PE firm is buying my [medical] practice. Help!

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iRetina
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PE firm is buying my [medical] practice. Help!

Post by iRetina » Sun Jan 07, 2018 8:24 pm

Physician here. Work as an associate. I'm not a partner in the practice. Only the owner is partner.

A healthcare focused PE firm is buying the practice that I work for. We will be the "platform practice" in the area. They plan on acquiring surrounding "anchor practices" to consolidate and drive up profits. At any rate, as part of the deal, the PE firm is offering physician employees the opportunity to invest in the PE firm/fund. The IRR quoted on previous funds this firm managed (now closed) ranged from 18% - 35%. Their funds have typically been held for 4-5 years. Held $0.5-$1.5B in assets.

Tomorrow night I have a phone conversation scheduled with one of the head PE guys to discuss possibly investing in their current fund (started 2016) which currently has $2.3B in assets.

What questions should I be asking? Expected IRR? Class shares?? I know little about investing in PE firms. Help!

TIAX
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Re: PE firm is buying my practice. Help!

Post by TIAX » Sun Jan 07, 2018 8:35 pm

Would you be investing in something like this if you weren't an employee?

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ResearchMed
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Re: PE firm is buying my practice. Help!

Post by ResearchMed » Sun Jan 07, 2018 8:37 pm

Don't invest too much, if you invest at all.

Otherwise, you'll have your income *and* your investments based pretty much upon the same thing.

I know nothing about PE, so I can't comment on how to deal with that on its own.

RM
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Offshore
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Re: PE firm is buying my practice. Help!

Post by Offshore » Sun Jan 07, 2018 8:42 pm

I am a physician as well. My practice looked at selling to a PE firm some years ago. We did not (remain a private practice). We saw little upside, and much to be fearful of. I get it that you have no choice in the sale. You indicate that you do have a choice in investing in the firm. I can not give you specific questions to ask on your conference call tomorrow, however, I will say this; "If you don't fully understand all facets of what you are investing in, don't do it."

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Re: PE firm is buying my practice. Help!

Post by Raybo » Sun Jan 07, 2018 9:04 pm

Don’t invest more than you are willing to lose.

Also, remember that this is not a publicly traded investment. So, getting access to your money will be at the whim of the managing partner/corporation. How does this entity report taxes? Do they have capital gains or dividends? Will you get imputed income/losses/depreciation from the investment that you will have to report on your income taxes.

When you do get your money out, how does it do me to you? Capital gain or some other method?

What happens if you leave the practice?

I’d suggest getting a copy of the prospectus or whatever contract you will be asked to sign and read it carefully. If you can’t understand it, wither don’t invest or hire an advisor/lawyer to explain it to you. If they don’t have such a document, don’t invest.
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Re: PE firm is buying my practice. Help!

Post by veindoc » Sun Jan 07, 2018 9:16 pm

Is this your only opportunity to buy into the PE firm? Or will there be other opportunities at say year 1, 3 or 5, if you decide to pass right now? How will you be able to divest from your investment if you wanted to? Do they have financials you can review from previous years?

The reason I ask is because my father got wrapped up in one of these PE firms and it did not end well for him.
He was in private practice for over 30 years. He wanted to slow down and just see patients and essentially eliminate the business side of his practice.
Things were ok late 2013-2014, but the firm did not acquire nearly as many practices as they had expected and none were as productive as my father's. Unbeknownst to him he essentially ended up supporting the entire enterprise.
In 2015, my mother became acutely ill over several months and ultimately died. It was a roller-coaster of surgery, ICU, ER visits, re-admissions, rehab, etc. Multiple times we were called in the middle of the day or night to learn my mother's situation had taken a turn for the worse. My father's main concern was her well-being. The situation was complicated by the fact that my mother became ill while visiting me - several states away. So he was traveling back and forth weekly. Then there was the wasted time and effort of trying to find a rehab or nursing facility that would accept her back home and how we could safely transport her there. It never happened. He was busy but did not see as many patients as he had previously, approx 75% of his previous load. Well, 9 months out of the 12 in 2015, my father was not paid by the firm. No salary, nothing. He sent inquiries to the heads to find out what was going on but couldn't really pursue the issue until after my mother passed. He simply did not have the energy to fight another battle until after she was gone. At that point, it was clear the firm was not solvent and they parted ways. He never got his money as a lawyer would have cost more than the pay-out.

