DSOs are facing a pivotal year in which strategic moves could make or break their appeal to private equity investors, industry leaders warn.
Two DSO leaders — Weston Spencer, DDS, the CEO SPP Dental Partners, and Robert Rubino, the CEO of Qualitas Dental Partners — recently joined the Becker's Dental + DSO Industry Virtual Forum to discuss the future of DSO consolidation.
Here is what the two CEOs shared about their predictions for private equity in dentistry this year:
Editor's note: These responses were lightly edited for length and clarity.
Question: How is private equity shaping the trajectory of DSO consolidation? What are the risks and benefits of private equity in dentistry?
Dr. Weston Spencer: It certainly is not going to be ignored because one of the things that's priming private equity to play in the dental space is what they're usually looking for, and dentistry checks a lot of those boxes ... They love healthcare for one. They're looking for industries that are somewhat recession resistant, and while we've dealt with recessions, dentistry is still here, and it comes out of recessions pretty quick and really well. It doesn't have to be geographically centric. You could manage multiples in a lot of different locations. There are different regulations and different states, but once you learn that, it's doable. One of the most important things, and COVID was a really good example of this, is you can't regulate dentistry out of existence. You can regulate it some, and there's frustrations as being a dentist, but it's not going to go away. I just built an office in 2020 right before COVID, and I made a joke with my friend, "Well, it's a good thing there's never been a time when dentistry went to zero," because I needed to be busy, and then the next month, I shut my office for a month and a half. But we came out of that, so it's very resilient.
Ultimately, there's a lot of built-in inefficiencies in dentistry. Classic, traditional private practice is four to maybe nine team members, and you're doing everything yourself. You're managing it all yourself, and you're having to wear so many hats. That is why private equity can come in and see all that and say, "We can build on this. We can support all of this. We have the money to back it up." There's a ton of it on the sideline ready to be deployed. Some of it's been sitting there for a long time, just waiting. I always try to help partners to understand that, just like no dentist is alike, not all private equity is exactly the same ... depending on where your group's at and what you want to accomplish, there's private equity for those different levels and different times and different amounts of equity that they want to buy into your group for ... what [dentists] really need is the right kind of groups around them to help them navigate because you can't just go from a single dentist straight to getting good money and private equity on your own. There's going to be kind of a launch pad somewhere in the middle there. That's where a lot of these hybrid groups I think do a good job of having a landing place for those partners who get where the industry is going and they want to participate in that value. Yes, private equity is going to probably provide some of the biggest amount of that value for it, but it's also not something we should be completely afraid of because there are really good people out there who are looking for the right types of groups to work with, who are doing it for the right reasons. If you're patient centric and you're successful being patient centric, you've got a good model that's going to be continuous, and they're going to want to invest in you for that.
Robert Rubino: There's 8,000 private equity firms in the United States. They've got $2 trillion of capital to deploy, and that's before you leverage it, so there's $4 trillion or $5 trillion, but they are smart individuals who are managing money endowments and universities and pension funds and high net worth individuals, so they're not just putting out money without thinking about it. Dentistry is only 20-25% consolidated, so they like the fact that there could be more rapid growth through consolidation ... The positive of private equity really is that they're bringing capital into an industry that needs it. We all know dentists who've hung on to the same piece of equipment for years because they don't want to spend the $45,000 on a new CBCT. The practice calls for that when they need to be invested in, and that's not a big reach for private equity. So, there are a lot of positives to private equity coming in.
Dentistry has an issue, though, that they need to perform in these corporate models better than they are, or else private equity is going to look at and go, "Hey, interesting industry. Really hard to roll it up, really hard to make consistency of cash flow [and] really hard to exit." We're too young in the roll-up of dentistry to see how it ultimately plays out. So, it's really a call of caution or call to action for those who are running these firms — please be sure you know what you're doing when you're running your DSO or DPO. Make sure you know that there's industrial logic to your investments or who you're buying because at the end of the day, investors are watching, and they want successful output. Focusing on the patient, doing the right things for industrial logic, your value will accrue up and more money will flow in ... So, as we talked earlier about M&A picking up hopefully in 2025, we all have to caution ourselves and steal ourselves and be disciplined on how we're going to do it because there are stakeholders out there watching intently, some who would like to come jumping in. Some of that $2 trillion needs to come back in. But if we don't show that we can manage the sector well, it won't come in.