Our next talk is on evaluating private equity, what must you know before, during, and after. And this talk is being given by Praveen Suthram, who is joining us bright and early from Mumbai, India, 4 a.m. there. Thank you so much for joining us at that wee hour. He is well known for many of the business leaders in GI as an entrepreneur and healthcare futurist. So I'm really hoping that he has a really good, clear crystal ball and he can tell us a lot about all of the things that we've talked about today. He co-founded Next Services, co-founded Noble Liver, which is focused on fatty liver and liver health. And he also runs a digital mastermind program talking about networking this morning. He brings GI leaders together to share expertise and thoughts and ideas. So I really thank him for that as well. So I know there's a lot more I can say, but I will let you take the lead and discuss the evaluating private equity talk you have. Thanks everyone for having me, and I will try my best to provide as neutral a perspective as possible. And I couldn't have asked for a better foundation, you know, which Scott has given about private equity and private equity in gastroenterology. So I can go a little faster with some of the slides earlier in the presentation. But for the next 20 minutes, what I want you to take away is the big picture of where everything is going. How have we arrived where we are, where things are right now, and where things are going. So my own personal journey through this private equity timeline with GI started with an article that I had written back in towards the end of 2018. And at that time, there were two GI transactions. By the time the book on private equity and GI came out, there were already about 17 transactions that year. When Scope Forward came out, there were 17 other transactions in 2020, the pandemic not withstanding. And now, you know, we are over 30 transactions. So there's significant momentum about this. And again, Scott did cover this, but I like to view it in terms of a visual. So when you take stock of where everything is and divide the world of GI, there were about 2000 plus private practices in gastroenterology. Now when you look at that world, and divide it up into large groups, mid sized groups and small groups, most of the large groups are already taken, they've made a decision on whether they want to do private equity or they do not wish to do private equity. For example, Minnesota Digestive Health, Minji Digestive Health has decided not to go for it. And there are several other groups that have decided to go for it. And they're, they're already part of a platform, or they've created a platform or they will be creating a platform, but those decisions are mostly done. Then there are the mid sized groups and this conversation is ongoing. Again, several of them have aligned and or aligning, but then the vast majority are the small GI practices. I do sense that this bucket or this group is is a mixed bag in the sense that people are mostly confused on what to do. And with the COVID period, and the disruption that COVID brought, there is a fair degree of confusion and there's increasing interest on private equity and at least understanding what is to be done and you know, Scott said healthcare is local, it is very local in the sense that if a neighboring GI practice is considering private equity, then automatically it has, you know, it ripples over to what group is deciding to do. So that's from a big picture standpoint. Now, Scott also talked about how the how a PE fund operates. And I do want to set this context, because it lays the foundation for how to think about what they're doing. It is a business model, and it is important for you to accept that it is a business model. This is how private equity companies operate. They take money from limited partners. And these could be, you know, other than pension funds, these could be even universities like Harvard and Michigan. So they give them money, ask them, you know, please invest my money, buy companies with it. And they invest in companies. But also what they do is they take debt on behalf of the company. So this is a very, very important distinction. So a lender also comes together, and together the PE fund and lender give money to the investee company. Now, the company gets the money, then the PE fund makes sure that the leadership team is in place, restructures the company, sells the company in a typical three to seven year window, because that's their exit window. And once they sell it, they give the profits back to the limited partners, because that is their agreement. But there is another important thing for you to remember is there is a 20% flow back into the PE fund that the fund managers make, and that is often referred to as carry. And it is a significant financial number. And therefore, what you must know is that the PE fund managers are very driven financially to make sure that the investment thesis that they're setting out for happens. And that is something for you to keep in mind. I'll touch upon this theme again later in the presentation. So here's a very quick run through on how it has played out in gastroenterology. Of course, the story began with Audax Private Equity investing in gastro health in 2016. In 2017, it was only gastro health doing transactions. By the end of 2018, there were two new platforms, one in Texas, the other in Atlanta. In May, there was another PE platform. At that time, it was considered one of the largest. And three groups came together to float that. And that happened in Pennsylvania. Then what Scott referred to as MSO Light. So that happened in August. This was the Capital Digestive Care and Physicians Endoscopy Platform, which is a strategic platform. And then the story continued that year. Fast forward to 2020, in April, right in the middle of the pandemic, there was yet another