When chatting with veterinary practice owners or those who’ve recently sold their practices, you might hear the term “recapitalization” thrown around. But what does this finance buzzword really mean?
Recapitalization Defined & Its Role in Veterinary
A recapitalization happens when a company is sold from one private equity firm to another. Private equity firms and family offices own most of the corporate groups consolidating the veterinary industry, and they usually hold investments for three to seven years. When a recapitalization occurs, the management team typically stays the same, but ownership and the board shift from one private equity firm (seller) to another (buyer). The major change in a recapitalization is the ‘capital structure’—who owns the business’s equity and debt. Hence the term “recapitalization.”
Recapitalization Example: Veterinary Practice Partners
Veterinary Practice Partners (VPP), a corporate group, was founded with an investment from Deerfield Partners in 2011. After five years of growth, Deerfield Partners sold VPP to Pamlico Capital. This is a recapitalization because the management team stayed the same, but the ‘owners’ of the capital changed.
Recapitalization vs. Sale
A recapitalization is different from a business “sale.” In a sale, the buyer is generally a ‘strategic’ buyer, or a company in the same or similar industry. For example, Sage and Ethos, two specialty hospital consolidators, sold to NVA in 2022. These are sales, not recapitalizations, because the change is in both the management team and the ownership. NVA’s management team will run the business and may bring some Sage and Ethos management and most of their hospital level employees onto the NVA team. The current owners and lenders of NVA provided all the capital to buy the businesses, not a new PE firm. The owners of Sage and Ethos will get a lot of money but won’t own the business going forward.
In a sale, merging two organizations makes the integration process more complex. Difficult decisions about roles, responsibilities, and cost savings have to be made. In a recapitalization, changes happen at the board level, not within the management team, making the process more seamless for the day-to-day business team.
Practice Owners: Why Should You Care About Recapitalizations?
Let’s take a look at how deals are currently structured to understand why (and when) recapitalizations matter.
Structure of Deals & Impacts on Practice Owners
Rising prices for veterinary clinics from 2016 to 2021 prompted corporate groups to offer part of their purchase price in company shares instead of cash. These shares are called TopCo (“Top Company”) or Parent Company equity. Since most veterinary corporations are private (for now), these shares aren’t traded on the stock market. Veterinarian shareholders get the chance to convert their shares into cash only during a recapitalization or sale event, which happens every three to seven years. This is why there’s so much buzz in the industry about these events and when they’re expected to happen.
Some History and Future Outlook for Vet Recapitalizations
Throughout 2021 and early 2022, many veterinary groups went through recapitalizations, including American Veterinary Group, United Veterinary Care, Alliance Animal Health, Veterinary Practice Partners, Amerivet, Rarebreed, and others.
So far, almost every company that recapitalized has brought significant upside to its shareholders, with practice owners seeing returns ranging from good to phenomenal. When valuations go up, almost everyone makes money.
However, since mid-2022, the recapitalization market has ‘frozen’ because the Federal Reserve raised interest rates from nearly 0% to 5%. This rate hike has made it much more expensive for private equity firms to pay high valuations for existing veterinary consolidators. ‘Valuation‘ refers to the purchase price multiple paid by buyers. In 2021, this multiple ranged from 20x to 25x profit—which were record levels. If these multiples drop to around 17x to 19x profits in the next few years, it will be harder for shareholders to achieve the high returns seen in the past when each dollar of profit is valued lower than in 2021.
What’s Next for Veterinary Recaps?
With so many practices being sold to corporate groups—nearly 3,200 hospitals between 2020 and 2023—vets are eager to know when their corporation will recapitalize so they can ‘cash out’ on their TopCo shares. Up until early 2022, recapitalizations had great outcomes for most vet shareholders. But now, with higher interest rates, things are in limbo, and the market is pretty much frozen until late 2024 / 2025, when we expect to start seeing recapitalization re-start. Time will tell how this all plays out.
Ackerman Group has an unparalleled understanding of the vast number of buyers in the US. When it’s time to sell your practice, you need a buyer who aligns with your strategy and goals. We specialize in creating a competitive bidding process tailored to your needs, negotiating optimal terms, and finding the perfect buyer for your veterinary practice. The first step is signing up for a complimentary and confidential valuation analysis. Get started today!