Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Veterinary Specialty Hospitals
Transcript
- Lucas: Luna, I want to talk about a quiet roll-up that touches a nerve for anyone who's ever rushed a sick pet to the emergency room in the middle of the night. Luna: You mean the specialty vet hospital space? I've seen more and more of these places get bought by private equity. Lucas: Exactly. For years, the pet care roll-up story was about general practice — think Banfield, VCA, your neighborhood vet clinic. But the last three, four years, the target has shifted to specialty and emergency hospitals. These are the big referral centers with boarded specialists in oncology, neurology, cardiology, surgery. And they're getting bought at eight to twelve times EBITDA. Luna: And that's not cheap. What's the typical EBITDA on one of these places? Lucas: A single multi-specialty hospital can throw off three to eight million dollars in annual EBITDA. Compare that to a general practice, which might do half a million or less. The margins are wider because the procedures are higher-revenue — think a three-thousand-dollar CT scan or a fifteen thousand dollar spinal surgery. And the referral moat is real: once you've got two or three boarded surgeons referring into your network, it's hard for a new independent to compete. Luna: So private equity is essentially buying a pipeline of high-ticket procedures. Who are the big players right now? Lucas: You've got BluePearl — that's owned by Mars Petcare, the candy and pet food giant. They run about a hundred and fifty hospitals across the US. Then Ethos Veterinary Health, backed by private equity firm Berkshire Partners, has been on a buying spree. There's also Veterinary Emergency Group, or VEG, and MedVet. A lot of these are consolidating not just single hospitals but entire regional referral networks. Luna: And the vets themselves — how do they feel about being acquired? I've heard some clinics resisted at first. Lucas: That's the fascinating tension. A lot of specialists went into this field because they wanted clinical autonomy — they didn't want to be a cog in a corporate machine. But the offer comes with a check for maybe two to five million dollars for a practice owner who's been working eighty-hour weeks for decades. Plus the promise of capital for new equipment, better staffing, and relief from the administrative headache of running a business. For many, it's hard to say no. Luna: Right, but the trade-off is that decisions about pricing and staffing move to a corporate office. I've seen studies showing that emergency visit bills at pe backed hospitals run twenty to forty percent higher than at independent ones. Lucas: That's the number I was going to bring up. A 2023 working paper from researchers at the Wharton School and the University of Miami looked at over two thousand veterinary practices and found that after a private equity acquisition, prices increased by an average of sixteen percent compared to similar independent practices. And for emergency and specialty services, the markup was even steeper. The argument from the firms is that they're investing in better equipment and recruiting specialists in a tight labor market — but the sticker shock is real for pet owners. Luna: And this is happening against the backdrop of a severe vet shortage. There are only about fifteen boarded veterinary oncologists per state in some regions. Lucas: Right. The shortage actually strengthens the roll-up thesis. If you own a network of specialty hospitals, you can offer a higher salary, a signing bonus, loan repayment, and a schedule with more predictable hours than a sole practitioner can. So the best specialists gravitate toward the corporate networks, and the independents struggle to recruit. It becomes a virtuous cycle for the consolidators and a vicious one for the holdouts. Luna: Let me play devil's advocate, though. If private equity is improving access to care by funding new facilities and attracting specialists, isn't that a net positive for pet owners? Even if prices go up? Lucas: It depends on your perspective. For a pet owner in a rural area who now has a twenty-four-hour emergency hospital within an hour's drive instead of three hours, that's a genuine improvement. And for a specialist who wants to focus on medicine instead of payroll taxes, the corporate model can be appealing. But the data also shows that these pe backed hospitals tend to recommend more advanced diagnostics and procedures — more MRIs, more surgeries — than an independent might. Critics call that over-utilization; the industry calls it comprehensive care. Luna: So it's a quality of care debate masked as a business model debate. What do the next few years look like? Are we heading toward four or five big national chains owning most of the specialty capacity? Lucas: I think that's exactly the trajectory. We're already seeing a land grab. BluePearl, Ethos, VEG, MedVet — they're all competing to acquire the remaining independent hospitals. Some deals are happening at twelve times EBITDA or higher. The question is whether the FTC or state regulators start paying attention. So far, veterinary consolidation has flown under the antitrust radar because the market is still fragmented at the national level. But in some metro areas, you're seeing one network control forty to fifty percent of specialty beds. Luna: And that's when pricing power really kicks in. If you're the only game in town for a pet needing a neurologist, you can charge whatever the market will bear. Lucas: Exactly. And pet insurance is still a relatively small market in the US — only about four to five percent of pets are insured, compared to fifty percent in the UK. So most owners are paying out of pocket. That gives consolidators less pricing pushback than you'd see in human healthcare, where insurers negotiate rates. Luna: I want to come back to something you said earlier about the shortage of specialists. Some of these PE firms are also building their own residency programs to train more boarded vets. Ethos, for example, launched a residency in emergency and critical care. Is that a long-term play to solve the pipeline problem? Lucas: It is, and it's smart. If you control the training pipeline, you control the future labor supply. But residency slots are expensive — you need a board-certified specialist to supervise, and that specialist could otherwise be seeing patients and generating revenue. So it's a multiyear investment. The firms that do it well will have a durable competitive advantage. The ones that just acquire without investing