In 2012, my partners and I ran the largest 24/7 multispecialty hospital within the city limits of Seattle and also operated a second growing 24/7 facility about 25 miles south of the city. We had opened both our hospitals as startups and had weathered not only a tough learning curve but also the 2008 recession. We had tried to sell 20% of our hospital to some of our associates in 2010 prior to opening our second location, but were only able to sell 6%. We were starting to anticipate needing a new facility and were also looking at succession planning. Around that time, we started receiving unsolicited offers to buy our practice.
The interesting thing about these offers is that they were not from VCA or NVA. They were from private equity firms, many of whom knew nothing about the veterinary market except that pet industries overall were growing and that veterinary medicine is an almost entirely cash business.
Being veterinary owners without business degrees, we had no real idea what private equity was. As I talk to veterinarians around the country, I realize that very few have heard of this segment of capital that is reshaping of our profession. Understanding private equity is key to understanding what happened to both fuel and also end groups such as Pets’ Choice and Brightheart.
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” (https://www.investopedia.com/terms/a/accreditedinvestor.asp) 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. Private equity 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. 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.
Pets’ Choice, who I worked for from 1996-1999, was one of the early private equity funded buyers of veterinary practices. Over their 9 years in existence, they grew to 46 hospitals in 5 states and had revenue of close to $70 million. They merged with VCA in July, 2005. (http://investor.vcaantech.com/releasedetail.cfm?releaseid=248798) Why did they merge? After 9 years, they were past the 5 to 7 year comfortable window for private equity investors. The only ways to pay out the investors were to: 1) Have an initial private offering (IPO) and go public, 2) Sell to a different larger private equity firm, or 3) Sell to a larger organization. Due to market conditions at that time, an IPO was not feasible so a sale was inevitable.
Brightheart was another private equity backed consolidator of specialty practices. Brightheart started in 2007 with stated lofty goals. ( http://veterinarybusiness.dvm360.com/new-corporate-practice-player-brightheart-veterinary-centers) However, it needed a number of private equity investment partners to achieve their growth (http://www.andersenllc.com/case-study-brightheart.php, https://www.businesswire.com/news/home/20080125005116/en/LLR-Partners-25-Million-Equity-Investment-BrightHeart). Thus, like Pets Choice, they had a limited time to grow fast and provide a return to their investors. Brightheart sold to VCA in 2011 after accumulating 9 large hospitals.
My partners and I spent quite a bit of time trying to understand the motivation of the private equity groups that approached us. Our understanding led us to ultimately join a group that was not backed by private equity at that time.
Why should all veterinarians care and learn about private equity? There are several reasons:
1) Private equity is one of the factors driving both increasing non-veterinary ownership and consolidation in the veterinary industry. This is a summary of some of the private equity players in the industry: (http://www.providenthp.com/wp-content/uploads/2016/07/Q2-2016-Veterinary-Newsletter.pdf). Some consolidation may be valuable in providing economies of scale and ability to buy needed equipment. However, as the daughter of an anti-trust attorney, I strongly believe that competition is good for consumers, in this case, pet owners. Furthermore, research in human healthcare has shown that regional hospital mergers in fact lead to higher prices without measured improvement in quality of care (https://www.brookings.edu/testimonies/health-care-market-consolidations-impacts-on-costs-quality-and-access/)
2) If private equity partners are the majority owners of the business, their primary obligation is maximizing return on investment for their investor group. That means they need both growth in revenue but also improvement in cost control. Because the single biggest cost in a veterinary hospital is support staff, minimizing this cost becomes a priority. Many independently owned hospitals that have sold to non-veterinary owned consolidators have seen this pressure to reduce staff numbers and minimize staff wage increases first hand.
3) If you are signing a contract to work for any practice, you should know how likely it is that you will work for a different entity in the coming years. It is appropriate to ask and understand who is the controlling owners of the business. You especially need to understand the consequences to your contract if there is a sale or merger. If one of the majority partners is a private equity firm, there is a real possibility that a sale could occur within a several year window.
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