BUSINESS Private Equity and Practice Transitions in 2023 As Deal-Making Pace Slows, Buyers and Sellers Prioritize Infrastructure By Marge Axelrad and Daniel Breeman Thursday, April 27, 2023 1:00 AM RELATED CONTENT Groups Pursue Investment Strategies for Long-Term Practice Growth Navigating Complex Practice Transition Decisions Download a PDF of Private Equity and Practice Transitions in 2023.NEW YORK—2023’s vision care space will see a more measured pace of new deals and practice acquisitions. At the same time, in many cases, internal investments in infrastructure, systems and support will accelerate for both private equity-based groups and practice transition facilitators in the U.S. optical market this year. Experts throughout the optometry and ophthalmology arenas, including a range of major practice brokers and experienced observers contacted by VM, concur: confronted with higher inflation, spiking interest rates, an uneven stock market, and a changing competitive landscape requiring top-notch clinical and practice management fundamentals, the business climate this year is realigning priorities for all investors and operators. A combination of political tensions, climate challenges, social change in workforce dynamics and employee satisfaction gave a slightly different tone to what had been the robust PE deal activity and dynamics of 2021 and the first half of 2022. The macroeconomic and geopolitical trends are having just as much impact broadly across all broad healthcare, retail and supply sectors, experts tell VM. The result is an environment where acquisitions and deals are still happening, but not as robustly as they were in 2021, when the eyecare space saw a crescendo of them resuming after 2020, the initial year of the COVID-19 pandemic. From discussions that VM has had with executives this past month, activity that took place through the first half of 2022 subsided a bit towards the end of last year. As 2023 unfolds, there is a new mood among buyers and sellers, too. Chris Harris Chris Harris, managing partner at FFL Partners, has been involved in the eyecare space for several years, including its prior investment EyeCare Partners, its current investments in optical retailer, Eyemart Express, and now with Quebec’s CDPQ and others in New Look Vision Group. He told VM, “Integration varies and there are different levels out there. There is headwind for some groups. For prospective sellers today, it’s important to do your own due diligence, speak to doctors who have partnered with particular groups. All groups are not the same. Eyecare is essential, it can be deferred but not forever, we’ve seen that. We’re hopeful about the overall outlook by 2024.” Anne Kavanagh, CEO of Kavanagh Consulting LLC, one of the most experienced advisors in the vision care space who represents many sellers, observed, “There are three factors out there now. First, higher interest rates creating a higher cost of capital for buyers, who are not sure where rates are going to come down. Anne Kavanagh Second, economic uncertainty including the troubles at Silicon Valley Bank, Signature Bank and others along with persistent inflation and prediction of a possible recession—the economy is in a slowdown. And, third, there have been operational issues at some key consolidators, so they are pausing or curbing buying, and competition drives value.” Added Kavanagh’s Jason Preator, managing partner, “On balance, though, several buyers were aggressive in 2022 in entering new states and markets, which helped overall with competition and options for sellers.” Noted Kavanagh, “Private equity will continue to be aggressive and continue to tweak their model for creating alignment since having ODs and PE aligned creates success. The importance of having all practices on one integrated system is definitely being understood as a necessity to manage the practices more efficiently. Also, high margin private pay areas like dry dye and more medspa amenities are getting traction within groups.” François Huré Added François Huré, partner at CapM Advisors, “Integration and infrastructure issues are becoming more important to MSO’s. Sometimes this is not in just branding across a group or maintaining local brands to the consumer, but IT systems or revenue cycle management are emerging as critical functions and those require support and big investment.” Huré also noted, “Many sellers have not adjusted their expectations yet, but volume of deals are down this year. Over time, with more expensive debt, multiples will come down a bit. I’d advise sellers to focus on running a good operation, make sure you have good people, invest in your practice, This creates value.” Hunter Puckett, managing director, HPC Puckett & Co., added, “2022 PE-backed activity was slower overall than 2021. A few of the platforms were more focused on organic growth. We have been fortunate to see valuations remain high in 2022. In 2021, PE buyers were much less afraid to miss and with fewer transactions in the pipeline now, they