I don't know all the details. The whole situation was pretty painful for him, as expected, so we don't talk about it much. In hindsight, he did not do his due-diligence. They had no previous track record of success. He was also the first doc to sign-on. So I would tread lightly. As another person commented, don't put all your eggs in one basket. At the same time, investing a bit into this company will give you a peek into the financials so you know how solvent the company is and when it might be time to move on.

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Re: PE firm is buying my practice. Help!

Post by runner540 » Sun Jan 07, 2018 9:31 pm

I suggest you find an attorney who can help you navigate the agreements (investment, employment, non compete, etc) that will be coming your way on tight timelines.

Do you know what a capital call is?

This could be a good opprotunity, but it is risky.

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Re: PE firm is buying my practice. Help!

Post by drk » Sun Jan 07, 2018 9:40 pm

runner540 wrote:
Sun Jan 07, 2018 9:31 pm
I suggest you find an attorney who can help you navigate the agreements (investment, employment, non compete, etc) that will be coming your way on tight timelines.
This should be the end of the thread. It is the only appropriate advice for OP's situation.

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Re: PE firm is buying my practice. Help!

Post by JohnFiscal » Sun Jan 07, 2018 10:01 pm

Offshore wrote:
Sun Jan 07, 2018 8:42 pm
I will say this; "If you don't fully understand all facets of what you are investing in, don't do it."
Really good words of wisdom. Saved my bacon on numerous occasions.

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Re: PE firm is buying my practice. Help!

Post by buzzbuzzbuzz » Sun Jan 07, 2018 11:22 pm

Edited
Last edited by buzzbuzzbuzz on Mon Jan 08, 2018 7:50 am, edited 1 time in total.

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GreatOdinsRaven
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Re: PE firm is buying my practice. Help!

Post by GreatOdinsRaven » Sun Jan 07, 2018 11:55 pm

Find out how your equity shares will be valued and when you can sell them. Also, you need to know the vesting schedule for your equity shares. Many of these deals are structured with 5 year vesting schedules. Often, PE firms dictate when shares can be sold (liquidity events). This is often at the time one PE firm sells to another (larger) PE firm. This could result in the ability to sell shares at the “best” price, the price the selling PE firm is receiving from the buying PE firm.

Some contracts allow you to sell the shares anytime you choose (once vested). Some PE groups allow you to sell the shares to your partners (first right of refusal) and if there are no buyers the PE firm agrees to buy the shares (at a valuation that should be predetermined based on a formula).

Your noncompete will almost certainly be changed and it will probably become more restrictive (longer duration).

Good luck.
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Valuethinker
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Re: PE firm is buying my [medical] practice. Help!

Post by Valuethinker » Mon Jan 08, 2018 4:04 am

[edited see below]
Last edited by Valuethinker on Mon Jan 08, 2018 8:27 am, edited 1 time in total.

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Re: PE firm is buying my [medical] practice. Help!

Post by 4nursebee » Mon Jan 08, 2018 4:58 am

What a great business model. Borrow your money then make you work hard to pay yourself back?
4nursebee

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Re: PE firm is buying my [medical] practice. Help!

Post by Valuethinker » Mon Jan 08, 2018 8:26 am

Valuethinker wrote:
Mon Jan 08, 2018 4:04 am
iRetina wrote:
Sun Jan 07, 2018 8:24 pm
Physician here. Work as an associate. I'm not a partner in the practice. Only the owner is partner.

A healthcare focused PE firm is buying the practice that I work for. We will be the "platform practice" in the area. They plan on acquiring surrounding "anchor practices" to consolidate and drive up profits. At any rate, as part of the deal, the PE firm is offering physician employees the opportunity to invest in the PE firm/fund. The IRR quoted on previous funds this firm managed (now closed) ranged from 18% - 35%. Their funds have typically been held for 4-5 years. Held $0.5-$1.5B in assets.

Tomorrow night I have a phone conversation scheduled with one of the head PE guys to discuss possibly investing in their current fund (started 2016) which currently has $2.3B in assets.

