No matter how enticing the payout, private equity can’t buy physician alignment, and many leaders feel that’s a make-or-break factor in any deal.
During the session “What Physicians Should Know Before Selling to Private Equity” at the 22nd Annual Spine, Orthopedic and Pain Management-Driven ASC + The Future of Spine Conference in Chicago, leaders in orthopedic MSOs and real estate discussed the critical need for alignment before physicians ever enter the letter of intent phase of a transaction.
Andrew Carlson, director of growth and strategy at Growth Orthopedics, opened with a clear warning: PE partnerships won’t solve internal rifts.
“If there’s no physician alignment in the group, a strategic partnership won’t fix that,” he said. “It’s really important to understand the goals of the group, and make sure that it’s aligned with every single physician and they understand what the future holds.”
Mr. Carlson emphasized that deals must be structured for the long haul, not just to reward the physicians closest to retirement, but to support the ones still in training.
“You have to make sure that the partnership is structured for longevity, not just the folks who are close to retirement, but the ones who are still in residencies and fellowships today,” he said.
These alignment issues become even more complicated when physician ownership, particularly real estate ownership, is involved. Mr. Carlson warned that misalignment in ownership stakes can introduce post-deal friction and unintended consequences.
“I’ll be frank — it gets extremely messy post-deal,” he said. “Getting things aligned ahead of time well in advance is important. And one thing I’ll also say, do not look to sell your practice at the same time that you’re looking to sell your real estate. That also creates kind of an environment where your concentration should be here, but it’s here and it makes it hard. So I think if you are going to look to make some big real estate investment or divestment, it’s going to be either well before or months after a partnership.”
Misalignment is not just about geography or contracts, it is generational too. As younger physicians enter the fold, Mr. Carlson noted that equity incentives must be equitable across experience levels to avoid long-term dissatisfaction.
“These PE firms, they need to raise capital,” he said. “Obviously, ideally, you want skin in the game, you want physicians to be aligned with this … but newer doctors, you want to make sure they have that too.”
Jason Winker, vice president at ASC Realty Advisors, echoed these concerns, pointing to real estate ownership as a major source of discontent when physicians aren’t on the same page.
“A lot of times there are conflicts where you have different levels of physician ownership in the real estate and some members that do not have real estate ownership,” he said. “Typically what happens is a physician who’s owned for longer wants to sell the real estate interest and market value, and a younger physician wants to not pay market value but pay based on already being a part of the group. And that’s where there’s a real disconnect in what the value of the shares are of the real estate.”
Mr. Winker emphasized that this kind of misalignment doesn’t just stay in the real estate lane, it bleeds into operations and compensation models as well. This leads to even more conflict that can spill over into operations or how they value fair compensation on transactions, he continued. Selling the real estate to a third party first, “allows for minority ownership back into the real estate a lot of times can solve that problem.”
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