Why is Private Equity Eyeing Retina?

Eric Nudleman MD, PhD
Jonathan Prenner, MD

The last several years have been a feeding frenzy of private equity buyouts in ophthalmology.  Although many people are now deeply involved in negotiations, others have never heard of EBITDA and have no idea what it means for their future.  We caught up with Larry Halperin, MD, who kindly offered us a primer on the process.

First of all, what is private equity (PE)?

In the simplest terms, private equity is money raised from pension funds, equity groups, and high net worth individuals, that is pooled to invest in established businesses. In general, PE is looking to buy companies (or in our case, private practice groups) that are profitable, and then make them more valuable in order to sell and get a multiple return on investment.  It is arbitrage – buying the company, making it more valuable, and then re-selling, often to other private equity groups. 

What is the strategy for making a retina practice more valuable?

The most common strategy is a roll-up.  PE is looking to acquire many practices in a given area, providing them with greater negotiating power with payers.  This is essentially a consolidation of medical practices, which is happening in many other fields of medicine.  The trend for leveraging economies of scale is happening throughout medicine.


Why is this happening now?

This is actually not new. The role of PE in medicine began with a wave of interest in the 1990s.  Many practices consolidated in an effort to have power, partly in reaction to the rise of health maintenance organizations.  But as HMOs waned, so did the force of large practices in ophthalmology.

Now we are seeing a massive resurgence.  Part of it is private equity now has a greater amount of money, and they are ready to deploy.  There is a lot of appetite for deals.  They are looking for investments that are uncorrelated with the market, and are particularly focused on baby boomers since it is such a robust market.

Ophthalmology (and retina in particular) has been profitable for several consecutive decades.  This is coupled with the fact that inflation is low, giving them leverage on money they invest by raising cheap debt.  Altogether this is a setup for amplification on investments by buying retina practices.

This sounds like a deal for them.  What’s in it for the retina doctor?

The main reason is that it allows you to diversify your financial portfolio.  In the buyout, PE will provide some percentage of your potential future earnings as an upfront payment.  This money can then be invested, which decouples your income and future earnings from your medical practice.  This reduces risk.  At this point, there are a lot of potential risks in the future of health care. These include technology risks, regulatory risks, and market risks.  The promise of PE is that it provides insurance against these potential changes. In addition, the money given now is considered capital gains, and therefore one pays less in terms of taxes than a straight income tax.  That is an additional incentive.


Why would the retina doctor turn it down?

There are a number of reasons.  First, the buyout may be too low.  The risks for the retina market in the future are really unknown, and it is a judgment call if the cash upfront for a percentage of future earnings is worth it.  There are many variables to consider, and it is impossible to accurately predict if the offer is worth it.  The players from PE are very smart; they don’t know retina, but they know the numbers. So they make a deal that is enticing, but not a clear cut yes or no.

Second, the retina doctor no longer owns their practice. This can be a potential source of frustration.  Part of the joy of being in private practice is the ability to make decisions about schedules, offices, personnel, equipment, etc.  All of that is forfeited when you sell your practice.  Of course, PE is interested in your success. Therefore they want to keep the factory the way it is.  But you relinquish control when you decide to sell.  In the end, the decision relies on a gestalt analysis.  The only guarantee is that the decision will not be easy.