Episode 204 – Requested Replay: Defining Private Equity

“Dentistry is the star right now. It’s what private equity wants.” ~Dr. Bruce B. Baird

You’ve probably heard the term “private equity” thrown around a lot recently. Well the reason is private equity is a natural part of the conversation about DSOs and consolidation of the dental market.

But what you probably want to know is what it means for you and the value of your practice as a private dental business owner.

I’ve been getting this question a lot recently about private equity, EBITDA, and what it means for independent practice owners and their options for selling their practice for the highest value.

So today, I am going to shed some light on private equity so you walk away knowing:

• What private equity is
• How it impacts the dental market
• What private equity might mean for your future

Never miss an episode! Subscribe on iTunes & Spotify. Visit us at http://www.productivedentistpodcast.com

EPISODE TRANSCRIPT

Dr. Bruce Baird 2:18
Hi, this is Dr. Bruce Baird with the Productive Dentist Podcast. Today, I wanted to talk, last week before last we talked about EBITA and I was telling you that I was out in Honolulu speaking to a bunch of dentists and nobody knew what it was, and hopefully you have a little bit better understanding of what EBITA is. It’s basically is the profit in your practice. When you take away all the stuff like your car that you expense through, a lot of those things, and that is what we call your EBITA. So if we’re looking at another question that I get, I was just down in San Antonio, on a panel discussion this past weekend at Freedom founders, that’s David Phelps’ course for and it’s not just real estate investing, but it’s a really great course on alternative investing, including real estate, but they have lots of different experts that come in, but the question kept coming up about private equity, and what is private equity and I’m done. You know, when I’ve been doing my research and, and really learning about consolidation theory, which is the aggregation of dermatology practices, the aggregation of Ophthalmology practices of physicians, and for the last 15 years dentistry, is kind of the, it’s the star right now. It’s what private equity wants and what private equity is. Private equity is actually a fund that is put together for investing. So let’s say a company says, goes out and finds investors. And these are, these are not people wanting to invest, you know, 50,000 or 100,000. These are families and groups that are interested in investing hundreds of millions of dollars and so they put this together, and they do it in a way that allows these people to have a fixed contract meaning it is a closed-end contract. I’m going to invest X amount of dollars with you. I’m going to put in, I’m going to put in 20 million. They find a lot of people that want to invest that 20 million and that becomes their fund. Now that fund has a life span. That lifespan is five to seven years usually, and it has a guaranteed return. So what the group does, that is forming this private equity, and there are huge private equity groups that have, you know, hundreds of billions of dollars as a part of it. And they get more investors because they’ve had a great track record of doing great things. The KKRs, the AKKRs, which I saw compassionate finance to two years ago. They have a huge track record of, of returns, I’m getting returns of 8% 9% 10%. And that’s what they’re looking for is that seven to 10, maybe even 12% return for the investors.

Dr. Bruce Baird 5:40
Now, what they want is the opportunity to get a 3x or 4x. So what I’m saying is, if they invested $100 million, over a five-year period, what they’d like to do is get back a return of 100 million, let’s say 350 million, or 400 million, this is what they do. So they’re looking for cash-producing businesses that have profit that have EBITA, and they go straight to doing this investing, but being a closed fund, what I want you to understand is, and it can be confusing, but you know, let’s say it’s a five-year closed fund or a seven-year closed fund, they pay that person, that investor, here is 10%. So if it’s 100 million, here’s 10 million, and they do they pay them that 10 million every year, for five years and at the end of that five years, if it’s a five-year close and contract, they get their money back. So here’s your 100 million, and here’s your 50 million for a 10% return, but in order to do that, they have to liquidate whatever it is that they’ve purchased. That’s what then comes into word the closed-end fund. So they invest at five years, well, what do they do at five years? How do they how do they? How does it change? What do they have to do? Well, what they have to do is they have to find another private equity firm, usually a larger group. So there’s all different sizes of private equity, and they’ll find a larger group that will come in and buy them out. So they leave the investment and now there’s a new investment. I know with Heartland, they had a certain group of investors, and then that changed to the Canadian Teachers Association, and then that changed to KKR. In other words, the big boys start to get involved, and I know BlackRock, one of the largest private equity groups in the country, they have just gotten involved in dentistry. You know, so they’re starting to invest in dentistry, and they’re the largest in the world, but one of the questions and when we start talking about private equity, and DSOs, or forming a DSO, my question has always been, “Well, what happens and we know consolidation is going to go on for, gosh, seven more years, eight, nine, 10?”

