Private Equity’s Strategic Evolution in Dental Support Organizations (DSOs)

In the recent panel discussion "Private Equity's Next Play for DSOs" at the Becker's Spring Future of Dentistry Roundtable, Phase 1 Equity Chairman, Allied OMS Chief Development Officer, and DuneGlass Capital Managing Director Brian Hamilton shared valuable insights into how private equity (PE) investments have shaped the dental service organization landscape and what the future holds.

Evolution of PE Investment in DSOs: Private equity has been investing in DSOs for over two decades, initially focusing on general dentistry. Over the past 7-10 years, PE interest has expanded into specialty dental practices, attracted by their favorable margin profiles.

Why DSOs Attract PE Firms Now: PE firms are drawn to industries that grow faster than the overall GDP and can optimize value quickly with capital infusion. Dental services are particularly attractive because they are not cyclical, reducing investment risk.

Impact on Financial Performance and Valuation: PE investments drive growth and profitability in DSOs through both organic and inorganic means. This includes de novo opportunities and acquisitions that leverage existing investments in systems and infrastructure.

Risks and Challenges: The primary challenge is ensuring alignment between doctors and investors on mission, vision, and culture. Candid, in-person discussions about economic perspectives, practice management, and succession planning are crucial for maintaining alignment.

Future Predictions: The panelists foresee continued maturation of PE investment in DSOs, with varied ownership models emerging. For example, the Doctor Equity^TM model used by Allied OMS and Phase 1 Equity allows doctors to partner with experienced HC PE leaders while investing as shareholders, aligning interests and fostering entrepreneurship.

In Short: Brian noted that "DSOs that empower doctors by teaching them about private equity and making them shareholder partners in managing the platform will be more attractive targets for PE investment than traditional DSOs. "