platform that was started in Tennessee. Later that year, one in Michigan, and the transactions just kept on continuing. Now if you look at what's been happening this year, the momentum is on. I mean, this is the most number of transactions that we have seen. Everybody in the GI space, physicians particularly, had this question, what is the second bite? And when are we going to see the second bite? Well, we saw it. We saw it in the form of ODAX recapitalizing gastro health. And there's a new private equity fund that has invested in gastro health. It's called Omer's Private Equity that's based in Canada. So we saw whatever the second bite is. But there is no particular art as far as the second bite is concerned. And I'll talk about this because people are very curious about it. It simply goes on a timeline. So I had made a prediction that recapitalization will begin around 2021. It wasn't really hard because you just add five to the year when something was started. So which means that all the platforms that have been founded in the last few years, you keep adding five or around five to that. And there you have it. That's when the second bites will keep happening. I'm sure some of you in the audience may disagree, but let's keep watching. So as of November 2021, we've seen about 33 transactions. There could be more before the end of the year. But this will continue. This is not a short-term gain. I want you to take away that. So this is not going to end anytime soon. It's not like all the practices will be acquired and it's done. That's not what is going to happen. There are several levels of T funds. And it's going to change hands from one level to the next to the next. And it may go even beyond gastroenterology. I foresee multi-specialty private equity platforms. I foresee hospitals getting involved. I also foresee technology companies getting involved. But there is no indication publicly about that. So here's a case study. And this is based on my conversation with Dr. Larry Kuczynski, how they went about their PE transaction. So they began investigation by the end of 2016. And by early 2018, they'd engaged an investment bank. And they submitted their playbook to 200 private equity firms. 84 reviewed. And 21 of them gave bids. So they bid for it. And then the group interviewed 16 of them and asked them to re-bid. So this was by June and July of 2018. Then they narrowed it down to four private equity funds and two gastroenterology platforms. They had really long interviews with three of them in August. And they had a letter of intent with GI Alliance by November of 2018. And then the next year, the due diligence began. And they made an announcement in July. This is very typical of a formal PE process with either a large or a mid-size platform. Again, there are a lot of variations. But this is an example for you to consider. Now, regardless of whether you're doing private equity or not, an important measure that PE uses called EBITDA is for you to understand because this is how all the valuations are based. So when you look at EBITDA, I like to think in terms of very simple terms. It is a measure of profitability. And what is profitability is revenues minus costs. So I take away costs from revenues. And there I have it. Now, if those are the two levers that I need to work with, then in revenues, so I have two ways to increase revenues. One is I maximize my existing sources of money. And second is I find new sources of money. So for example, if I find new sources of money, then my profitability goes up. If that goes up, then my EBITDA goes up. If EBITDA goes up, then my valuation goes up. Let's look at the cost side. If I reduce my cost and if I'm able to get done at the same level, but at a lower cost, then I save money. Then also my profitability goes up. Let's say I reduce wastage by using technology. So I streamline my operations. If I do that, again, my costs go down. Therefore, profitability goes up. And therefore, my valuation goes up. It's very simple. But it's important to understand what this is because this is how valuations are based. Let's consider an example at a super high level. I'll not get into the details of the math. But just so you understand how a PE fund things. So let's say a practice makes about $5 million in revenue, and the total expenses are $4.8 million. So there you have earnings as $200,000, $5 million minus $4.8. And then you add interest, expense, taxes, depreciation to arrive at this wonderful term EBITDA. So we're at $400,000. And there is a thing that happens particularly for physician practices, which I want you to remember when you're evaluating private equity, which is the ad backs. So there is an ad back related to physician compensation because they like to normalize the physician compensation. Let's say you were making $800,000 along with ancillaries and all the other income. But then in the market, the GI practice compensation is only $500,000. So they're going to adjust that. The reason is, again, varied, but we'll not get into that right now. So they're going to do that physician compensation adjustment. They're also going to do one-time expenses. That's going to be added back. And finally, they arrive at what is called as an adjusted EBITDA. So in this example, the adjusted EBITDA is $1 million. So now after that, you apply a negotiated multiple. And that's more of an art than a science. So it depends on how much in demand your practice is, how you negotiate with the private equity group, how much they really want you, and so on, or what the general norm is at that point of time. So in this example, let's say the multiple is nine. So we arrive at a valuation of $9 million. Now the platform or the fund might come back and tell you, look, we'll give you 80% of that money in cash, but 20% will be rolled over into equity of the MSO that we are forming or the MSO that we