The biggest challenge previously facing private equity investors for several years running has been finding attractive investment opportunities. Amid high prices and stiff competition, overall deal count has dropped 19% since 2014, the high-water mark for deal activity in the current economic cycle.
Yet one sector, retail healthcare (including Dental Service Organizations (DSOs), has been conspicuous in its growth. From 2012 to 2017, the number of deals involving retail health companies—those that operate freestanding health-related outlets like dental clinics or urgent care facilities—has soared, increasing at a compound annual rate (CAGR) of 34% in the North American market.
As discussed in Bain & Company’s recently released Global Private Equity Report 2018, retail health is a fragmented, high-margin sector with strong growth characteristics. In a sea of high prices, it still offers targets at reasonable multiples and many opportunities to unlock substantial value.
The playing field includes a wide range of health services, from urgent care and dental to physical therapy and dermatology. The sector has been growing at a steady 3%–4% clip annually, and individual retail health clinics typically enjoy strong earnings before interest, taxes, depreciation and amortization (EBITDA), with margins of around 25% and often much more. The sector is benefiting from healthcare trends that encourage cost management and greater patient choice. It also plays to the needs of an aging population, and as with many health-related businesses, growth is likely to be recession-resistant.
For PE buyers, the sector is especially attractive because it offers many opportunities to quickly help retail health businesses perform even better. Boosting organic growth by adding outlets, for instance, can deliver a very high return on invested capital. Similarly, a buy-and-build strategy gives PE investors the chance to arbitrage multiples that historically have expanded with a company’s growing scale and clout. While retail health businesses with fewer than 10 outlets have been commanding multiples of around four to seven times EBITDA, those with 10 to 50 clinics are selling for seven to nine times, and some marquee assets with more than 50 clinics are trading in the low teens.
None of that is easy, and careful due diligence is essential to finding the right targets. But at a time when PE funds are awash with capital but lacking appealing targets, a sector as vibrant as retail health is worth a close look.