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Private equity in the healthcare space: Transaction trends & lessons learned

Over the past 20 years, private equity involvement in healthcare has steadily grown and private equity investors now play an extremely important role in the healthcare ecosystem.  Private equity invested more than $10 billion in healthcare deals in the first half of 2018. And, as of September 2018, more than $1 trillion of investable capital remained available for deployment in healthcare, according to a Bloomberg report.

Becker's Hospital Review recently spoke with VMG Health founder and CEO Greg Koonsman about his perspective on private equity investments trends in healthcare. Mr. Koonsman noted, "Back in the early 1990s, there were only a handful of private equity firms actively seeking healthcare services investments. But fast forward to 2019, and just about every one of the 4,000 private equity firms has an interest in healthcare services." Healthcare is approaching 20 percent of the gross domestic product and given the fragmented nature of many verticals, it is a very attractive market. Mr. Koonsman sees a significant amount of investable capital in the market, along with tremendous demand among private equity investors for quality healthcare service companies.

What's driving private equity demand

The basic structure of the healthcare services market makes it attractive to private equity investors. The healthcare services market is highly fragmented, with over 150 physician specialties (more than 900,000 physicians) across the United States. This fragmentation results in operational inefficiencies, and inefficiencies provide opportunities for consolidation by private equity investors within specialties and geographies. Consolidation strategies have historically produced attractive returns for private equity investors.

Mr. Koonsman has observed a pattern of private equity firms investing in "platform" businesses in healthcare services. This involves creating a platform organization of some size and scale, building a talented management team and then executing a strategy focused on both organic and merger and acquisition growth.

The area within healthcare services currently showing the highest demand among private equity investors is physician services, followed by ancillary services. These areas are overshadowing investments in acute care hospitals at this point in time.

What private equity investors have and what they need

In Mr. Koonsman's experience, private equity firms have abundant capital and significant expertise at identifying and attracting top talent to companies where they invest. They also typically have support from credible consultants, accountants and diligence firms.

But private equity firms are often lacking subject matter experts who understand the overall healthcare environment and the unique nuances of specific healthcare service verticals. They may not understand the drivers of value within a specific vertical or geography.

Mr. Koonsman remarked, "In many cases they don't have an expert within the actual vertical that helps them understand what makes that business operate and what the critical success factors are. You can run the numbers, but if you don't understand when a benchmark is out of place and why it's out of place, then you could easily miss a key positive or negative attribute of a company." He continued, "I think having subject matter experts that know the business being targeted is a must. . . . having someone who understands all aspects of the target businesses in a way that allows the PE firm to truly understand the risks as well as the opportunities of an investment."

In addition, while healthcare providers already recognize how important it is to have legal and regulatory experts with deep healthcare expertise, Mr. Koonsman sees some private equity firms failing to get adequate legal advice when engaging in transactions. He suggested that private equity firms work with a credible healthcare regulatory advisor that specializes in transaction-related regulatory work.

VMG Health's evolution

Historically, VMG Health has specialized in providing transaction-related valuation and analytics services to healthcare providers, including hospitals, surgery centers, imaging centers, physician organizations and more. Over 22 years, VMG Health has assisted healthcare organizations in thousands of transactions, and this remains a core part of VMG Health’s service offering.

With private equity investors' increasing interest in healthcare services, VMG Health has evolved its service offering to meet the needs of private equity firms. VMG Health provides the deep healthcare knowledge and vertical subject matter expertise these firms need.

"Private equity firms do not need valuation assistance, but they need diligence around quality of revenue, quality of earnings, service lines, vertical consulting and benchmarking," Mr. Koonsman said. "We provide diligence services around what makes target companies successful."

It is VMG Health's years of experience assisting healthcare providers in transactions combined with capabilities to support private equity firms that makes VMG Health unique.


The entrance and growth of private equity firms in healthcare services is good for the industry. These firms bring abundant capital to the sector, increased managerial sophistication, successful business models and an ability to infuse talent into companies. As a result of the increased presence of private equity firms in healthcare, provider organizations are being run more efficiently, the chances for long-term success increase and valuations for many healthcare service businesses are rising dramatically.


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