have. So you get $7.2 million in cash. Of course, you would pay capital gains and everything on it. But $1.8 million gets rolled over into equity in the MSO. And so when a second byte happens or when a future transaction happens, that turns into material money. So you can cash that out. So that is the idea. And that way, you stay engaged in the success of the MSO. Now, what are the things to consider when talking about private equity? And this will be the last part of what I'm going to talk about. So one is technology. And Scott touched upon it. Yes, one big area of interest is going to be the business aspect of technology. Because PE funds are going to make sure that they track the productivity, they track the money across the board. So they are going to invest in dashboards. Now, they may or may not work on EHR or practice management consolidation. Some may take a data warehousing approach where they don't have you change your EHR, but they just get the data that they need using what is known as a data warehouse. Some others may suggest or insist that you change over to the platform that they have established. Either of that could happen. You may get to try new tech. But again, more than the clinical technology movement that we see, what I've seen happen is more innovation or interest of applying technology on the business side. You will run faster. It is almost like having a coach. Because as I mentioned, they're on a timeline. The PE funds are on a timeline to start and finish between three to seven years. So if that has to happen, they're going to make sure that everybody is productive and they're on the schedule so that the investment thesis that they're setting out for is met. And that is very, very clear. You would get a makeover, but the makeover definitely will happen on the management team side. That's what I've seen happen. They will iterate the PE funds, iterate again and again and again, and make sure that they'll change the leadership team as many times as they want until they're absolutely sure that the leadership team that they have in place is the one that they need that is going to execute and run with the thesis, their investment thesis, and give them that success, give them that exit, the financial exit by the end of three to seven years. The infrastructure, you may or may not get a boost. I've seen, again, sometimes happen and sometimes it doesn't. It depends, again, if it's part of the investment thesis or not. Culture, it's fair to expect your culture to change. You might have been used to operating in a certain way at a certain pace. But I think it's fair to expect that the culture to dramatically change. And it should because now you're part of this larger entity, larger organization. So even at an individual level, if you do make this decision, then I think it is important to not fight it after you make the decision. It is important to accept and make sure that you make your employer's business successful because that's what you signed up for. Now, an important thing to remember is about debt. I talked about it briefly. I'm coming back to it again. Now, the companies that you're seeing on right, Hertz, Toys R Us, J.Crew, Brookstone, what is common amongst all of them is that they all filed for bankruptcy. And they're not necessarily bad companies at all. Like, in fact, customers love them like Toys R Us or even Hertz. But the reason that that happened is because of the debt that they took. And or rather, when the P would have invested money, they would have also had a lender give debt to them. Now, if you don't generate the cash that is required to pay back the money to the lender, the lender is going to say that, hey, I might as well just sell the assets and take my money now. And that's what happened there. And again, there's no point trying to say that the lender is good or bad because that is their business model. And this is private equities business model. But for you as physicians and as private practice owners, it's something to consider. It's something that is important for you to understand, at least know what you're going into. Now, again, we've talked about the second byte. Gastroenterology saw its first, second byte this year. We're going to see several more as the timeline coincides with that three to seven year window. And that is what it is. But they're going to be multiple bytes on this apple. You know, before the story settles down. There are four types of risks that I want you to take away. And the first one is the business model risk. So I've pretty much asked every private equity platform that I've either interviewed or interacted with on the question goes like, you know, what is your plan B? Because I asked them saying that, hey, look, like, you know, I understand that what your investment thesis is. I understand you're expecting certain physician productivity numbers. My question is, if there is technological disruption and that doesn't work, like, so what is the plan B? There is never a straight answer, because I think collectively us as an industry as a whole, I'm not pointing to private equity or not everybody as a whole. We've really not thought through on what our plan B is. Just this week, FDA made an announcement that they've approved Pell Camp for doing remote home screening. So now if that becomes the norm, what happens to 20, 25% of your revenue, regardless of whether you're in private equity or not? And what kind of a disruption would it cause in the investment thesis on which my valuation is based and for which I've already given money? So that's, again, one risk to consider. The second risk is the market and debt risk. We've already been through a pandemic. We've seen the disruption that it can cause. There can be a recession. Again, what surfaces here is how leveraged a certain deal is. And what does that mean? How much debt that they've taken? Because