The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference is authored by our colleagues Amanda Roenius  and Timothy Fry.

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Private equity investment in various sub-specialties, such as retina and oral surgery, continues to be a significant trend, providing even more opportunities for private equity to invest in the healthcare space. Experts spoke on a panel titled “Advanced PPM Topics: The Evolution of Sub-Specialty Investment Strategies” at the 17th Annual Healthcare and Life Sciences Private Equity & Finance Conference, held in Chicago on February 19 and 20, 2020.

Experts included Giovanni Barbat, President at American Vision Group; Roy Berjano, Co-Founder and CEO at Scale Physician Group; Richard Hall, President and CEO at US Oral Surgery Management; Todd Roland, Principal at GCM Grosvenor; and Timothy Wentink, Managing Director at Twin Brook Capital Partners. The panel was moderated by Tim Fry, an attorney in the Chicago office of McGuireWoods LLP.

Here are five key takeaways from the panel discussion.

1. Additional opportunities (and complexity). The growth of sub-specialties provides additional opportunities to expand the scope and target range of investment opportunities. As the experts opined, both multi- and single-specialties provide excellent growth opportunities within a specific sector. At the same time, investors should understand the unique challenges of investing in sub-specialties given the additional complexities surrounding payor relationships, referral patterns, and physician alignment. These complexities should be carefully weighed and addressed at the outset to maximize success.

2. Understanding payor reimbursement is key. Investment in sub-specialties requires a more thorough expertise in the specific sector, especially as it relates to payor reimbursement. For example, experts commented that as private equity investment in sub-specialties increases, payors will begin looking for more continuity of care and to better understand the investment structure. Additionally, although many sub-specialties remain heavily fragmented, certain sub-specialties tend to see a higher percentage of Medicare and Medicaid reimbursement, causing some investors to shy away. Understanding the reimbursement landscape not only better positions investors from a financial standpoint, but payment diversification will continue to play a major role for investment.

3. Create a clear vision for sub-specialties within the platform. Investors should have a clear vision for their sub-specialty investments. As the experts opined, in some healthcare sectors, sub-specialty investment has been slower to see growth. Accordingly, in those sectors, experts suggest investors focus their investments on fewer sub-specialties as opposed to “owning the market.” According to some experts, this strategy will, in turn, provide more time to focus on the day-to-day needs of growing a particular investment. On the other hand, some experts juxtaposed this discussion, looking to sectors such as vision in which it may make sense for investors to own more of the market and become vertically integrated. Ultimately, for success, private equity funds will need to create a clear vision for what their sub-specialty investments look like based on the overarching sector.

4. Growth models may differ. Understanding growth strategies and how they may vary between sub-specialties is important for success. As investors look to grow their sub-specialty investments, it is important to understand that not all sub-specialty investments can (or should) grow at the same rate. Accordingly, the experts encouraged investors to fully understand the business they are committing to and partnering with in order to best set forth a realistic growth model. Similarly, experts also caution that there is the potential for growing too quickly, urging investors to take careful consideration in selecting practices within a sub-specialty with whom to partner.

5. Physician alignment is mission critical. Alignment, especially amongst younger, entrepreneurial physicians, is a key component for sub-specialty investment success. In discussing how investors can best ensure alignment and incentivize new physicians, the experts suggested treating physician alignment as its own separate business model. Investors should provide physicians with a separate pitch deck and consider various incentive models, such as rollover equity or an associate equity pool to attract younger physicians and gain their buy-in to the overall model. Investors should seek to strike a balance in aligning with both the more seasoned physicians, who are better positioned to sell, while at the same time, attracting the next generation of providers who will help excel growth.