Announcing The Post-Op Season 3

Pivoting to the universe of healthcare service buyouts

With Season 2 covering learning differences following Season 1 on end-stage renal disease (ESRD), The Post-Op stayed within the same universe of health conditions (like the White Lotus and its hotel chain, remember?). In Season 3, however, rather than a new condition, we’re focusing on a common transaction in healthcare – the active world of healthcare service business buyouts.

I am referring specifically to private equity firms or acquisition-minded entrepreneurs (altogether, let’s call them the financial buyers) acquiring controlling stakes (51%+, but most often 100%) in a healthcare service business, a business where a provider delivers care to a patient (primarily in a clinic or at-home) in exchange for payment from the patient directly or from their payer.

Such deals happen across just about every subsector in healthcare.

Chart 1: Healthcare service buyout activity by subsector[1]

At a basic level, financial buyers “buy out” these businesses using a combination of debt (lent by banks) and equity (provided by return-seeking investors). Financial buyers see an opportunity and have a strategic plan to grow both revenue and/or EBITDA (i.e., earnings before interest, taxes, depreciation, and amortization), the metric used to assess the profitability of the “core” business, before selling it to another financial buyer or a strategic buyer (like Optum) for much more than they bought it.

Season 3 will dive into various elements of these deals including the characteristics of good targets, mechanics of valuation and transaction structuring, growth strategies, projected financial returns, and more! We won’t discuss whether financial buyers are good or bad for healthcare, but instead, we’ll focus on helping you more deeply understand the key dynamics at play when a healthcare service business gets bought out. Perhaps, it will even lay the foundation and motivate you to become an acquisition-minded entrepreneur yourself.

Aligning on the term “private equity”

Private equity (PE) is defined as “an alternative investment class that invests in or acquires private companies not listed on a public stock exchange”[2]. By that definition, even venture capital is a form of “private equity” since it involves investing in private companies (i.e., startups).

Nevertheless, in the universe of healthcare service buyouts, many players meet the definition of private equity. These include, but are not limited to, large, well-known PE firms (like Blackstone, KKR, etc.), smaller lower/middle market private equity firms, and acquisition-minded entrepreneurs (i.e., often called search funds), all looking to acquire healthcare service businesses worth $500M-$5B+, $25M-$1B, and $1-$20M, respectively[3]. Each have their own investors (known as limited partners) providing capital to finance portions of these buyouts, and each deploy similar strategies to generate returns to said investors.

Throughout Season 3, we’ll primarily concentrate on smaller healthcare service buyouts through the lens of an acquisition-minded entrepreneur as hopefully this is the most unique, relevant, and interesting to you. There is not enough space nor time to cover every step, decision, assumption, and/or calculation in detail, but we will dive deep into certain key areas and provide access to the underlying financial models for further exploration if needed.

Why I’m writing about healthcare service buyouts

You might be wondering why I am choosing what might seem like a random topic after focusing on DaVita not too long ago. First, PE in healthcare is not going anywhere, so we all stand to benefit by better understanding the nuts and bolts behind the deals. In addition, entrepreneur-led acquisitions in healthcare services create an opportunity for these businesses to maintain independence and avoid consolidation from payers or hospitals, which could ultimately benefit the system overall.

Last and more personally, coming into business school, I was very interested in joining a digital health startup, but that interest began fading as I learned how employee equity gets diluted, how liquidity events are sparse, and how difficult venture-backable scale is to achieve. Thus, Season 3 is a vehicle for me to explore whether becoming an acquisition-minded entrepreneur and buying a healthcare services business is a viable career path, and I hope you’re interested in coming along for the ride.

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Links to: Sources | Analysis (Excel) | Graphics (PPT)

If this topic interests you in any capacity (investor, entrepreneur, etc.), please feel free to reach out on to me on Twitter @z_miller4 or connect with me on LinkedIn here!