you will be owning the debt, not the private equity company. The third one is clinical autonomy. Dermatology had a lot of bad press about this. Because there were articles in New York Times and other magazines. They love beating up private equity. So most of those articles are about the overuse of physician extenders and pushing procedures and so on. So that's, you know, it's very, very important. I'm going to quote Dr. Larry Kuczynski's words. So which is, keep the business goals and the clinical goals separate. And that can only happen if physicians lead. You lead and you show the way to the private equity firms, if that's what you're doing. You don't have to necessarily follow everything that's been told to you. Fourth, the ROI pressure. Now, I've seen this was pre-pandemic. You know, I'd see gastroenterologists gather, you know, whenever there was a conference, they'd gather in one corner or the other. And the conversation would be about, you know, what is your multiple? And people would ask, like, you know, my multiple is X, your multiple is Y, and this group is having that multiple. The question was all about multiple, less about what exactly that means and what does that entail? Why somebody had 8X versus a 9X versus 11.5 versus a 14. So the thing is, let's say you do end up negotiating high multiples and you get a high valuation, great. But also remember that the expectations from you will be high because the private equity fund will make sure that they get the ROI, the return on the money. So these are the four important risks for you to consider. And then the final thing is, I want you to, regardless of whether you like private equity, whether you dislike private equity, whether you do it or not do it, but everyone in the audience and the panel. So if you consider this curve, this is the aging curve, like with life, it has birth, growth, prime and aging and death. I want you to ask this question, where is your industry or our industry? Where is gastroenterology? Is it between birth and growth? That's like the self-driving cars. Like, you know, there is, it's not as uncertain. We know for sure that all of us are going to sit in one, you know, pretty soon in some city or the other. Or is it in prime like Amazon and Apple are, even Uber is, or is it beyond prime? Is it on the right side of the curve where, you know, the aging has begun? Like, so the smartphone, think about it. We're not as excited regardless of how many of our features are put into a smartphone and then goes beyond aging. All of us used to use a Nokia phone. Now I'm sure we don't know what the company does. So there's entropy. And again, like Kodak, if we fail to listen to what's happening in the industry, the industry trends, then the outcome is death. So where exactly is our industry? And the final question, where is your practice? And where are you personally? Like, you know, in this curve, is your practice between birth and growth? Like, so is there high uncertainty? Are you able to take high risks? Are you top line focused? Meaning, are you focused on revenues or are you in your prime, total certainty? And you are maximizing your profits or you're on the other side of this curve where, you know, the situation is not very certain and there is a tendency amongst you or your partners to just hang on to whatever is going on. Because if those are the symptoms, then it means that if you do not innovate, then you die. Because that's pretty much what happens in industry cycles. Because beyond that is entropy chaos and not being able to sustain what's happening. Final three takeaways. One is, you know, the train has already left the station. There's no point. And I think Scott also brought this up, you know, very nicely. It's left the station. Like, so either you decide to get on it or decide not to get on it. And that's about it. Like, so if you do get on one, please lead and make it the right one. The second one is, again, it's not about whether P is good or evil. Sometimes, you know, I get into conversations where people tend to talk about private equity in terms of it's evil, it's bad. It's not. You know, if you're buying a cup of coffee, you are feeding the engine. So there's really no point trying to label it as good or evil. My take is, again, lead and make it about making healthcare as a force for good. Because if this is the direction of where the industry is going, if more consolidation is going to happen anyways, might as well make it a good one. And if physicians are going to be involved, let it be about healthcare being a force for good. And then the final takeaway I want you to consider is regardless of whether you'll do private equity or, you know, you don't do private equity, both sides have a risk disruption. Because you can be in this large, comfortable setting of a private equity environment and you may have all the money, but if you don't make the right moves and if you don't channel your resources, then you may be disrupted. Or let's look at the other way. You may be the small practice that is very niche and, you know, you own the market that you're in. But again, you're not in the P setting. So you feel that you're very nimble, but if you really do not act and take action with respect to the trends that are happening in the industry, you will also be disrupted. So again, that final takeaway is to lead and reimagine gastroenterology care because we are on to a fantastic opportunity with all the changes, you know, that are happening today. You can take advantage of the changes and make sure that you use the very disruption which is happening as the very force to propel you forward. So I want to thank you again for having me. I do want to remind you that the future of GI is quite literally in your hands. So let's make the best of it. Thank you.

Praveen Suthram

private equity

gastroenterology

evaluating

EBITDA

risks