Whew – what a year! 2019 was a whirlwind of activity at TUSK and in the DSO economy. We saw a significant amount of change, growth, M&A activity and new entrants into the market that it is hard to keep track of. Before we dive into 2019, let’s reflect on how the year started by looking at how 2018 ended:
- We saw transformational growth of some of the enterprise level DSOs including Heartland and Pacific Dental both adding 100 practices or more and NADG growing the number of affiliated practices by 49% in just one years’ time. New doctor-founded, debt-funded groups were popping up on our radar regularly.
- Attendance at almost all DSO conferences were up big – interest in the space was growing.
- We were getting a call from a new Private Equity Group interested in the DSO space a couple of times a month.
- At TUSK, we sold more practices than ever before, across all specialties at multiples well above our client’s (and frankly our expectations) and worked with well over 70 groups to help them START, GROW or SELL their practice or group.
As 2018 came to a close, we were asked regularly about when the velocity of the consolidation might slow. Rather than respond with our gut, we looked to the drivers of the consolidation:
- The dollars Private Equity Groups (PEGs) had yet to deploy (“dry powder”) into investments int he lower-middle market.
- The US Economic drivers including GDP, unemployment, wages and the costs of funds
- How long PEGs had been in investments into DSOs as they would be looking to re-cap within 5 years of their initial investment and likely would look to bold on significant EBITDA before they went to market.
To see us discuss these issues (and determine how clear or foggy our crystal ball was in 2018), check out this webinar here. For those of you who follow our research, remember that PEGs were sitting on stacks of cash (positive), there were many DSOs likely to recap in by 2020/2021 (positive) but there were a lot of questions around the future of the US Economy, mainly arising from the likely Fed Funds rate hikes that the Fed had signaled which would increase the cost of debt and could drive down valuations as well as multiples.
Check out the 2019 M&A Recap video below:
2019 – The Year in Review
Below are some highlights and lowlights from the year of 2019.
Investor Interest in DSOs Up in 2019
Investor interest in the DSO space only grew in 2019. While we received a couple of calls a month in 2018 from PEGs, in 2019 it was one per week. We took meetings with Family Funds, Search Funds, and traditional (LP-backed) PEGs of all shapes and sizes from all around the world. We also began to see a new type of strategic arise: the non-DSO strategic. We took meetings with large publicly traded media companies and real estate investment companies looking to leverage their assets and synergies into the DSO space. The biggest news in non-dental strategic investment for 2019 was Walmart. Walmart entered the dental game in September of 2019 with a company-side strategy. Walmart has dabbled in this business for many years in a disparate fashion, but now they have hired a well-respected and seasoned DSO executive, Dr. Roshan “Ro” Parikh, Founder of Chicagoland Smile Group, to drive strategy and execution on a national scale.
New Groups Emerged
In 2019, we spoke at DSO conferences nationwide and even hosted our own DSO workshop in San Francisco. Over the course of the year we spoke in front of crowds totaling more than 3,000. Although there were a lot of familiar faces out there at DSO conferences (you know who you are), we met 100’s of new dentists looking to START, GROW & SCALE their practices. We have no way to calculate the number of newly formed groups over 2019 but it must be in the hundreds. The caliber of talent looking to build a group or DSO was impressive. These new groups are looking to technology, marketing, and disruptive technologies to grow. They are also not just doctors. The next wave of DSO leaders includes heads of marketing companies, newly minted MBAs, leaders in PEGs making the plunge into leadership roles and veterans of Silicon Valley. They are bringing fresh, new ideas to a continually evolving economy and I, personally, cannot wait to see their impact on patient care, access to care and the patient experience.
Hiring and Retaining Talent was a Struggle
As many of you will remember, the GDP was improving, unemployment was low and wages were being driven up resulting in a tight employment market and many job hoppers! We saw this manifest itself inside of the DSO market throughout 2019. When reflecting on the 2019 DSO job market at the executive level, Jon Fidler, Founder of Fidler and Associates shared, “there is just such a small pool of seasoned talent in the DSO space, not due to lack of talent, but due to lack of experienced people. The market is growing faster and has more human capital needs at the operations, marketing, finance and executive level than ever before. We found there were two distinct ways the search for talent was being addressed. Following the influence of outside, non-dental specific focused PE firms getting involved in the segment, DSOs were open to looking outside of dentistry to find the talent needed to grow. Additionally, we are seeing candidates placed in jobs 12 months ago gaining upward mobility more quickly within the same organization or by jumping to a newly formed group.”
Massive M&A Activity
Any fears around a slowing M&A market were squashed early and often in the DSO market. We experienced more M&A activity across all levels of the DSO space than ever before. While TUSK stayed busy working with clients selling to strategic and financial buyers across the nation, there were a series of large transactions that grabbed the headlines:
- Partnership of Decision One Dental Partners (D1) & Smile Brands – a perfect blend of cultural alignment & infrastructure provide fuel for growth for AJ Acierno’s D1 brand in the Chicagoland areahttps://info.tusk-partners.com/overview-of-services
- Mid-Atlantic Dentals Acquisition of Dental One Partners - resulting in the formation of a new top contender in the DSO space with over 240 practices in 18 states
- Sale of North American Dental Group (NADG) to Jacobs Holdings – this acquisition likely to lead to the largest international DSO in coming years as Jacobs also owns Colosseum Dental Group (CDG) that will result in a combined $900M of revenue across 450 practices.
- Heartland grows to over 1,000 practices - after another banner year, Heartland remains the largest DSO in the US.
- Pacific Dental Services added 200 affiliated practices in 2019 - that is opening or affiliating 3.8 practices / week!
Best to you all in 2020
2019 was an incredible year all around. As we start 2020, we believe that the trends from 2019 will continue. We at TUSK have seen a big uptick in activity on the M&A side and are continually talking with new entrants to the market. We wish you all the best in 2020.
About TUSK Partners: TUSK Partners provides industry-leading resources to group dental practices and DSOs. We help Founder-Owners START, GROW and SELL their DSO. For an overview of our services, please click HERE or visit our website, blog or YouTube channel.