Sun Capital sees physician practice consolidation opportunity as solo groups struggle

As independent practitioners providing non-essential care have been disproportionately negatively impacted, Sun's portfolio companies have the ability to expand.

The value of joining a private equity-backed practice group versus remaining a sole practitioner is evident with lockdowns causing greater strain on companies without broader support, according to Stephen Cella, a principal at Sun Capital Partners.  

“The benefits of aligning with a larger group are apparent today more than ever,” Cella told PE Hub in a recent interview that came right around the Boca Raton, Florida-based firm’s 25th anniversary. 

First and foremost, there’s financial assistance for these groups, said Cella, who helps lead healthcare efforts at Sun alongside Managing Directors Dan Florian and Jared Wien. 

“As we open, there are going to be investments made to rebuild or build inventory in protective equipment, and make the necessary investments in centers for businesses to operate safely and effectively going forward,” Cella said. 

Sun, who backs West Dermatology, Simply Beautiful Smiles and ClearChoice, has kept some portfolio company operations open in a legally compliant way, while providing operational support around things like patient and employee communications and reopening protocols. 

Consolidation opportunity

The economic downturn will likely convince some independent providers to merge with larger practices, which are better equipped to withstand financial crises, Cella said.

Outpatient physician groups have fielded significant private equity investment to date, but the vast majority of physicians, varying by specialty, remain sole practitioners or operate within a small number of office groups. 

With some larger physician groups across the broader industry focused on defensive measures, there may be an even greater opportunity for firms like Sun, he said. 

“Supply for affiliation may increase, but some of the demand may fall slightly,” Cella said. “We’re hoping that our businesses that were well-capitalized coming into this should benefit and be in a position to expand.”

Sun’s portfolio companies are already engaged in a number of these conversations that it hopes to move forward starting this summer, he said. 

The firm provides equity backstops in the vast majority of its deals and has always deployed creative deal structures to be collaborative with sellers, be it through earnouts, different tranches or seller noted, Cella said.

“In this environment, these features and this ability is becoming even more valued by sellers,” Cella said. 

For example, the firm’s February 2019 investment in Simply Beautiful Smiles was 100 percent equity backstopped, with financing obtained down the line. 

Creative solutions 

With today’s auction opportunities slim, Cella said the first actionable opportunities surfacing are those in businesses with liquidity disruptions that are looking for a minority investment or structured capital to bridge until the economy’s restart. 

Sun also is beginning to get calls through lenders on assets that need to be restructured or realigned from a balance sheet or operational perspective, particularly because of the firm’s deep operational resources, Cella said. 

From a thematic perspective, there is no major shift in the way Sun views healthcare investing. 

“While I do expect some marginal changes to the way healthcare is provided coming out of this — mandatory protocols, telemed,” Cella said he expects the forces that were driving healthcare to remain intact.   

Sun will continue to back businesses that fit into one of four frameworks: those that empower the consumer to drive their own healthcare choices; group practices that drive costs lower for payers and patients that are paying for their own care, while increasing quality; innovative treatment paradigms that are increasingly offered by outpatient physician specialty models; and the outsourcing of business processes that can best be accomplished at scale with better price or better quality.

As for near-term areas of new investment, Cella said the healthcare team is focused on specialties where there may be less immediate disruption as a non-essential service. That includes home care, the pharmaceutical supply chain and physician businesses focused on high-acuity cases, he said.

Action Item: Check out Sun’s latest Form ADV.