure purchase price over seven years and receive less than 4.5%, fixed, for taking that risk. Rent increases based on CPI changes are now lower because CPI increases are smaller. To address Dr. Woodman’s question of an acceptable rate of profit, I suggest reviewing this very recent article:
https://news.vin.com/vinnews.aspx?articleId=53435
co-written by a former AVMA Economics Division director. Using the return example in that article, if one assumes we are nearing the end of an unusually long period of economic expansion, a comparatively low-risk 7% return going forward sounds pretty good, or at least it does to this aging veterinarian. As Dr. Davidow’s post did not touch on associate compensation, why does Dr. Woodman suggest that Mars practices are currently “over-paying” the associates? Would Mars, using its own, updated metric, agree that it is paying too much? Or is that suggestion based on an obsolete metric of some sort? To me it makes complete sense that Mars, in order to fill vacant positions, is willing to pay more. It also makes complete sense that a lower cost structure enables Mars to do it.
Things are different now. There may be a tier of private equity that does not flip its veterinary acquisitions. Associates may, for a variety of reasons, now choose higher current compensation and fewer long-term opportunities to own and to earn more through practice ownership. There’s a lot about practice ownership that sucks, and the younger generation is increasingly aware of it.
I think it is a mistake to use historic metrics to analyze and to criticize what is currently being paid for veterinary practices. Too much has changed, in our profession and in our world.
Thanks for your comments, Dr. Kramer. I would disagree that money from MARS or the Reiman family is the same as from private equity funds. Individual families have a lot of leeway in terms of how they use capital and on the return they want to see. Private equity funds are a very specific financial vehicle with a specific management and investment structure. Although some of the veterinary groups have had the same leadership for a long time (NVA and Medvet being two), they every 3 years have to go look for new funding or they can’t continue to operate. This time structure that is set specifically by this type of funding creates ongoing pressure for a true ROI.
That being said, I do agree that with either private families or with private equity fund investors, there is no transparency (unlike a public company that must provide statements) and both groups of investors are looking for a return on investment.
For an interesting look at how Private Equity can prioritize short term financial interests to the detriment of the long term survival of a company it is worth looking at this article:
“How Private Equity Ruined a Beloved Grocery Chain”
https://www.theatlantic.com/ideas/archive/2020/02/how-private-equity-ruined-fairway/606625/
Thank you for the interesting article, Dr. Woodman. The influence of private equity is more prevalent than many people realize.
I really appreciate you for publishing this blog here about private equity veterinarians; it’s really a helpful and very useful for us. This is really appreciated that you have presented this data over here, I love all the information shared. Great article!
As I client, you first sense something different when a practice is bought out. The (former) practice owners never said the practice was sold. The change was subtle at the beginning. In my case, a sudden 30% increase in prices. There were a couple of tech staff departures. No one said anything. The staff faces were longer. The exchanges were more formal. Things felt more tense. I was there last night and they totaled up the receipts for the day, as if they had to report them, saying they had had a good day. Then there was this new person behind the office, who didn’t act like the rest …because she wasn’t. She had outsized influence. She came to handle all the billing, later I surmised placed by the new owners. She spoke in jargon. When I said, that a price of one antibiotic pill that I can get at the local pharmacy for less than 50 cents was 10x that there was kind of expensive, she said in a condescending manner, “Everything’s expensive these days Charles, that’s just how it is.” I finally wised up to what was going on when I paid a bill –or thought I did, because I handed over my credit card– and got a dunning email and USPS letter saying I was delinquent and the balance was due immediately. I called and said I had given them my card, this new controller woman tried to make small-talk. I said I didn’t want small talk and I like the assertion that I had not paid. I said that’s not how they should be treating clients. The new office woman (leader) said, “Well, sometimes things don’t go through.” I said, that’s not my fault. She said, “Yes, it’s nobody’s fault.” More jargon from the private equity firm’s watcher. It was someone’s fault …theirs. I said, please send my pet records on to a new practice. Some weeks later, a friend said her practice had just been bought up by a private equity group. When I looked at a list of their practice acquisitions, there was my former practice. It all came together. I could point to the time 1-1/2 years earlier when things started to change. The final straw, a formal dunning letter in the mail, made sense. It was all about making money. The staffing changes made sense. The former practice owner didn’t have the consideration for his clients to say, the practice has been sold. He got his buyout. His clients now face a new, less kind regime. I worked along side of private equity people before I retired. What they do is not pretty. It’s all numbers. These are not nice guys or white knights; they are cold-hearted businessmen (mostly men) trying to produce the highest returns. They are in it until they have made their targets, and then they look for a new owner (sucker). The people who work for the firms they roll up mean nothing –no-thing!– to them, and just forget the animals. It’s all about the money. Just business. Anything you hear differently from the private equity master is just gobbledygook, a flavoring for a bitter pill. Different days ahead for pet owners and their animals in an industry dominated by private equity and private equity-like practice owners.
You place blame on a practice owner for not notifying the clients of a practice sale. This ignores the facts realities that in today’s economic climate many practice owners can find no buyers for their practice other than corporate consolidators, and that it is almost certainly a condition of the sale that an owner do everything possible to transfer the goodwill of existing client relationships to the new owners of a practice, and therefore practice owners are almost certainly legally obligated not to notify clients of a sale.
As an owner of a small 1.5 dvm practice, I would love to have someone like a “20 years ago me”, come-in and want my practice. I would even sell to that person for less money then I could get elsewhere, finance it, support them, hell, whatever it takes. But, these vets are rare now, and I likely will never meet one. While I can agree with the characterization of corporate investers as detrimental for the ideals of many of us in this profession, for many of us, this option will likey be the ONLY one available to not just close our doors and walk away when we are too old to work further. For me, this is less about owner greed as much as it is about the realities of supply and demand. I hope it changes, but I don’t see things going that way.
I just read this and it has been awhile since the post. Wanted to say I am in the same boat, too old to practice, no realistic buyers, actually a little too small to be interesting to corporate buyers. Don’t want to sell to them anyway. Having a hard time just closing my doors after so many years. I would definitely sell or finance for less than actual worth of practice, but there are no buyers. Pretty sad. Nevertheless, still love my profession and do not regret giving my all for 30 years. I predict eventually the clients will leave corporate practices and go back to the private clinics because they see the difference in care. If there are any left.