Although private equity has largely defined the last few years of consolidation in dentistry, many executives agree that this era is now over, and that financial performance will begin to decide who survives long term.
Three dental executives joined Becker’s Future of Dentistry Roundtable Sept. 14-15 to discuss where private equity is headed next for dentistry.
Note: Responses were lightly edited for clarity and length.
Question: Is the PE-backed dental model still in a period of expansion, or are we entering a more mature and selective phase of investment?
Richard Hall. Chair of the Board for U.S. Oral Surgery Management (Irving, Texas): Yes and yes. I think it’s still expanding because we’re still so fragmented. The percentage of dentists that belong to a dental service organization is still relatively small, less than 35% nationally. In some specialties, it’s significantly less than that. In oral surgery, we think it’s somewhere around 14% or so. So [there is] still significant upside for consolidation.
We started our business at the very end of 2017. Today, we have 300 oral surgeon partners that own 56% of the business. Private equity is involved, but they’re not the majority owner anymore. Back in those days, money was cheap. You could buy practices at five to six times their EBITDA, and then you could trade at 13 or 14 times, or even higher. So, the value creation that was being driven on the arbitrage of that transaction was what was really driving the consolidation. Now, since the interest rates have more than tripled and the cost of capital has done what it’s done, these are still solid businesses, but their balance sheets are upside down because of the amount of debt they carry, which is always the best way to create shareholder value. I think this is actually going to be something that we look back upon two to five years from now as a positive of the cycle that we’re in because now businesses throughout the dental industry are focused on driving real value to the practices they partnered with, driving better patient experiences, driving higher quality of care, and they’re building real infrastructure now to deliver on the value proposition. It’s no longer just a roll up strategy for a quick flip. Those days are gone. When we look back upon this era we’re in right now, it’ll actually be seen as positive for the industry because we’re going to be building stronger businesses overall.
Greg White, DMD. President and CEO of PepperPointe Partnerships (Lexington, Ky.): There had to be a righting of the ship when everybody got involved in this, they were creating DSOs out of thin air. I can remember going to the AAO meeting in L.A. in 2019, and you had private equity groups there trying to find an influencer orthodontist in order to build a pipeline. They had no DSO. They were just trying to figure out, how can I extract as much money from these practitioners as I can by giving them this “feast, famine and a promise” deal. The promise hasn’t come through in about 60 or 68 recaps that were scheduled since June of 2022. You end up with a situation where you do have a $1 million house, but you’re paying a mortgage on $3 million for it. How valuable is your house if you’re not going to own it when it’s all said and done? That’s the problem that the dentists end up in. Very few people ever talk about what it looks like for the dentist that’s actually out there driving it all … The consolidation is far greater than people are really saying in terms of what’s available and what’s worth anything.
We definitely have entered the maturity phase. The rapid consolidation is over. I think most of the growth and most of the consolidation that you’re going to see from this point forward is going to be a game of musical chairs and Russian dolls. When the music stops, if there’s not a chair, private equity will get you out. You better take a look overhead at who’s getting ready to consume you because that’s what’s getting ready to happen over the next little bit. Consolidation will be taking place in the bigs eat the middles and the middles eat the littles, and I’m not talking about necessarily size. I’m talking about, how good is that balance sheet? That balance sheet matters, and it’s not like you’re going to be able to just push the PE group and push the lender aside. You’re going to see some that will exit. The lender will start converting the loan to equity, and you’re already seeing that in the industry where the PE groups are having to just exit and take their losses and move on.
Andy Schroeder. Director of Business Development, Northern U.S. at Imagen Dental Partners (Scottsdale, Ariz.): I look at it as a phase of metamorphosis … There’s going to be maybe a Nordstrom venue of dentistry and a Walmart [venue] dentistry, but everybody that’s out there who wants to continue to survive needs to figure out where their niche in the market is and be able to really lean into that. I agree with Dr. White that that sub million-dollar zone of dentistry — those are going to be the people that turn the lights off and walk out the door one day because there isn’t a whole lot of value in there. My fear is what happens to that portion of the dental-going population when the rural practice or the small practice just closes its doors. I think as the business aggregates, if we’re really interested in taking care of patients, that’s the thing we need to pay attention to.
At the Becker's 5th Annual Future of Dentistry Roundtable, taking place September 14-15 in Chicago, dental leaders and executives will gain insights into emerging technologies, practice growth strategies and the evolving landscape of dental care delivery, with a focus on innovation, patient experience and operational excellence. Apply for complimentary registration now.
