Med spas are rapidly becoming the front door to healthcare, and Empower Aesthetics has put out the welcome mat.

Partnering with financial sponsor Shore Capital, Empower’s platform of medical spas are located in Texas and Tennessee and building in the Midwest and upstate New York. With host Geoff Cockrell, Empower’s CEO Alyssa Rapp and Shore’s Logan Pitts share their insights on growing a med spa platform. She attributes Empower’s success to a relentless focus on “pure-play med spa” that offers injectables, lasers, and body contouring. “We’re sticking to our knitting and very clear on what we’re doing,” she says.

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

This is The Corner Series, a McGuireWoods series exploring business and legal issues prevalent in today's private equity industry. Tune in with McGuireWoods Partner Geoff Cockrell as he and specialists share real-world insight to help enhance your knowledge.

Thank you for joining another episode of The Corner Series. I'm your host, Geoff Cockrell, partner at McGuireWoods. Here at The Corner Series we try to bring together dealmakers and thought leaders at the intersection of healthcare and private equity.

Today we have two guests, Alyssa Rapp, the CEO of Empower Aesthetics, and Logan Pitts, vice president of Shore Capital. Alyssa, if you could maybe give a little bit of your background and describe Empower Aesthetics a little bit, and then Logan, I'll ask the same intro of you, and then we can jump into some questions.

Happy to do so, Geoff, and thank you so much for having us. My name's Alyssa Rapp. I'm the CEO of Empower Aesthetics. We are a platform of medical spas that we are partnering with around the country with density so far in Texas, Tennessee, building in the Midwest, and up to Upstate New York.

And we are thrilled and delighted to be partnering with Shore Capital. They are a financial sponsor, and Logan Pitts, my colleague, will speak more about Shore. We have six partners currently, we have four under development. We expect to be officially part of our family by the end of the year, and we are grateful to be scaling in the medical aesthetics space. I can say more about that later. Logan, maybe you want to give a quick overview on Shore?

Sure, absolutely. Well, Geoff, thanks again for having us. And as you know, my name is Logan Pitts on the Healthcare Fund at Shore Capital.

As a bit of background on Shore, we're a Chicago-based growth-focused investment firm. We started off in healthcare, and so that's where we spend a majority of our time and do a lot of deals in the multi-site healthcare services here.

So businesses that are really provider-driven, where the providers are the most important asset of the business and where there are multi-site operations, which are relatively simpler to manage when you're one or two locations, but in order to scale, you need to make a lot of investments in people and process and system. And that's really an area of the market where we've focused, where we've spent a lot of time and where we continue to see opportunity.

Shore's invested with over 1,000 medical practices across the US. We've opened over 300 new locations under those brands, and we've looked at basically every sector of healthcare. We've invested from vet to orthodontics to women's health to autism. So all very similar business models, but different areas of medicine.

I launched, along with Alyssa, the Empower platform right around two years ago. So have led the thesis from a Shore side and excited to continue to partner with Alyssa as we endeavor to develop the best med spa platform in the US.

Alyssa, what's the thesis for growth in the med spa arena?

Sure. There's so many we could talk about, and Logan is very well-versed. Well, I can jump in as well. First of all, the demographic trends of consumers seeking services from med spas, they are many ways becoming the front door for healthcare.

Like it or leave it, you feel comfortable talking to a medical aesthetics professional who's often a nurse or a nurse practitioner about how you feel about yourself, your skin, your aging process. And that can have a short-term clinical effect of having services completed that reduce wrinkles or the appearance of wrinkles and fine lines and boost collagen and do other things that provide a more youthful appearance on an ongoing basis.

But what that's doing is actually much more than skin deep, candidly, pun intended. It really is we are helping inspire joy and confidence through aesthetics, and that is our genuine mission and it's also our differentiation. This is not about yes, it is a multi-site cash pay business model, but that's not the why.

The why is that we're helping our clients and customers come in and experience the joy and confidence through aesthetics. And we're also, from a vision standpoint, striving to be the first-choice destination for growth-minded aesthetics professionals.

And what that means on a tactical basis is we only partner with seller partners who are maniacally focused on clinical excellence, clinical training, clinical results, and therefore client satisfaction. We are not fly-by-night. We take the clinical piece of this extremely seriously and think through our clinical advisory board and more about how we're going to continue to invest in the clinical training of our team.

And it's a theme that I get to sit in on all of our clinical advisory board meetings and it's wonderful to hear their thoughts on this. I'm proud of that. That's a key differentiation.

And then I also think a key differentiation in the space is we are partnering with growth-minded seller partners. So we are not partnering with folks who built a business, they want to step away. These are primarily women entrepreneurs who have built something meaningful, and we're grateful for the opportunity to partner with them, but they want more. They want to grow bigger faster, they want to have support on same-store growth, they want to get back to focusing on clinical excellence and not business operations.

So we're really looking to partner with her who when she wants a partner to support all the mundane activities of running a business, HR, finance, ops, technology, marketing, and then some, so she can return to growth and client satisfaction as her primary areas of focus. That's who partners with us, not just the why.

You talked a little bit about the dual aspects of aesthetics in medical treatment. There's quite a spectrum that I see in the medical aesthetics arena where on one end you've got maybe much closer to true dermatology practices that have an aesthetics arm to them, and on the other end just true aesthetics that don't have very much medical application. How do you think of Empower on that spectrum and what is the market advantages of those different approaches?