What questions should I be asking? Expected IRR? Class shares?? I know little about investing in PE firms. Help!
EDIT

I assumed they are offering you a stake in a well diversified fund. The typical fund has a 10 year life, 5 year active investing period (commitment period) and invests in 20-30 deals. And

If none of that is true, and it's unclear (at least to me) what they have offered you, then I would tread carefully.

If they are offering you a stake in the business for which you work, what is key is what happens in terms of what goes wrong (e.g. they fire you). And whether they are offering you preferential terms, etc. (there is "sweet" equity which is on preferential terms, and "sweat" equity which is what management gets, because they work so hard for it).

The basic rule of thumb that you probably do not want to have more than 5-10% of your net worth in this still holds. And that you need a lawyer to review the investment contract.

Original answer

You probably need a lawyer to explain the clauses in the agreement. I am assuming that they are offering an investment in the Fund, not in the Firm itself-- the Firm itself is usually an adviser to the Fund (they will have several funds at any one time that they manage) for which they are paid typically 2 & 20 - 2% pa on committed capital (even that not yet invested) and 20% "carried interest" or carry, a performance fee (usually above a benchmark return to the investors, the Limited Partners or LPs, of 6-8% p.a.). Yes you are paying them a lot of fees (if the fees are higher than that, I would start to raise an eyebrow- -red flag; there are some Venture Capital (tech) funds that do higher than that, but it's impossible for you and I to get access to the successful ones, and there's definitely a bubble going on in tech VC right now).

Generally:

- returns can be good - at least 10% pa and maybe 15% over the life of the fund
- risk is high in the individual deals because they are leveraged - some can go very wrong
- you need to understand what happens if you leave employment, get divorced, die
- you need to understand the cash flow impacts on you - when a PE fund "calls" on its investors, they have to stump up the cash or they generally lose the rights to all the money they have invested so far ("Limited Partner Default")
- you need to understand the tax implications (they will doubtless be messy, lots of ugly forms)
- what reporting information will you get on the portfolio companies? (to be honest, that's half the fun of these things, reading about the performance and strategies of private companies)

Therefore

- if you do go for this, I would say not more than 10% of your net worth, maybe 5% - -because in principle you could lose the lot. Normally you won't (it doesn't sound like they are a tech fund), but your money will be tied up for up to 10 years (probably no significant payments for at least 3) and you could wind up, after tax, not much further ahead than you started

- the main thing is to have a lawyer go through the agreements to explain your commitments

As long as you stay below 10% of your net worth (or lower, 5% is probably a good benchmark) then you can probably afford this bet. It will hurt, then, if it goes horribly wrong (I'd define that as getting back less than your committed capital over the usual 5 year commitment period (when they can draw you down to make investments). But it won't finish you off, financially.

I know people who increase their mortgage to go into these things. Unfortunately we are relatively late in the cycle - PE performance tends to track the economic cycle-- the most successful PE investors are those who invest at the bottom of the recession. Thus, funds raised in 2008-9 (there were very few) have had storming performance, ditto funds raised 2001-03 and 1990-1993. However funds raising in 2006-07 (there were a lot more) had horrible performance. The year a fund is raised is called its "Vintage" btw.

If they are doing relatively small deals, in a focused area of the economy, then they may escape the worst of the cycles. This late in the economic cycle, with this much money in the PE industry, deal valuations are way over the top (at least in Europe) and there's going to be some unpleasant reality checks.
[/quote]

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Re: PE firm is buying my [medical] practice. Help!

Post by GreatOdinsRaven » Mon Jan 08, 2018 8:36 am

Valuethinker wrote:
Mon Jan 08, 2018 8:26 am
Valuethinker wrote:
Mon Jan 08, 2018 4:04 am
iRetina wrote:
Sun Jan 07, 2018 8:24 pm
Physician here. Work as an associate. I'm not a partner in the practice. Only the owner is partner.

A healthcare focused PE firm is buying the practice that I work for. We will be the "platform practice" in the area. They plan on acquiring surrounding "anchor practices" to consolidate and drive up profits. At any rate, as part of the deal, the PE firm is offering physician employees the opportunity to invest in the PE firm/fund. The IRR quoted on previous funds this firm managed (now closed) ranged from 18% - 35%. Their funds have typically been held for 4-5 years. Held $0.5-$1.5B in assets.

