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Knowing Which Ones to Watch: Private Equity Investment in Certain Retail Health Clinics


With change comes opportunity. And few industries are changing faster than U.S. healthcare.

The Affordable Care Act is transforming healthcare and will create new categories of winners and losers. Given the radical change taking place—and the increasing pressure to be more efficient—certain retail health sub-segments appear to be a natural target for private equity investment.

The number and value of private equity buyouts in healthcare accounted for roughly 11 percent of all PE deals in 2012, according to management consulting firm Bain and Company. However, the most recent numbers from Thomson Reuters suggest a stark decline in healthcare deals, with overall deal values dropping 65% from last year. But the reality is that while broader investment in healthcare by PE firms may have decreased, key sub-sectors such as surgery centers, walk-in clinics, and urgent care centers are still very attractive to both PE investors and strategic acquirers.

Indeed, data from Thomson Reuters shows that private equity firms invested nearly $4 billion in health and medical services in 2012, up from less than $1 billion in 2009, with clinics and urgent care centers accounting for much of that growth.

Retail Health – A Growing Market

Clearly, the retail health category, which includes walk-in centers and urgent-care facilities, is on the rise. Over the past five years, given the long emergency room wait times and overcrowding, retail health clinics have expanded into imaging, laboratory work, and suturing as well as specialty centers like infusion therapy and endoscopy.

The walk-in clinic and urgent care market is in a unique position to drive revenue from the increase in patient demand due to several factors detailed below. In fact, almost half of the centers today are less than five years old. The majority of these centers are based in suburban locations where the ratio of emergency rooms to patients is substantially lower than in urban locations, and where the population is large enough to support significant revenue opportunity.

In fact, the walk-in clinic and urgent care market is expected to grow to almost $18 billion by 2017, up from $13.7 billion in 2011, according to the Urgent Care Association. What’s more,  since 2010, the growth rate of newly opened clinics and care centers has doubled from almost 300 per year to over 600 per year, with more than 9,000 clinics and care centers in operation at the end of 2012. A number of factors are driving this growth including:

  • An aging U.S. population which is resulting in an increase in demand for healthcare services
  • Emergency room wait times and overcrowding of ERs
  • Low clinic and care center start-up costs
  • Generic service offering
  • Minimal regulatory hurdles

This market is expected to see continued substantial growth, especially as the Affordable Care Act introduces 30 million newly insured patients to the market, beginning in 2014. What’s more, a greatly increased number of insured patients and preventive services that require no co-payments may make the walk-in clinic and urgent care market even more robust.

Retail Health – A Lucrative Area for Investment

The past two years have seen an increase in mergers and acquisition activity within the walk-in clinic and urgent care center market. Given the availability of capital and the opportunity presented by the financially attractive characteristics of this market, CohnReznick expects to see a further increase in acquisition activity by both strategic and financial buyers.

The retail health category is appealing to PE investors for a number of reasons. First, retail health is an increasingly popular and affordable option for healthcare consumers. The cost difference between a clinic or urgent-care visit versus an emergency room visit for the same diagnosis can be nearly $600.

In addition, most categories in retail health are highly fragmented and underpenetrated. Today, most clinic operators own fewer than three centers and lack a dominant market position – and the top 10 providers1 account for less than 10 percent of the market. This dynamic presents numerous opportunities for consolidation as well as organic growth.

Favorable Regulatory Environment – There are several other reasons why retail health is an enticing opportunity for private equity.  One is the favorable regulatory environment. Walk-in clinics and urgent-care centers are not required to register with the government or get accreditation by the Joint Commission (a non-profit organization that accredits more than 20,000 health care organizations and programs in the United States. A majority of state governments have come to recognize Joint Commission accreditation as a condition of Medicaid reimbursement). The centers are also not subject to certificate-of-need laws, which many states have in place to control the number of healthcare facilities in a given area to prevent the price inflation that comes along with market saturation.

Increased Demand for Retail Health – Another stimulus of private equity interest in retail health is the aging U.S. population and the increased demand that demographic shift will bring. Walk-in clinics and urgent-care centers are an attractive opportunity to capture the rise in patient demand and drive revenue. Many private equity firms are seeking to capture this opportunity by acquiring a well-positioned group of clinics or centers and then growing their investment through the consolidation of smaller regional or specialized players.

The Urgent Care Association estimates that the current ownership of clinics and care centers is split fairly evenly among physicians, corporations including private investors and insurers, and hospitals. Many of these smaller operations, especially those owned by entrepreneurial physicians, are now looking to merge their practices with larger outfits, portfolio companies of private equity firms or partner with a financial sponsor as a platform for consolidation.  When done right, an acquisition can benefit all parties and result in tremendous growth and substantial economies of scale.

