Why Your Healthcare Strategy Should Include Dental

Fragmentation, demographics and regulation combine to make dental a huge PE opportunity.

The dental space is continuing to attract private equity investment, as industry fragmentation, demographic trends and provisions of the Affordable Care Act combine to make it particularly well suited for the PE operational improvement playbook.

“The U.S. dental industry is stable and growing, estimated to reach $168B by 2020,” says Paul Murphy, a partner at Sentinel Capital Partners. “This growth has been driven by a number of factors, including increased enrollment in dental plans driven by population growth, increased awareness of the importance of dental health, expansion of dental plans offered by employers, and the increase of appearance enhancing and cosmetic dental procedures.”

The dental space is also highly fragmented, making the subsector a prime target for continued consolidation. Murphy cites two main demographic shifts for this trend. First, aging baby-boomer dentists are looking to retire; second, the current younger generation of dentists tends to be more focused on practicing medicine rather than running the business side of his and her practices.

“Dental care demand has [also] traditionally been non-cyclical or less susceptible to broader market declines during recessions [than other sectors],” Murphy says.

Added to these market conditions is the impact of the Affordable Care Act, which includes several provisions related to oral health that are expected to increase the number of patients in the system. Legislation within the ACA requires that pediatric dental care is included as part of the minimum essential coverage for children and adolescents via state-run healthcare exchanges. Murphy estimates an additional four million patients will be covered as a result of the new law.

Sentinel Capital Partners recently exited one of its dental investments, adding to the firm’s expertise in the growing subsector of healthcare. The firm recently sold portfolio company Northeast Dental Management (NEDM), a provider of dental office support services in the Northeast and Mid-Atlantic, to strategic acquirer Dental Care Alliance for an undisclosed amount.

In addition to NEDM, Sentinel has invested in three other dental companies dating back to 2003. The firm’s portfolio has included Castle Dental and Metro Dentalcare, both regional providers of general and specialty dentistry office support services; and ReachOut Healthcare America, provider of administrative support to mobile dentists.

With NEDM, which provides administrative staffing, human resources, purchasing, financial and information technology support services to locally branded dental offices, Sentinel pursued a full-force consolidation strategy.

Sentinel expanded the portfolio company’s finance team significantly by adding several new vice presidents to help integrate the 24 add-on affiliations the firm acquired during its ownership. In three years, Sentinel increased the number of dental offices served by NEDM to 65 from 29. During that time, NEDM’s footprint expanded to seven states from four states, including Maryland, Massachusetts, and Connecticut, while serving nearly 200,000 patients annually.

“We saw an opportunity to build the platform infrastructure and team necessary to consolidate dental practices in the Amtrak corridor, a region that was highly fragmented,” Murphy explains. “The sale was not the result of an auction process.

[The market for exits in general], and for the dental industry in particular, was very strong.”