Tomorrow night I have a phone conversation scheduled with one of the head PE guys to discuss possibly investing in their current fund (started 2016) which currently has $2.3B in assets.

What questions should I be asking? Expected IRR? Class shares?? I know little about investing in PE firms. Help!
EDIT

I assumed they are offering you a stake in a well diversified fund. The typical fund has a 10 year life, 5 year active investing period (commitment period) and invests in 20-30 deals. And

If none of that is true, and it's unclear (at least to me) what they have offered you, then I would tread carefully.

If they are offering you a stake in the business for which you work, what is key is what happens in terms of what goes wrong (e.g. they fire you). And whether they are offering you preferential terms, etc. (there is "sweet" equity which is on preferential terms, and "sweat" equity which is what management gets, because they work so hard for it).

The basic rule of thumb that you probably do not want to have more than 5-10% of your net worth in this still holds. And that you need a lawyer to review the investment contract.

Original answer

You probably need a lawyer to explain the clauses in the agreement. I am assuming that they are offering an investment in the Fund, not in the Firm itself-- the Firm itself is usually an adviser to the Fund (they will have several funds at any one time that they manage) for which they are paid typically 2 & 20 - 2% pa on committed capital (even that not yet invested) and 20% "carried interest" or carry, a performance fee (usually above a benchmark return to the investors, the Limited Partners or LPs, of 6-8% p.a.). Yes you are paying them a lot of fees (if the fees are higher than that, I would start to raise an eyebrow- -red flag; there are some Venture Capital (tech) funds that do higher than that, but it's impossible for you and I to get access to the successful ones, and there's definitely a bubble going on in tech VC right now).

Generally:

- returns can be good - at least 10% pa and maybe 15% over the life of the fund
- risk is high in the individual deals because they are leveraged - some can go very wrong
- you need to understand what happens if you leave employment, get divorced, die
- you need to understand the cash flow impacts on you - when a PE fund "calls" on its investors, they have to stump up the cash or they generally lose the rights to all the money they have invested so far ("Limited Partner Default")
- you need to understand the tax implications (they will doubtless be messy, lots of ugly forms)
- what reporting information will you get on the portfolio companies? (to be honest, that's half the fun of these things, reading about the performance and strategies of private companies)

Therefore

- if you do go for this, I would say not more than 10% of your net worth, maybe 5% - -because in principle you could lose the lot. Normally you won't (it doesn't sound like they are a tech fund), but your money will be tied up for up to 10 years (probably no significant payments for at least 3) and you could wind up, after tax, not much further ahead than you started

- the main thing is to have a lawyer go through the agreements to explain your commitments

As long as you stay below 10% of your net worth (or lower, 5% is probably a good benchmark) then you can probably afford this bet. It will hurt, then, if it goes horribly wrong (I'd define that as getting back less than your committed capital over the usual 5 year commitment period (when they can draw you down to make investments). But it won't finish you off, financially.

I know people who increase their mortgage to go into these things. Unfortunately we are relatively late in the cycle - PE performance tends to track the economic cycle-- the most successful PE investors are those who invest at the bottom of the recession. Thus, funds raised in 2008-9 (there were very few) have had storming performance, ditto funds raised 2001-03 and 1990-1993. However funds raising in 2006-07 (there were a lot more) had horrible performance. The year a fund is raised is called its "Vintage" btw.

If they are doing relatively small deals, in a focused area of the economy, then they may escape the worst of the cycles. This late in the economic cycle, with this much money in the PE industry, deal valuations are way over the top (at least in Europe) and there's going to be some unpleasant reality checks.
[/quote]

Good points. Recently, I have seen PE offerings with significantly different terms. For example one firm offers equity shares that vest over 5 years but in the event of both voluntary and involuntary unemployment you are forced to sell your shares at the (then) current valuation (determined by a prespecified formula). Another deal I have seen offered to a physician practice called for equity ownership that vested over three years and whose shares could be sold at anytime once vested. In this particular deal the seller is able to first offer her shares to her coworkers for purchase. If they decline to purchase them then either the purchasing company (created by the PE firm) can buy the shares or if they decline to purchase the shares then the PE firm, itself, has the obligation to buy the shares. In the latter deal example the terms allow one to gift the shares to family upon your death. In the former example your shares are immediately redeemed by the company upon your death and the cash value is paid to your estate.