Dr. Bruce Baird 7:35
You know, nobody knows for sure but when the market gets to the 65-70 %, like we’ve talked in the past, that’s when private equity is not as it’s not as good an investment for the private equity groups. So what do they do at the end of this seven or eight-year cycle? If in fact, you know, we’re doing five-year closed-end agreements, and that’s something I’ve done a lot, a lot of research, ask lots of questions and what will happen when you get to the point of full consolidation in the marketplace? What happens to the private equity groups? And I’m going to use the term that gets left holding the bag. Well, that’s one way of thinking, but the truth is, they’re not really holding the bag. I mean, like they’re not going to be able to do anything with it. What we’re going to see and, this is my prediction and take it for what it’s worth, but my prediction is we’re gonna see a consolidation of the consolidators, and I think that that’s pretty well what you’re gonna see, how five to seven major groups, you know, I would assume that The Heartland will be there, Aspen, you know, there’s are some that are so large, and they’re going to start buying up other DSOs in the marketplace,and that will be the first step and then you know, you’re going to start seeing the possibility of them giving a return because they have cash coming in, they own these practices. They have cash coming in, and they would love to leverage that. We say insurance companies with other groups that are looking for return, it’s going to go to more asset base, just straight returns are not going to try to keep flipping and making this because there won’t be anybody to flip it to, you know, to make that 5x ,4x return, but they still have a great product, they still have these dental offices that are still producing. So when I look at it, I go, “Okay, I understand that.” The other thing that they might do, or they will do is, that’s when you’ll see two or three of these groups, these large groups go public, and that’s where you see them getting returns, you know, 30x times, you know, 30 times they’re, they’re EBITA and so that’s the scenario, but what does that have to do with dentists? What does that have to do with a dentist selling to a DSO? And I’ve told you guys we’re doing a group, all of our PDA docs, we’re bringing our PDA docs together and we’re presenting that straight to private equity.

Dr. Bruce Baird 10:29
We currently have cash, we’re closing in on 40 offices that are interested with a total EBITA of 25 million to 25 million plus, and these offices have not committed 100% yet. We’re going through the process of building the platform, but they’ve shown an interest and they we’ll be signing an LOI here probably in the next three weeks, that says, “Yes, I’m interested.” Well, there is no obligation that they have to sell until we go out and find the right private equity group, and the right private equity group is going to be somebody who is already been in the game, or who wants to get in the game of dentistry, and find great returns. These practices that have been a part of the Productive Dentist Academy, they’re unicorns, they have EBITA as of 25% of their total collections. So these are, these are top producing and top profitable type practices, and we’re aggregating them, and we’re also including coaching with it. So our coaching clients at PDA grow, on average, about 13%, year over year. So we’re going to bake in coaching with that, we’re going to continue to grow that business and continuing to add PDA Docs to this as they determined, yes, they want to do that. I told you last time, why on earth would you sell a practice when you’re 41 years old, and now I understand that much better. The reason I understand it better is because you’re taking cash off the table, and people say, “Well, why would I want to do that?” Don’t confuse, don’t confuse cash and ownership. You know, if you’re able to do whatever it is you want to do, meaning, no one’s going to tell you how to do your dentistry, no one’s going to force you to do more crowns or less crowns, no one’s going to change your supplies, no one’s going to change your lab. What they’re going to do is, they may negotiate with that lab and get better pricing, they may aggregate your accounting services, they may do these things to save money, but that money goes to the bottom line, which is good for private equity. It’s also good for the doctor that owns portion of his practice. So having said that, that’s the deal that we’re doing, we’re putting it together so that doctors have options. You’re still going to be an independent practitioner. So what happens if you sell 60% of your business and you roll 40%, meaning a joint venture with this DSO? Well, you know, you still earn 40%. You get 40% of the distributions of profit.

Dr. Bruce Baird 14:02
Again, why would why would private equity want to mess with offices that are doing phenomenal? And I bring that up, because you see people out there saying, “Oh, yeah, just sign up and bring your office and pay us money for the evaluation.” I talked about that last time. “Pay us money.” No, that’s BS, don’t, don’t pay anybody money to do an evaluation, because there’s plenty of people out there that will do it at no charge. Now, it has to be kind of an independent situation where you can get an evaluation of your EBITA, but doing it from a third-party standpoint, not from the DSO, they’re spying on you. Why? Because they’re going to control what your EBITA is, and that’s going to tell you a lot about what your overall value is. So what we’re doing at PDA is we’re using an independent group that evaluates all of our offices and gives everybody that EBITA on the same playing field, on the same deal, and I, and that, to me is extremely important. So we’re going to continue to talk here, and I know, you know, I like doing these podcasts 12 to 15 minutes long so that you can hear it on the way to work or whatever, but what happens to the dentist? And I’m going to talk about this next on the next podcast we do about what is the dentist do and how do they make money through the process of working through a DSO, and what the DSO is. If they’re leaving you alone and letting you do the things that you want to do, which truthfully is the PDA practices. They don’t mess with us, Heartland never mess with me after I sold to Heartland 12 years ago. Why? Because we were productive, we were we were putting out tons of revenue. So those are the things that we look at, and we’ll talk about that on the next podcast. So no, I hope, I hope that the discussion of private equity was helpful. I see. I get lots of questions about it on an ongoing basis. So I look forward to the next podcast and to talk a little bit more about what is the dentists see and how does that work for them. Talk to you guys next time and appreciate your votes for top podcast and tell your friends.

Dr. Bruce Baird 16:20
Thank you for joining me for this episode of the Productive Dentist Podcast. If you found this episode helpful, make sure you subscribe, pass it along to a friend. Give us a like on iTunes and Spotify or drop me an email at podcast@productivedentist.com don’t forget to check out other podcasts from the Productive Dentist  Academy of productivedentistspodcast.com Join me again next week for another episode of the Productive Dentist Podcast