The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference focuses on opportunities for investment in dental services organizations. It is authored by our colleagues Bart Walker and Amanda Roenius.


Investments in Dental Services Organizations: 5 Key Considerations

By Bart Walker and Amanda K. Roenius

Dental services organizations (“DSOs”) continue to experience consistent growth in both market share and revenue in the dental industry, making them a continued area of interest for investment and expansion. Experts at the 15th Annual Healthcare and Life Sciences Private Equity and Finance Conference, hosted by McGuireWoods on February 21, 2018, explored trends in DSO investments as well as insights as to what potential investors should look for to best align themselves for success.

Experts on the panel included David Friedman, Vice President of Silver Oak Services Partners, James R. Davis, Jr., Managing Partner at Blue Sea Capital, Craig Castelli, Founder and Chief Executive Officer of Caber Hill Advisors, Sean Roberts, Partner at Huron Capital, and Ken Doyle, Partner at The Halifax Group.

Here are five key considerations from the panel discussion:

1. The investment market is active and competitive. As DSOs continue to thrive, so too does the competition for investments. The dental services niche remains fragmented. By most estimates, approximately only fifteen percent (15%) of dentists are associated with a DSO. Panelists opined that private equity-backed platforms with a wide array of healthcare experience, including in the dental field, are amongst the biggest competitors for investments. Nevertheless, operators who have little to no dental experience are also entering the market with success. Given the strong pool of competitors, potential investors should consider looking at smaller practices that may allow for successful consolidation and should strategically select a market that will allow for growth and expansion.

2. Consistency and integration are keys for success. When considering an investment in a dental platform, panelists emphasized the need for consistent and integrated policies and strategies across the platform, such as those related to hiring and training, branding efforts, and service offerings. The more integration and consistency that exists, the more value the investment will bring. As such, whether investors are looking at pre-established or de novo investments, these core considerations should be emphasized from the start.

3. Stay aware of changes in reimbursement, specifically with regard to Medicaid. Although the panelists noted that Medicaid reimbursement has remained fairly consistent over the past several years, investors must keep in mind that reimbursement varies from state-to-state (and market-to-market). Services that are reimbursed by Medicaid in one state may be reimbursed at a much lower rate (or not at all) in another. Investors should pay attention to lobbying efforts in their selected markets and continue to focus on building connections with state managed care organizations to best align themselves for success.

4. Consider the market’s regulatory landscape prior to investing or expanding. When considering whether to expand or invest in a particular market, panelists emphasized the need to consider the market’s reimbursement rates, regulatory structures, and competition. For example, North Carolina often poses challenges for DSOs from a structural and Medicaid reimbursement standpoint. Panelists noted that the difficulty of a market may sometimes lead to enhanced value when properly structured, citing Texas as a state that, even with the hurdles, can be very profitable.

5. Align investment incentives and goals with those of the dentists. The quality and motivation of a platform’s dentists are key factors to success. Panelists stressed the need to keep the investors’ and dentists’ interests, incentives, and goals aligned. This can be done through various compensation and staffing models as well as flexibility on the part of the investor. Investors should position themselves to help dentists meet their end goals in an acquisition, which, in turn, will help the investor meet its goals as well.