To the OP you might consider surfing over to the WCI website and see if there have been any discussions on this topic.

Good luck.

GOR
"The greatest enemies of the equity investor are expenses and emotions." -John C. Bogle, Little Book of Common Sense Investing. | | "Winter is coming." Lord Eddard Stark.

kenoryan
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Re: PE firm is buying my [medical] practice. Help!

Post by kenoryan » Mon Jan 08, 2018 12:49 pm

if You become an employee of the PE firm, it won’t be long before your practice gets resold. They’re in for a quick profit and then move on to something else. The problem will be if you become an employee you will have a no-compete clause forcing you to leave town if you decide to quit later.

If you have the gumption, turn down the offer of employment, and if you’re still young, start your own independent practice. This is a great time to build something that you will own yourself. And you can sell it for a profit when you’re ready.

There are plenty of small towns that need a retina specialist. You could do cataracts and sell glasses till retina work picks up.

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Re: PE firm is buying my [medical] practice. Help!

Post by DaftInvestor » Mon Jan 08, 2018 12:56 pm

I'd look at it as a high-risk investment - I wouldn't even make it part of your AA - just use money you aren't afraid to lose.
I've only got experience with tech companies I've worked for that have taken private through PE firms. In one case I made a little money while in another I had a tax write-off.
One caution - they likely will tell you stories with survivor-ship bias. When a PE bought my last company they talked about how much they launched their average IPOs and then gave examples of several companies whereby after they took them they increased EBITDA substantially over 5 year periods. What they failed to tell (until prompted) was how many companies they took whereby they lost money or the companies were run completely into bankruptcy.
There is a lot to understand (What are the different class shares; etc. - with Tech PEs there are typically Class A shares that are paid out first with a specified return PRIOR to any Class B shares being paid out, etc.).

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Re: PE firm is buying my [medical] practice. Help!

Post by GibsonL6s » Mon Jan 08, 2018 3:24 pm

4nursebee wrote:
Mon Jan 08, 2018 4:58 am
What a great business model. Borrow your money then make you work hard to pay yourself back?
I agree, Do you produce any of the revenue? In other words if you leave does their income and profit go down? I would be looking to get a share for signing an agreement to stay. See if you can leverage this "opportunity" into something for yourself. I would also simultaneously be figuring out your market value and how other opportunities in the market look. Don't be passive in an instance like this as cost cutting is frequently a strategy of PE firms. Someone just put a shark in your pool and you need to act accordingly.

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Re: PE firm is buying my [medical] practice. Help!

Post by climber2020 » Mon Jan 08, 2018 3:33 pm

kenoryan wrote:
Mon Jan 08, 2018 12:49 pm
This is a great time to build something that you will own yourself. And you can sell it for a profit when you’re ready.
Good luck with that. The old guys in our town who started decades ago when medical practices were worth a lot more have been trying to sell their practices for years. No one is willing to pay even a fraction of the asking prices when it's so much cheaper to start from scratch.

Having your own practice is great for flexibility and independence, but I would not go into it with the expectation to make a ton of money from the practice sale when you eventually decide to quit unless you're one of the lucky ones who can find a greater fool.

kenoryan
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Re: PE firm is buying my [medical] practice. Help!

Post by kenoryan » Mon Jan 08, 2018 3:46 pm

climber2020 wrote:
Mon Jan 08, 2018 3:33 pm
kenoryan wrote:
Mon Jan 08, 2018 12:49 pm
This is a great time to build something that you will own yourself. And you can sell it for a profit when you’re ready.
Good luck with that. The old guys in our town who started decades ago when medical practices were worth a lot more have been trying to sell their practices for years. No one is willing to pay even a fraction of the asking prices when it's so much cheaper to start from scratch.

Having your own practice is great for flexibility and independence, but I would not go into it with the expectation to make a ton of money from the practice sale when you eventually decide to quit unless you're one of the lucky ones who can find a greater fool.
i


I guess it depends on what kind of ‘medical practice ‘ we are talking about here. Family practice probably won’t sell for a lot. ENT, Urology, OBGYN Ortho, sleep center are better. Anyway it’s better to work for yourself than for someone else, especially a corporate entity that just wants to squeeze every penny out of your practice.

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Re: PE firm is buying my [medical] practice. Help!