Case in Point

  • Private equity firm Silver Oak Services Partners acquired Physicians Endoscopy, an owner and manager of endoscopy centers, in 2008. Silver Oak doubled the size of the Physicians Endoscopy surgery center network, from 14 centers to 29 centers, and nearly tripled EBITDA. In September of this year, Silver Oak sold Physicians Endoscopy to private equity firm Pamlico Capital for a healthy profit.
  • Elm Creek Partners is another private equity firm targeting the retail health space. Elk Creek made its first healthcare investment in 2011, when it acquired Millennium Healthcare Management, an urgent-care chain with clinics in Louisiana and Mississippi. Today, Elm Creek Partners is actively looking to make more acquisitions in the walk-in and urgent-care center market, in part because they expect that the Affordable Care Act will greatly increase the population of insured patients and the number of preventive services that require no copayment, which makes the market more attractive.

Key Considerations in Investing

Still, there are challenges for PE firms targeting the retail health space. These deals are often very competitive because retail health opportunities are relatively easy to value and enter, even for investors that lack expertise in the industry due to relatively uncomplicated operations and cash flow generation as well as low barriers to entry.

That means even among experienced healthcare investors, competition is fierce, and the best deals often have a large number of bidders, which can significantly inflate prices. Given the high prices paid for many retail health companies, it is critical for investors to know exactly what they want to do with the investment once the sale is complete. For instance, do they want to rapidly expand the footprint nationwide, or do they want to improve operational efficiencies?
The good news for private equity is that there is strong pent-up demand for exits in the retail health space. Since 2006, private equity firms globally have made more than 1,300 healthcare buyouts, but there have only been about 600 exits. A recent survey by the Healthcare Private Equity Association found that most PE professionals expect exit activity will start to pick up in 2014. Investors that can successfully create value in their portfolio companies will likely see a sizable return on their retail health deals.

Other considerations for PE firms targeting the retail health space include:

Preparing pro forma statements – For acquirers, it’s vital to take a critical look at the financial positions of all of the practices involved by preparing pro forma financial statements. Pro forma statements will provide a picture of what the groups will look like after they consolidate, while also providing transparency and a realistic indication of the finances of the merged practices.

Reviewing operating agreements – In addition, reviewing trends in revenue, expenses and profitability will provide the acquirer a valuable operational management tool in order to identify efficiencies and areas for operational improvement.

Examining market dynamics – Another critical area to explore is underlying market dynamics, including the target company’s mix of patient versus third-party payment and the level of reimbursement pressure the business faces from payers. Also important is scale and expansion potential. What is the relative scale of the target company in its local market and how likely is it to gain additional share? And how will it expand? By opening new clinics or pursuing acquisitions?

Key Considerations in Selling

Sellers’ efforts should include conducting detailed due diligence and preparation of their own asset for a liquidity event. It takes time to properly structure a deal—generally, at least nine to 12 months. A commitment to man hours for gathering data and holding regular discussions on everything from operational issues to corporate culture, values and ethics will be critical to the acquisition’s success.

Manage Due-Diligence Process – Private equity firms have particular criteria and timeframes. Sellers should consider designating a representative from their medical group to drive the due-diligence process. Ideally, this should be a detail-oriented person who can compile the necessary documents and data while also managing the day-to-day interaction with the consultant. To keep the process moving, the internal resource can designate committees to address specific issues (e.g., how to handle pension plans and fringe benefits in the combined practice).

At the same time, sellers should not get so consumed with the merger that practice performance starts to slip. By engaging experienced consultants who can tackle due-diligence requirements for the merger or acquisition, sellers can remain focused on running their facilities and providing quality care.

What Does CohnReznick Think?
The evolving Healthcare industry yields increased opportunity for lucrative private equity investment – in particular sub-groups of retail health. CohnReznick expects to see continued demand as newly insured patients are introduced to the market. However, when making the decision to invest in or sell a practice, it is well advised to carefully examine the financial status of all practices involved and carry out proper due diligence, which may be best executed by seeking the advice of a consultant versed in medical practice investment activity.


For more information, please visit CohnReznick’s Private Equity and Venture Capital Industry Practice webpage or the CohnReznick Medical Industry Practice webpage and contact:

Private Equity - Jeremy Swan, Principal, at 646-625-5716. 

Medical Practices – Richard Puzo , Partner, at 973-228-3500.

1According to the April 1, 2012 ConvUrgentCare Report distributed by Merchant Medicine, the top 10 providers include:  MinuteClinic, TakeCare, The Little Clinic, Target Clinic, Fast Care, RediClinic, Baptist Express Care at Walmart, DR Walk-In Medical Clinics, Cigna Care Today and Aurora QuickCare.

Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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