Invisible dental support organization (IDSO) partnerships with dental practices of all types continued to accelerate during 2023. Many LPS clients achieved new, record-high values. A large influx of new IDSO bidders empowered by billions of dollars of fresh global, institutional capital drove values up. The investors in dental practice consolidation are not just private equity, but also trillion-dollar sovereign wealth funds and multibillion-dollar family offices which invested billions in IDSO growth in 2022 and 2023.
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Opportunities abound
The opportunities for specialists in 2023 were especially broad with 17 OMS-only, 14 ortho-only and 10 dental trifecta IDSOs all competing to become a pediatric specialist, orthodontist, or OMS doctor’s silent partner. Growing periodontic, endodontic, and implant-focused practices are also achieving six or more qualified bidders from single and multispecialty IDSOs, and general practices (GPs) have dozens of qualified options.
Consolidation and IDSOs are beneficial to many practices but can bring new and growing risks to doctors eager to remain independent. IDSOs operate in all 50 states in GP and all specialties. They can be a doctor’s friend or a fiercely competitive foe.
Some IDSOs have now partnered with over 1,000 practices in dozens of states. Their size enables far lower costs on virtually everything, including supplies, technology, and benefits. In addition, many of the larger IDSOs are now reimbursed by payers at higher rates than achieved by independent dentists.
Doctors become an IDSO partner by selling 51% to 90% of their practice for cash at today’s favorable tax rates. They’re able to reduce administrative burdens, gain family time, and utilize their silent partner’s resources. As a result, they grow bigger, faster, and more profitably, benefiting both the owner doctor and the IDSO silent partner. With the right IDSO partner, doctors continue to lead their practice with their brand, team, and strategy for years or decades with full autonomy.
Interest rates have impacted the time required to complete an IDSO partner search, and many IDSOs have limited their new partnership goals for 2024. Fortunately, the many newly capitalized IDSOs have taken their place, and values in 2023 continued to achieve records for growing practices in desirable locations. But doctors in their thirties and forties partnering with IDSOs more and more, impacting values for doctors in their sixties.
I expect 2024 could see a minor reduction in values achieved due to the new rate environment, US political uncertainty, and growing global strife. I hope I am wrong, but at least the cash received by doctors up front in an IDSO partnership now earns a 5%-plus yield in risk-free investments!
ESG investment impact on practice values
ESG investing is a hot topic in 2024 with trillions of dollars pursuing ESG-related investments globally. The total number of investable dollars is uncertain, given the various definitions of ESG, but Bloomberg estimates that ESG-labelled funds have attracted over $7 trillion in assets. That compares to over $17 trillion estimated by the US SIF Foundation, which is the “nonprofit hub for sustainable and impact investment sector in the United States.”1
The impact of the growing ESG trend on US dental practices began several years ago. ESG-focused funds started investing in IDSOs which provided government-paid care for pediatric and orthodontic patients including Medicaid. I expect this trend will accelerate as ESG investments will potentially increase the institutional demand to deploy capital to increase affordable access to dental care via IDSOs and their practice partners. The dental trifecta IDSOs with ortho, pediatric, and OMS partners will likely be a major beneficiary of this new capital.
A hint at what some ESG investors are targeting comes from the ESG webpage of BlackRock, the world’s largest investment manager, which is already an investor in other IDSOs in the US through non-ESG-focused funds. “Health care is probably the most established sector within private equity, and there are many opportunities to improve access to and affordability of basic medicines and healthcare services.”2
I predict that the values for practices which accept Medicaid and other government-supported dental care will be positively impacted by ESG investors in the coming quarters and years.
Doctors are urged to learn the details of an IDSO partnership, as larger practices will ultimately join one or compete with many. We are still in the early innings of dental consolidation, but like other provider-based businesses (e.g., medical clinics, veterinary clinics, etc.), consolidation is either predominantly completed or accelerating quickly. And as in any growing industry consolidation, there will be winners and losers. Doctors should become fully educated and choose wisely.
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References
- Nair N. ESG funds: What makes for good performance? Bloomberg Professional Services. August 8, 2023. https://www.bloomberg.com/professional/blog/esg-funds-what-makes-for-good-performance/
- Sustainable outcomes, attractive returns. BlackRock. https://www.blackrock.com/ch/professionals/en/insights/alternative-investments/sustainable-returns-private-equity
Chip Fichtner, cofounder and principal of Large Practice Sales, completed more than $1 billion of practice transactions in 2022 and 2023 with 38 IDSOs for clients in 31 states. He has built, bought, and sold companies in a variety of industries, and has been featured in numerous media outlets. His tolerant wife of 33 years allows him to live on airplanes visiting clients every week.