Post by dm200 » Mon Jan 08, 2018 3:52 pm

Wow! When I go to a Doctor, I am happier if that doctor spends time reading medical journals rather than The Wall Street Journal! :oops:

kenoryan
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Re: PE firm is buying my [medical] practice. Help!

Post by kenoryan » Mon Jan 08, 2018 4:23 pm

An Emergency Medicine group recently sold out in my area. It was bought by a corporate entity which is heavily backed by Wall Street investors. There are 9 docs. Gross revenue was $7 million. The sale price was $24 million. Part of the deal was the docs had to stay and work for a minimum of three years at a reduced income. But they all got close to 2.5 million each. That money was treated as a LTCG.

For the company that bought, their investment is $24M but after expenses they make a profit of $2.4. That’s a 10% returns. They turn around and increase the billing, make better reimbursement deals with the payors, decrease costs and sell it in two years for $30 M.

That’s corporate medicine. And docs are the ones bringing in the money for the Wall Street overlords.

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dm200
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Re: PE firm is buying my [medical] practice. Help!

Post by dm200 » Mon Jan 08, 2018 4:30 pm

kenoryan wrote:
Mon Jan 08, 2018 4:23 pm
An Emergency Medicine group recently sold out in my area. It was bought by a corporate entity which is heavily backed by Wall Street investors. There are 9 docs. Gross revenue was $7 million. The sale price was $24 million. Part of the deal was the docs had to stay and work for a minimum of three years at a reduced income. But they all got close to 2.5 million each. That money was treated as a LTCG.
For the company that bought, their investment is $24M but after expenses they make a profit of $2.4. That’s a 10% returns. They turn around and increase the billing, make better reimbursement deals with the payors, decrease costs and sell it in two years for $30 M.
That’s corporate medicine. And docs are the ones bringing in the money for the Wall Street overlords.
We have never used one, but over the last 10-15 years or so, we see more and more small urgent care facilities popping up in various neighborhoods. Then, in the last year or two, the signs change and these places are now part of the same big corporate entity that operates several of the very large - and growing - hospital systems. Must be (very) profitable for someone.

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eye.surgeon
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Re: PE firm is buying my [medical] practice. Help!

Post by eye.surgeon » Mon Jan 08, 2018 4:56 pm

My experience with PE purchases of medical practices is the ones who profit are, in order:
1. the PE firm
2. the physician owners, mostly because income is taken in advance as capital gains instead of regular income

Notice who's not on that list?

Just my experience.
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett

CFOKevin
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Re: PE firm is buying my [medical] practice. Help!

Post by CFOKevin » Mon Jan 08, 2018 5:00 pm

Closer to a 20% annual return given that deals are typically 50/50 debt/equity.

So $24M practice with $2.4M EBITDA and a moderate growth rate pays off its debt in 5 years and sells for $30-35M to the equity holder who committed $12M to the deal. Lots of money made for LPs at 2-3x returns, even after 2/20.

Cheers and ROIC,

Kevin

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Re: PE firm is buying my [medical] practice. Help!

Post by Valuethinker » Mon Jan 08, 2018 5:27 pm

CFOKevin wrote:
Mon Jan 08, 2018 5:00 pm
Closer to a 20% annual return given that deals are typically 50/50 debt/equity.

So $24M practice with $2.4M EBITDA and a moderate growth rate pays off its debt in 5 years and sells for $30-35M to the equity holder who committed $12M to the deal. Lots of money made for LPs at 2-3x returns, even after 2/20.

Cheers and ROIC,

Kevin
Fund IRRs will be a lot lower - you've got the writeoffs and the living dead in there?

More than 15% IRR is bloody good in this market, going forward, for a PE fund.

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Re: PE firm is buying my [medical] practice. Help!