have become more selective. Factors such as geography and EBITDA margin have become more scrutinized.” Antoine Amiel Antoine Amiel, CEO, New Look Vision Group, which has augmented its presence in the U.S. and is now continuing to selectively acquire luxury optical retailers and practices, with the backing of FFL and others, commented. “While external growth has played a big role at New Look Vision Group, it’s organic growth that is really our philosophy. Back in the days when we were public, we had a clear sense that fast expanding companies in the public markets are very much judged on the quality of their organic growth. and by extension on the quality of the integration of acquisitions. Today, we’re in a similar dimension. Even when we multiply the number of doors, our comp store sales growth is always a consistent kpi (key performance indicator) for us.” At the end of 2022, New Look Vision Group’s overall store/office count stood at 490, with 422 locations in Canada under a number of different banners and 68 in the U.S, since that initiative began a few years ago with the acquisition of Edward Beiner group in Miami and subsequent deals after that. This year, the group in the U.S. has closed a few deals with independents. “The approach is unchanged. We look for an exceptional team. And we’re not specific to a geography, but where we can find the best assets and exceptional businesses in the luxury segment. We remain very choosy.” Another group which has been involved in acquiring practices, although not backed by private equity, is EssilorLuxottica. Its TeamVision is a management services organization within EssilorLuxottica that supports practice owners in the next phase of their career, the company told VM, with priority given to supporting the practice in staying health-based and patient-centric with a consistent legacy in the community. “TeamVision exists to provide an alternative choice when practice owners are considering a practice transition,” said Luca Tait, senior vice president of TeamVision. “We are here to continue to meet an untapped need in the market by providing an option for practice owners who reach out with aligned practice transition goals. In 2023, we will continue to invest in medical services, brands and lens innovation for the practices we support.” Vision Monday reported in September 2022 that there were approximately 100 TeamVision locations at that time. Overall, the new economic business climate is having an impact, but not one that will stop the progress of acquisitions and transition, observers say. With a perspective from the ophthalmology sector, Rex Adams, CEO, EyeSouth Partners, shared, “I think the primary challenge we’ll face in the next six to 12 months will be the gap in valuation expectations between buyers and sellers. The reality of today’s market is that valuations are not the same as they were 12 months ago at the peak prior to interest rate and inflation increases. While valuations remain very attractive, we expect seller expectations may still be rooted in what some of the rumored valuations were a year ago that may result in more challenges in forming partnerships. Our best partnerships are with those practices that recognize the longer-term value that can be created by partnering with an organization like EyeSouth that can help truly drive the benefits that come with scale, while also preserving local practice-level and market-specific culture.” MyEyeDr.’s CEO Sue Downes remarked, “The optical industry sits in a very unique space in comparison to other investment opportunities given it has the strength of healthcare—consistently performing well under a variety of economic pressures—and the very familiar retail component that attracts both consumers and patients into the space. As the population ages and visual challenges increase, the industry continues to grow to keep pace with eyewear and eyecare needs, but is also positioned to leverage technology to treat eye disease, improve and restore vision, and become more deeply embedded in the healthcare space as eyecare professionals become recognized as even stronger primary and secondary healthcare providers. Investors are looking for opportunities to partner in industries with high growth potential, with historically stable performance, and that have multiple ways to interact with consumers and/or patients over the short and long-terms. When you consider the space remains somewhat segmented, bringing the appropriate investment and the needed operational infrastructure to address the potential patient base creates a very attractive investment opportunity.” READER’s NOTE: Richard Edlow, OD of the Eyeconomist estimates that overall there are approximately 50 private-equity backed eyecare platforms in the U.S. optometric and MD arena. On the next several pages, VM provides a closer look at a select group of some of these, who shared their view of the current market, the pace of acquisitions, the role of PE-backed groups and other practice transition options.