in talent might struggle to keep the hospitals staffed. Luna: And there's the additional risk that some of these acquisitions are overleveraged. If interest rates stay elevated and the economy slows, can the debt service on a twelve times ebitda deal still work? Lucas: That's the vulnerability. In the low-rate environment of 2020 and 2021, these deals penciled out easily. Now with the Fed Funds rate at four and a half percent and the cost of debt much higher, some of those multiples look aggressive. If patient volumes dip or reimbursements get squeezed — though that's less of a factor in pet care — the leverage can become a problem. But so far, the demand for specialty vet care has been incredibly resilient. People will spend a lot to save a pet. Luna: And that brings up an interesting ethical question. Is it okay for private equity to profit from the emotional attachment people have to their animals? I mean, no one price-shops when their dog is having a seizure at 2 a.m. Lucas: That's the heart of the matter. The business model relies on inelastic demand in a moment of crisis. The consolidators know that when someone walks through the door of an emergency hospital, they're not comparison shopping. That's why the industry has been able to raise prices faster than the rate of inflation. The question for regulators, and for the industry itself, is whether there should be any guardrails — like mandatory price transparency or restrictions on surprise billing. Luna: I've seen some clinics actually start posting prices online for common procedures, but it's still rare. And the big chains don't seem keen to lead on that front. Lucas: No, they're not. And that's part of the opacity that makes the business so attractive. But I think there's a growing awareness among pet owners. There are now Facebook groups where people share their bills and compare costs across hospitals. That kind of consumer pressure could eventually force more transparency, especially if it gets picked up by journalists or lawmakers. Luna: If these conversations have moved your work forward in some small way — maybe you're thinking about your own practice, or you're an investor looking at this space — we wanted to mention something quick. Lucas: Yeah. A handful of listeners chip in monthly through Buy Me a Coffee, and that's literally what funds making this many of these deep-dive episodes. We don't run ads, and we want to keep it that way. If the show's been useful, you can find us at buy me a coffee dot com slash fexingo. Luna: And that support is what keeps us digging into these niche roll-ups. It goes straight into research time and production. So thank you if you're already part of that. Lucas: Alright. Back to the vet space. I want to talk about one specific deal that I think illustrates the trend: last year, a mid-sized private equity firm called Revelstoke Capital Partners acquired a group of three specialty hospitals in the Pacific Northwest. The hospitals were doing about twelve million in combined EBITDA, and the price was rumored to be around a hundred million dollars. That's about eight and a half times EBITDA. Luna: And what was the strategy there? Just geographic concentration? Lucas: In part. But also creating a platform for further add-ons. Revelstoke then recruited a CEO who had previously run a BluePearl region, and they're now actively looking for independent specialty hospitals within a three-hour drive of their existing locations. The goal is to build a regional network that can negotiate better supply contracts, share specialist time across sites, and eventually attract a larger buyer — maybe one of the national chains or even a strategic like Mars. Luna: So it's a build-to-flip model. That's typical private equity: buy a platform, do a few add-ons, show EBITDA growth through operational improvements and scale, and then sell at a higher multiple. Lucas: Exactly. And the key operational improvement in this space is often centralizing the back office — billing, scheduling, IT, supply chain — and then using the freed-up time of the veterinarians to see more patients. If you can increase case volume by ten percent without adding a new doctor, that's pure margin expansion. Luna: But doesn't that risk burning out the specialists? They already have high burn-out rates in emergency medicine. Lucas: It does. And that's a real risk. Some pe backed hospitals have seen turnover spike after acquisition because the culture changes. The vets feel like they're on a production line. The better firms recognize that and invest in retention bonuses, flexible scheduling, and mental health support. But it's a balancing act — the financial model only works if the specialists stay productive, and the specialists only stay if they feel valued. Luna: So where does this all land? Five years from now, do we see a handful of national chains, or does the model blow up? Lucas: I think we see more consolidation, but with a regulatory twist. The FTC has started looking at healthcare roll-ups more closely, especially in physician staffing and anesthesiology. Veterinary medicine might be next. But even if it isn't, the capital intensity and shortage of specialists create natural monopolies in local markets. My bet is we end up with three or four dominant players controlling sixty to seventy percent of the specialty bed capacity in most metro areas. The question is whether that leads to a backlash from pet owners or from the veterinarians themselves. Luna: And what about the independent specialists who choose not to sell? Can they survive? Lucas: They can, but it's getting harder. They need to differentiate — maybe by offering a concierge-level service, or by partnering with a local general practice network. Some are forming cooperatives to share administrative costs without giving up equity. But the economics of scale are powerful. I think we'll see a bifurcated market: a few high-end independents serving price-insensitive clients, and the rest going corporate. The middle ground is shrinking fast. Luna: It's a pattern we've seen in so many industries. But with pets, it feels more personal. Lucas: It does. And that emotion is part of why the business model works so well. But it's also why the pushback, when it comes, might be louder than in other roll-ups. Luna: Alright, next episode we are going to look at a completely different corner of the buyout world — one that involves concrete, steel, and a lot of debt. I think you'll like it. Lucas: I'm already looking forward to it. For Fexingo Business, I'm Lucas. Luna: And I'm Luna. See you next time.