Post by Valuethinker » Mon Jan 08, 2018 6:04 pm

DaftInvestor wrote:
Mon Jan 08, 2018 12:56 pm
I'd look at it as a high-risk investment - I wouldn't even make it part of your AA - just use money you aren't afraid to lose.
I've only got experience with tech companies I've worked for that have taken private through PE firms. In one case I made a little money while in another I had a tax write-off.
One caution - they likely will tell you stories with survivor-ship bias. When a PE bought my last company they talked about how much they launched their average IPOs and then gave examples of several companies whereby after they took them they increased EBITDA substantially over 5 year periods. What they failed to tell (until prompted) was how many companies they took whereby they lost money or the companies were run completely into bankruptcy.
There is a lot to understand (What are the different class shares; etc. - with Tech PEs there are typically Class A shares that are paid out first with a specified return PRIOR to any Class B shares being paid out, etc.).
With Leveraged Buy Outs, the PE firm tends to use Loan Stock/ Loan Notes which pay a fixed return (say 8% pa) and may be convertible into common stock on sale or exit. Thus giving themselves downside protection compared to other shareholders, but still capturing the equity upside.

It's more or less the same as Classes of shares BUT these are debt instruments, so they always get paid out before equity holders get *any* proceeds.

(the portfolio company can also usually make use of the interest on the LS/LN as a tax deductible expense).

Topic Author
iRetina
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Re: PE firm is buying my [medical] practice. Help!

Post by iRetina » Mon Jan 08, 2018 9:12 pm

Thank you everyone for your outstanding replies. Huge help. I remain in awe of the collective knowledge of the Boglehead community!

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GreatOdinsRaven
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Re: PE firm is buying my [medical] practice. Help!

Post by GreatOdinsRaven » Mon Jan 08, 2018 10:08 pm

iRetina wrote:
Mon Jan 08, 2018 9:12 pm
Thank you everyone for your outstanding replies. Huge help. I remain in awe of the collective knowledge of the Boglehead community!
Be sure to find explore the liquidity of your shares. Find out if you’re limited to selling during prespecified “liquidity events” and if so what comprises a liquidity event and when they are anticipated. Also you should know the order in which shares are able to be sold (pro rata, or only after the PE firm sells all their shares).
"The greatest enemies of the equity investor are expenses and emotions." -John C. Bogle, Little Book of Common Sense Investing. | | "Winter is coming." Lord Eddard Stark.

Valuethinker
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Re: PE firm is buying my [medical] practice. Help!

Post by Valuethinker » Tue Jan 09, 2018 6:14 am

iRetina wrote:
Mon Jan 08, 2018 9:12 pm
Thank you everyone for your outstanding replies. Huge help. I remain in awe of the collective knowledge of the Boglehead community!
We still don't understand what you are being offered:

- if it is the chance to invest in their fund ask for past performance of funds (it should be audited- IRR calculation signed off by an audit firm). This is an interesting opportunity if you can get comfortable with a 10 year lockup of your money (and no control over when you get returns). I would say 5% of your net worth or 10% at max*. You are looking at 2.0x your money over 10 years, maybe 2.5x if all goes well (3.0x if it goes really well). Note all that is before tax. It's a punt as we say on this side of the Atlantic. less than 1.0x is certainly possible-- and you will lose the returns that money might have made invested in the stock market, etc.

I (briefly) worked for one of the banks and they opened up a fund to staff generally, just before the peak of the dot com boom. At one point we were up 4x our money or something on Net Asset Value, I think in the end I got out most of my book cost-- only lost a bit of money-- got most of my $5k back ;-).

- is it a chance to invest in your actual business (clinic)? Ok that's interesting, and if everything goes well you could make good money on this (several times your investment). However you could also lose the lot.

* as a high earning professional your net worth is a moving target. You have to be prepared to make the commitment, then mentally write off the money-- if it comes good, then great.

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iRetina
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Re: PE firm is buying my [medical] practice. Help!

Post by iRetina » Tue Jan 09, 2018 8:55 pm

Valuethinker wrote:
Tue Jan 09, 2018 6:14 am
iRetina wrote:
Mon Jan 08, 2018 9:12 pm
Thank you everyone for your outstanding replies. Huge help. I remain in awe of the collective knowledge of the Boglehead community!
We still don't understand what you are being offered:

- if it is the chance to invest in their fund ask for past performance of funds (it should be audited- IRR calculation signed off by an audit firm). This is an interesting opportunity if you can get comfortable with a 10 year lockup of your money (and no control over when you get returns). I would say 5% of your net worth or 10% at max*. You are looking at 2.0x your money over 10 years, maybe 2.5x if all goes well (3.0x if it goes really well). Note all that is before tax. It's a punt as we say on this side of the Atlantic. less than 1.0x is certainly possible-- and you will lose the returns that money might have made invested in the stock market, etc.

