The Truth About Private Equity in Dental Practice Consolidation

For some unknown reason, dentists seem to think that Private Equity (PE) is the only buyer of dental practices. In reality, while PE is the financial sponsor of many Dental Support Organizations (DSO) and Invisible Dental Support Organizations (IDSOs)  – which purchase or partner with larger dental practices – they are by no means the only investor type in dental practice consolidation. Some of the highest values, both initially and over time, have been achieved by LPS for clients which partnered with NON-PE backed IDSOs.

In the last three years, Large Practices Sales (LPS) has completed over $300 million of dental practice partnerships with IDSOs NOT backed by PE. In some cases, DSO and IDSO investors  include Sovereign Wealth Funds (SWF) and Family Offices (FO). Some of the top 20 IDSOs in the country are funded by these two types of investors, not PE.

To put the PE myth in perspective, of the $5.0 billion invested in dental practice consolidation in the last half of 2022, in just three IDSOs, $1.0 billion came from a SWF and $2.0 billion was invested by a ten TRILLION dollar global money manager.

One of the keys to LPS achieving record values for our client practices is that we interact with the various investors in dental consolidation directly, not just with the management of the IDSOs. In fact, LPS clients have become the platforms for the creation of three new IDSOs with investors identified by LPS.

One of these investors was a PE firm which had backed an IDSO previously. We went to this PE backed group to create an Ortho Only IDSO focusing in the Southwest utilizing five of our great clients as the initial platform.

The other two IDSOs were created for Family Offices with a track record in health care consolidation. One of the LPS created IDSOs has already achieved their first recapitalization at a record 20x EBITDA multiple and $2.0 billion dollar value. In that example, LPS partnered the first practice and a total of 110 client practices with this specialty focused IDSO in 35 months. Some of the doctors achieved 500% returns on their retained equity.

Yes, PE has been successful in investing in DSOs and IDSOs over the last 30 years, but by no means are they the only investors which will be bidders for LPS client practices. 

DSO vs. IDSO; PE, Family Office, Sovereign Wealth Funds and Other Sponsors

While both DSOs and IDSOs have been very successful in the last three decades, no matter the source of their capital, by far the fastest growing type is now the IDSO. They have received the bulk of new investments in dental consolidation in the last five years. Virtually all of the new IDSOS formed in the last five years have been IDSOs, not DSOs. The new $5.0 billion of investments in late 2022 were all invested in IDSOs, not DSOs. Notably all of these investors were brand new to U.S. dental consolidation.

IDSOs are successfully attracting doctor partners in their 30’s due to their partial ownership/partnership model, whereas the DSOs typically do not have local doctor owners.

In an IDSO partnership, doctors sell 51% to 90% of their practice for cash at closing. They retain ownership in the balance and continue leading their practice for years or decades as an owner, not an employee. Doctors continue with their brand, team and strategy that has made them successful historically. IDSOs do not attempt to homogenize or micromanage their partner practice.

Doctors have 100% autonomy, freedom and decision-making authority. The IDSO functions as a silent partner providing support services to reduce the doctor’s admin burdens and headaches. IDSOs handle banking, accounting, payroll, benefits, taxes, legal, accounting, compliance, credentialing and payor/vendor negotiations. Doctors are empowered to focus on patient care and growth, not administrative minutiae.

The end goal of the IDSO/Doctor partnership is to grow the value of the practice and the IDSO and monetize it by selling the IDSO itself to a larger investor at a high value. Doctors participate alongside the investors, PE or otherwise, in the large gain potential of well-managed, growing IDSOs.

Doctors Doing It Themselves (DIY Investment Banking)

The concept of a doctor trained in creating beautiful smiles negotiating a life changing financial transaction against experts who manage billions of dollars and complete hundreds of transactions, it is almost comical! Who do you think gets the better end of the deal?

Smart doctors will choose an expert and specialist advisor to guide them to the best partner after a spirited bidding contest. The right advisor will negotiate and execute the highest value transaction with terms most favorable to the doctor, not the IDSO. Your life’s work deserves professional advice!

Chip Fichtner