The healthcare landscape is ever-evolving, and one sector that's been catching the eye of investors is the Ambulatory Surgery Center (ASC) market. Here's a deep dive into why private equity (PE) is so keen on this burgeoning sector.
A Peek into Private Equity's Healthcare Moves
2021 was a record year for PE in healthcare, with a whopping 1,018 transactions. However, 2023 started on a slower note, thanks to macroeconomic challenges like inflation, rising interest rates, and labor costs. With the cost of debt going up, PE investors are now exploring private credit and other innovative deal strategies. They're particularly interested in smaller deals that are easier to finance or add-ons that don't require debt.
But here's the silver lining: as the economic climate stabilizes, we can expect a resurgence in deal volume. PE firms are likely to keep their eyes on smaller platform deals, especially those involving independent targets.
Why ASCs are the Talk of the Town
Valued at $84 billion in 2020, the ASC market is set to soar to $131 billion by 2031, growing at a CAGR of 3.9%. The market is diverse, with 70% of ASCs being independently owned. Over the years, PE's stake in the ASC space has been on the rise. Big names like AmSurg, Surgery Partners, and others now have PE backing. Bain Capital's $3 billion buy-out of Surgery Partners in 2017 stands out as a landmark deal.
Driving this growth is a shift towards cost-effective procedures. For instance, patients can save an average of $684 per procedure at an ASC compared to a hospital. Orthopedics, in particular, is a hot area, with ASCs slashing costs by 17% to 43%. This not only eases the financial strain on patients but also boosts ASC margins.
While orthopedics is a favorite, gastroenterology, pain management, and ophthalmology are also significant players. Cardiology is emerging as the fastest-growing specialty, thanks to the aging population and the prevalence of cardiovascular diseases. As cardiology transitions from being predominantly hospital-based, PE firms have a golden opportunity to tap into this rapidly expanding segment.
A case in point: Lee Equity Partners' recent acquisition of the Cardiovascular Institute of the South, which boasts 21 locations and employs over 60 physicians.
Moreover, as patients seek the convenience of multi-specialty ASCs, these centers are growing at a CAGR of 4.3%, surpassing the general ASC market growth.
The Perfect Match: ASCs & Private Equity
The unique traits of the ASC industry, combined with the PE landscape, make for a promising partnership. Especially with 70% of ASCs being independently owned, there's ample room for transactions. PE firms are likely to focus on smaller add-on deals, consolidating multiple ASCs in a region. This strategy not only capitalizes on industry trends but also offers cost-cutting opportunities and handsome returns. For independent and physician-owned ASCs, this means access to a broader growth infrastructure, allowing them to prioritize patient care.
ASCs are a win-win, offering both cost savings and top-notch care. With the market poised for growth and a plethora of investment opportunities, PE's interest in ASCs is only set to intensify. As the economic fog lifts, we can anticipate a resurgence in PE investments in healthcare, with ASCs leading the charge.