Veterinary Practice Consolidators – 2023 Outlook

How will private equity backed veterinary hospital consolidators navigate 2023?

Since I wrote on the topic last, we have seen multiple private equity (PE) backed veterinary hospital network mergers consummated (NVA > ETHOS, Rarebreed > VetsBest Friend). We have also seen a material rise in interest rates which has dampened the enthusiasm of some corporates to acquire some individual veterinary hospitals. Finally, I have seen the launch and / or expansion of multiple private-equity backed hospital networks which grow exclusively through new site build-outs.

These developments are related and a natural response to the opportunities afforded (or shut) to private equity or venture capital investors in the veterinary services market.

When the cost of capital increases for private equity firms, they seek to lower the valuations they pay for their investments, including “tuck-in” investments like the acquisition of a single veterinary hospital by a larger veterinary services network. I say “seek” because the market is the ultimate determinant of the valuations that need to be paid, provided sellers use the market to their advantage (I’ve talked at length about why this isn’t always the case with independent practice owner sellers).

A private equity failure is a matter of degree. Most funds seek to deliver a 15 to 20% annual return on equity invested. If a private equity investment results in equity investors “just getting their money back”, the investment is a semi-failure. I can put my money in government bonds with very little risk and “just get my money back”.

However, a total blow-up, which does happen, occurs when equity investors are “wiped out”, meaning the portfolio Company must restructure with most, or all of the value in the operating assets being used to compensate debt claims. This is a very bad outcome for a private equity fund. We haven’t seen such an outcome in veterinary services, though maybe 2023 is the year.

Tight labor markets, combined with rising input costs owing to inflation makes the operating environment more challenging for veterinary practice consolidators and veterinary practices. In a tougher operating environment, the strong begin to acquire the weak. Some consolidators have already chosen to combine with other consolidators. I think we will see more of that in 2023.

With consolidator mergers, called strategic acquisitions, come synergies, in theory. On the expense side, a consolidator can eliminate the duplicative corporate infrastructure of the target creating synergies. On the revenue side, a merger might afford the combined entity the ability to drive more sales from a broader customer base. In practice, much can go wrong with poor execution. Time will tell whether the mergers completed by NVA and Rarebreed turn-out well.

In a more difficult operating environment, where interest rates are rising, yet valuations are still holding for premium assets, some investors have decided to build their own. Enter Veterinary Emergency Group, Modern Animal, Bondvet etc. The advantage to this strategy is that you can establish a premium veterinary hospital for far less than the cost of purchasing that same hospital.