I (briefly) worked for one of the banks and they opened up a fund to staff generally, just before the peak of the dot com boom. At one point we were up 4x our money or something on Net Asset Value, I think in the end I got out most of my book cost-- only lost a bit of money-- got most of my $5k back ;-).

- is it a chance to invest in your actual business (clinic)? Ok that's interesting, and if everything goes well you could make good money on this (several times your investment). However you could also lose the lot.

* as a high earning professional your net worth is a moving target. You have to be prepared to make the commitment, then mentally write off the money-- if it comes good, then great.
The fund the doctors are investing in is the same fund that's used to do physician practice acquisitions. The split is about 75% PE money/25% physician money. Their last IRR was 54% May 2017. Depending on when the docs invested their money they got back 2.2x - 3.6x their money. The liquidity event plan is between 3-5 years. This specific PE firm is acquiring practices across multiple states, so by investing in the fund, you're spreading your risk across multiple practices in multiple states.

It sounds like they're making a killing. Nonetheless, I will limit my investment to something reasonable.

veindoc
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Re: PE firm is buying my [medical] practice. Help!

Post by veindoc » Tue Jan 09, 2018 9:40 pm

Are they making a killing because of the productivity of the practices or the influx of physician money towards the investment? How many of these practices are profitable? What happens when their rate of practice acquisition inevitably slows down?

Just a few things to consider.....

Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: PE firm is buying my [medical] practice. Help!

Post by Valuethinker » Wed Jan 10, 2018 2:57 am

iRetina wrote:
Tue Jan 09, 2018 8:55 pm
Valuethinker wrote:
Tue Jan 09, 2018 6:14 am
iRetina wrote:
Mon Jan 08, 2018 9:12 pm
Thank you everyone for your outstanding replies. Huge help. I remain in awe of the collective knowledge of the Boglehead community!
We still don't understand what you are being offered:

- if it is the chance to invest in their fund ask for past performance of funds (it should be audited- IRR calculation signed off by an audit firm). This is an interesting opportunity if you can get comfortable with a 10 year lockup of your money (and no control over when you get returns). I would say 5% of your net worth or 10% at max*. You are looking at 2.0x your money over 10 years, maybe 2.5x if all goes well (3.0x if it goes really well). Note all that is before tax. It's a punt as we say on this side of the Atlantic. less than 1.0x is certainly possible-- and you will lose the returns that money might have made invested in the stock market, etc.

I (briefly) worked for one of the banks and they opened up a fund to staff generally, just before the peak of the dot com boom. At one point we were up 4x our money or something on Net Asset Value, I think in the end I got out most of my book cost-- only lost a bit of money-- got most of my $5k back ;-).

- is it a chance to invest in your actual business (clinic)? Ok that's interesting, and if everything goes well you could make good money on this (several times your investment). However you could also lose the lot.

* as a high earning professional your net worth is a moving target. You have to be prepared to make the commitment, then mentally write off the money-- if it comes good, then great.
The fund the doctors are investing in is the same fund that's used to do physician practice acquisitions. The split is about 75% PE money/25% physician money. Their last IRR was 54% May 2017. Depending on when the docs invested their money they got back 2.2x - 3.6x their money. The liquidity event plan is between 3-5 years. This specific PE firm is acquiring practices across multiple states, so by investing in the fund, you're spreading your risk across multiple practices in multiple states.

It sounds like they're making a killing. Nonetheless, I will limit my investment to something reasonable.
Depends if that IRR is realized investments only (cash to cash) or includes (private) valuations of portfolio companies (those have to be justified to the auditors, but they are not verifiable, the market could change between now and exit).

These roll-up games work, until they do not.

As a doctor, you probably have this situation where your net worth is expected to increase (barring accident or disability) by quite a lot in the next 5 -10 years?

That makes working out what's the right amount a bit tricky. But I would call this an investment in your employer, and the rule of thumb is 10% of net worth (or just of investment portfolio), maximum.

You could make a killing on this, but it could also be a duff investment. It's probably worth a punt, but as you say you are being cautious about overcommitting.

What happens if you leave employ? And do they ever arrange secondary sales--- for example if someone dies and the estate needs cash?

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