Subsector Snapshots — Investor Interest in Dental Subsector Continues in 2022 and Likely Beyond

March 21, 2022

The dental subsector has continued to garner interest from healthcare investors over the past several years, largely because the subsector remains fragmented. This offers numerous opportunities for buyers, particularly dominant acquirers in the dental space that are private equity-backed and certain other strategic providers, who are driving continued competition for add-on and platform dental transactions.

While transaction activity was somewhat sluggish during the end of 2020 and early 2021, as was the case for many healthcare subspecialties, dental transactions picked up as 2021 and 2022 progressed, leading to a highly competitive market. Expect acquisition interest in this subsector to persist for many reasons, including growing demand for professional management, opportunities for ancillary development in connection with scaled practices, economies of scale provided by consolidated platforms, and a demand for capital to use in expansion.

Read on for a “subsector snapshot,” detailing four key takeaways and considerations related to the dental subsector, an overview of recent transactions and a prediction on future investment interest.

Dental Subsector Considerations: Four Key Takeaways. Several factors make the dental subsector attractive to investors, but many of those attractive features also create capital and other regulatory considerations. Therefore, investors should consider the following dynamics:

  1. Recent transaction activity in healthcare subspecialties has been driven by clinicians’ desire to partially monetize their ownership in their practices and take a step back from the administrative duties of operating the practices on a day-to-day basis. The trend has not differed in the dental subsector.

    Instead, this subspecialty has seen more interest from clinicians (particularly those entering the clinical market) for professional management that provides data- and technology-driven solutions to practice management. Non-clinical service providers offer an attractive partnership because they provide an opportunity for senior dentists to benefit from a tax-efficient payment in exchange for selling some of their practices’ non-clinical assets, and potentially allow such dentists to receive equity in the service provider. This structure may allow the dentist to participate in a future sale of the service provider.

    Simultaneous with the financial opportunity described above, the non-clinical service provider often can contract with the clinician’s dental practice to provide administrative support, running the non-clinical operations of the practice. This support is important to many clinicians because it allows dental practices to access technology, capital and data resources that may not have been available under their previous, standalone structure — often at a reasonable cost.
  1. The proliferation of professional management companies and familiarity of clinicians with these non-clinical service providers in the dental subsector has led to continued growth for all sizes of dental businesses. The prevalence of large dental platforms, some specified in Section 2 below, has increased the opportunities for smaller dental practices to transact. A dental practice no longer must have more than 10 locations to be attractive to potential partners.

    As a result of continued fragmentation and interest in all sizes of dental businesses, there are many opportunities for add-on and platform transactions to gain greater economies of scale by joining larger dental platforms or contracting with non-clinical service providers. Further, visibility of professional management within the dental subsector has made joining an existing dental platform or contracting with an existing management company a more recognizable, possible option for dental practices that previously were unfamiliar with these structures. This additional familiarity of providers in the market has contributed to the prevalence of additional platform and add-on transactions over the past several years.
  1. In addition to economies of scale and relief from day-to-day administrative duties, potential development of new ancillary services, such as labs to aid patient convenience, have increased the interest and prevalence of dental transactions. Ancillary service lines, particularly in dental practices with a high concentration of Medicaid patients, attract scrutiny from state agencies and are highly regulated by federal and state fraud and abuse laws. When establishing, expanding and operating additional ancillary services, dental practices and administrative services partners should carefully review the regulatory requirements to implement the service line and adopt regular compliance and monitoring policies to ensure the service line is operated in accordance with laws.

    For example, dental laboratories are consistently governed by state self-referral statutes that prohibit certain financial relationships between the practice, dentist and patients. Each state law is unique, so as dental platforms expand into new states, they should carefully examine the state law to ensure historic practices are permissible in the new environment. Failing to monitor and review state regulatory laws poses risk to the dentists, administrative services providers and their businesses.
  1. As with many healthcare subspecialties, the means to expand a dental practice’s locations and footprint is one of the most common drivers of acquisition and consolidation. Within the dental subsector, there are unique opportunities for ancillary growth in the form of laboratories, radiology services, aligner technologies and cosmetic services. Many dental practices desire to implement these service lines, in addition to more complex technology platforms and data analytics, to provide a more convenient alternative for their patients.

    For example, many dental practices seek to develop dental laboratories in-house, due to the frequent use of such services by patients and the convenience of avoiding lead times for outsourced services to be returned. Also, many dental businesses with an oral surgery component explore investing in or developing a surgery center. This investment can often be responsive to payor and patient desires to perform procedures, when they are clinically appropriate, in a lower-cost setting of care.

    In many cases, ancillary service lines and improved technology facilitate patient conveniences (which ultimately drive positive patient retention rates), but such investments also create meaningful capital challenges. The investment in these ancillary services and the improved technology require sufficient scale by the dental practices to support the upfront costs. Capital providers and dental management companies often facilitate the creation of a scaled platform that allows a dental business to reach the level of production and demand needed to support these ancillary service lines and technology investment. Investment partners also may facilitate the funding necessary to support the initial capital outlay for these projects, which is attractive to dental providers.

Recent Transactions Within the Dental Space. The past several years have seen many dental, oral surgery and orthodontic platforms arise, often as a result of private equity investment in dental management companies. Notable transactions in the dental space that involve private equity partners include:

  1. DECA Dental Group transaction with the Blackstone Group
  2. American Dental Partners partnership with Heartland Dental Care
  3. Affordable Care transaction with Harvest Partners
  4. Smile Doctors transaction with Thomas H. Lee Partners
  5. U.S. Oral Surgery Management transaction with Oak Hill Capital
  6. 3C Dental Group transaction with Community Dental Partners
  7. GPS Dental transaction with Main Post Partners
  8. Affordable Dentures transaction with Harvest Partners
  9. Dental365 transaction with The Jordan Company

Future Market Predictions. Due to the prevalence of larger dental platforms in the market, expect these platforms to continue aggressive consolidation activities, particularly in smaller, add-on acquisitions. Larger dental transactions (similar to the transaction between American Dental Partners and Heartland Dental Care) also are likely to continue to be attractive options as service providers seek to grow. Given the opportunities in the dental subsector, the consistent investor interest in dental over the past five years likely will continue in 2022 and beyond.