25
Thought Leadership
The PE time bomb — where investment in GI is headed
in 2019
By Eric Oliver
W
hile three private equity firms
have invested in gastroenterol-
ogy to date, several analysts
believe more deals are on the way in 2019.
Provident Healthcare Partners Senior Ana-
lyst Abe M'Bodj analyzed the current state
of the market and offered insights into what
the rest of the year could look like as well as
how all PE firms can coexist.
Note: Responses were edited for style and
clarity.
Question: Several analysts believed the beginning of 2019
would further ramp up PE investment in GI firms. Why
haven't there been any deals closing in 2019?
Abe M'Bodj: While the activity did ramp up at the end of 2018, the
[Southlake-based] Texas Digestive Disease Consultants and Atlanta
Gastroenterology Associates deals were transaction processes that were
ongoing for a fairly significant amount of time.
As you might imagine, these transactions are complex and on aver-
age take about nine months to a year or more to complete. e vast
majority of GI practices that are currently exploring the market had
their interest sparked by the TDDC and AGA transactions. With those
transactions just complete, we expect to see a much larger pickup in
activity during the latter half of 2019 and in the beginning half of 2020.
ere are many GI groups that now would like to create their own
PE platforms. is has also changed the competitive dynamics of the
market, whereas historically [Miami-based] Gastro Health had been
the only partnership option.
Provident is currently aware of at least 12 ongoing transactions in the
GI market of varying size. Not all of those transactions will ultimately
get completed, but several will, and as they do, the market will continue
to see increasingly more activity.
Q: What's a trend you expect to see more of this coming
quarter?
AM: At the beginning of the second quarter of 2019, Birmingham, Ala.-
based Southeast Gastro announced its partnership with Gastro Health.
Provident served as exclusive financial adviser to Southeast Gastro.
is was Gastro Health's first out-of-state acquisition, making it the
first GI PE platform to complete a sizeable partnership in a new market
post-PE investment. Southeast Gastro will be leveraging the resources
of Gastro Health to continue growing throughout the state of Alabama
as the group becomes a regional platform for expansion.
During the second and third quarter, we expect to see some of the
other platforms that exist, in addition to Gastro Health, potentially
complete other large out-of-state acquisitions that will serve as regional
platforms for growth.
Q: What will the big trends be moving forward?
AM: As GI groups have continued to seek new avenues for growth, a
big trend has been to add ancillary service lines and enter into strategic
partnership relationships within their endoscopy centers.
With respect to ancillaries, most GI groups have expanded their offer-
ings to include anesthesia, pathology, imaging, pharmacy and infusion
services. Adding various ancillaries allows a GI practice to handle a
broader spectrum of care and provide more coordinated and conve-
nient care for patients.
For groups that have begun to evaluate PE partnerships, these ancil-
laries have been an attractive aspect of their respective practices. As GI
groups continue to look for additional ways to grow, adding ancillary
service lines will continue to be a successful strategy to increase profit-
ability and provide better-quality care for patients.
Within GI endoscopy centers, it has also become common for practices
to introduce a health system joint venture partner. Historically, GI
groups have partnered with ASC management companies such as Am-
Surg in their centers, but the recent trend of partnering with a health
system has become an attractive alternative.
rough these relationships, GI practices can gain access to power-
ful referral networks and additional contracting leverage with payers.
As groups continue to realize the benefits of a strategic joint venture
partner in their endoscopy centers, they will continue to leverage this
model to benefit their centers.
Q: How do you see the different PE partnerships coexist-
ing? Existing deals tend to all have their own regional mar-
kets. Do you ever anticipate a time where a group would
try to establish a presence in a competitor's market?
AM: As a result of the different PE-backed organizations within GI, the
mergers and acquisitions market has become extremely competitive,
which has enabled us to drive attractive valuations and create more
favorable transaction structures on behalf of our GI clients.
For groups that have the capability to become a PE platform them-
selves, they also benefit from fierce competition among PE firms who
are having to now compete with the established GI platforms — Gas-
tro Health, e GI Alliance and United Digestive. While the current
platforms do have their own markets, within these markets there are
several large ongoing transactions. It is very likely that in the near
future, some of these groups will be competing directly with each other
within their respective states, or with an entirely new PE platform. n