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NEW YORK—The challenges of 2020, for the most past, continue to drag on this year for most business sectors, including eyecare and optical retail. These challenges include recovering lost sales and patients, reduced appointment slots for many practices and the additional expense of PPE supplies and other safety measures that have become commonplace.

Yet, after a mid-year pause in 2020, the dealmaking activity in eyecare led by private equity-backed management services groups has picked up and, perhaps, exceeded the pace of deals pre-COVID, especially in the ophthalmology sector. But consolidation of the independent optometric sector also is back on track as almost a “perfect storm” of factors—including concern about potential changes in capital gains tax law and continued uncertainty about COVID-19—drive the new deals.

Richard Edlow, OD, a partner in Catonsville Eye Group (Catonsville, Md.) who is known as the “Eyeconomist,” said he believes private equity investors continue to be “laser focused on the eyecare industry with plenty of dry powder cash ready to invest.”

He added, “While COVID slowed the deal activity in 2020 it is back to pre-COVID levels. From 2018 to 2021, the percent of optometrists in consolidation models has more than doubled and for ophthalmologists, more than tripled. This could continue for several years at least. We also see more vertical integrations of optometry and ophthalmology.”

Health care is a “very defensive” investment sector and many ECPs performed well in a very difficult COVID-19 environment, noted Anne Kavanagh, managing member of Kavanagh Consulting. “When COVID-19 occurred, PE players stopped buying practices and focused on stabilizing operations over a five-month period.” According to Kavanagh, the private equity-backed groups operating within eyecare are “back with a vengeance and stronger than pre-COVID as vision care and health care are defensive and are performing well.” She added, “They are all back to buying practices at a very aggressive pace.”

In addition, ECPs are now more interested in selling as COVID was “an eye-opener” on just how quickly a successful practice can be upended, she noted.

Hunter Puckett, a managing director of advisory firm HPC Puckett & Company, said he believes “there’s a little rush” in the market because of a confluence of factors. “On the one hand, the marketplace is extremely competitive, although it varies a little bit from one geography to another. But because of the competitive nature and the timing of some of these platforms with their investors, valuations are quite high compared to historical levels.”

However, Puckett said he believes a change to the capital gains tax rate would have a significant impact on future transactions. “If that goes into place, I think you will see the volume of transactions drop exponentially,” he said.

“The two driving forces of transactions are the tax differential of capital gains versus ordinary income tax. The second component of that is the net present value of having the earnings of your business up front versus over time. If you add another large tax increase on top of that, it’s going to hurt net present value differential, which will make deals a lot harder.”

According to Edlow, in 2020, for private equity health care investments, eyecare was number one when it came to the number of deals consummated. Ffor doctors looking “to maximize the value of their practice, private equity is a very attractive path to take,” he added.

Among the management services groups, two of the most active in late 2020 were MyEyeDr. and EyeCare Partners.

As MyEyeDr. chief executive officer Sue Downes said, “We slowed down our acquisition pace for a few months in 2020 given the uncertain state of the world, as well as to focus on safety of our patients and associates, but are now firing on all cylinders again. COVID hopefully will have a lasting impact on our industry of truly helping us move forward into a health care position.”

MyEyeDr. added approximately 100 new offices (net growth of 90 to finish the year at 659 locations). EyeCare Partners (ECP) was active late in 2020, too, completing 16 partnership transactions since last October. St. Louis-based ECP also has approximately 600 practices, or sites of service, locations.

“I do think that the challenging marketing conditions have encouraged doctors who were considering affiliating with a business support partner to explore that option more aggressively than they have in the past,” ECP chief executive Kelly McCrann said. (The EyeCare Partners’ affiliation model does not include an option to sell the eyecare practice and then withdraw or retire. Doctors typically commit to active leadership of the practice for the following few years.)