Sure. I'll answer this first, and Logan, again, feel free to jump in if there's anything you'd like to add. Our strategy is pure play med spa. So we are not pursuing derm practices or plastic surgery clinics. We are a pure play med spa thesis, and there are a lot of reasons why, but the net effect of that is that we are really partnering with folks whose primary service offerings are injectables, lasers, and then body contouring.

And body in this day and age, as you probably know McGuireWoods, can mean many different things in many different states with many different ramifications. But in the end, whether it's reduction of fat through freezing or melting, whether it is medical weight loss or even weight management through hormone replacement therapy, also known as HRT, that body is sort of the last 1/3 of what we do, but the focusing on injectables and lasers are the first 2/3.

And that is, I think, a differentiation in the sense that we're very clear, we're sticking to our knitting and very clear on what we're doing. And it's also important, in my life experience from running several organizations, sometimes deciding what you're not going to do is in some ways harder than what you are going to do.

So really planting a flag on who we are and with whom we partner on these pure play med spas I hope refines the aperture of whom we're seeking as partners and even might increase our probability of them reaching out to us. Logan, I don't know if there's anything else you want to add.

Yeah, no, I think, Alyssa, that focus is ultimately so valuable. I think when we're looking to grow an organization as quickly as we endeavor to grow here and where we have successfully in the past at Shore, it's really hard to grow that quickly, right? And the more you try and do, the harder it becomes, right? The business becomes more and more complex.

And so we always try and focus, as Alyssa said, on a core area and absolutely master that area before we add any complexity. And at the beginning you kind of noted where are you on the spectrum between medical dermatology and medical aesthetics? I think the other spectrum that we're cognizant about is where we are on the acuity spectrum within aesthetics specifically, right?

Obviously on the higher acuity end there's plastic surgery, and that's an area that we've consciously avoided for now. And I think the reasons are on one hand more and more can be done in a minimally-invasive setting as technology has continued to evolve and become more advanced. There's things that can be done with lasers or injectables that years ago needed to be done in a surgical setting, and Alyssa provided one example on weight loss. More and more of that can be done in a minimally-invasive setting, which is a med spa, for lack of a better term.

And then the second dynamic is from a labor standpoint. We sure love these markets where there's this massive supply-demand imbalance, or at least a demand in quality supply. And in order to bridge that gap, we need to be able to train more high-quality providers in the space.

And when you think about med spas compared to plastic surgery, we like that it's a largely mid-level driven model. There's a lot more nurses, nurse practitioners and physician assistants out there, and that allows us to grow so much faster than in a pure play doctor-driven model.

Alyssa, how do you think about growth strategies from the perspective of pursuing aggressive de novo expansion versus M&A and affiliation-type transactions that might be able to accelerate growth quicker but has a different risk profile?

Shore has an amazing playbook and a decade and a half of experience on both. But the M&A component here, given the explosive growth in the industry as a whole and the explosive growth of new clinics, the last stats I saw in the space showed that the number of clinics is still outpacing the growth in terms of the TAM.

And why that matters is that I would rather partner with people who have done it and done it well and profitably, and bring all of those stars, those stars into our constellation. And if we pursue de novos, which we have already in one case, it's in partnership with that star seller partner who's already built a clinic and wants to build a second. That strategy of land and expand could include de novos and already has.

But at this point, there are so many great people with whom to partner in this space, and again, at risk of sounding positively sexist, women, that it doesn't feel like we need a pure play de novo strategy at this point.

And in fact, we have found in our own 10 months of work, my 10 months of work in the CEO chair, I started as a board member and stepped into the CEO chair from the board last December, we found that there is a panoply of possibility with whom to partner. And if anything, we've had to get real crisp and clear on where we're going to go from a geographic standpoint, because there's so many wonderful women to partner with.

I would love to partner with all of them, that's my kryptonite. But borrowing from the Shore playbook and ensuring we're doing so in geographies where we can continue to build density and have economies of scale is going to be important to our long-term success, or at least short-term success if not long-term success. And I'm grateful to have that Shore M&A playbook at our disposal.

And what that means in practice is that John Nelson, who's the CEO of Southern Orthodontics Partners, who's sort of four years ahead of us in his journey, if my goal is, and I'm relatively transparent about this publicly, if our goal is to build a platform of $40 million of EBITDA and 240 million of revenue in the next four years, there are other folks in the Shore ecosystem who've already done it. I can learn from them and accelerate our success because of it, so that borrowing from the Shore playbook in that regard is key here.

Logan, what's your thought on kind of the life cycle of the med spa arena in the sense of a few years ago it felt like all open green space, at some point you hit saturation maybe on a market-by-market basis? What ending are we in and how do you think about open space versus saturation?

There's still tons and tons of opportunity here. I think where deals in the med spa space slowed down last year is in larger platforms trading. And if you think about it, there are very few large platforms, and by large, let's say 50-plus locations, and really every single one of them has traded in the last five years for astronomically high multiples.

And so there's this scarcity of high-quality platforms that your more traditional middle market or upper middle market private-equity funds can partner with, but the interest is still there. And so that's oftentimes where we look to invest at Shore, is effectively creating an inventory of really good companies that larger private-equity funds will then be interested in.

And so see a ton of opportunity to do that here. And from a more micro M&A perspective, I think our pipeline is as strong as it's ever been at Empower and there's no indication that that's going to slow down at all. And you think of 10,000-plus med spas in the US, maybe 3 or 4% of them have affiliated over the past few years, so still a massive opportunity ahead of us.

Alyssa, how big of a disruptor have the GLP-1 drugs been? And their presence kind of on the scarcity list has opened up a lot of avenues for other people to be selling those. How do you think of the GLP-1 revolution?

So I think about it clinically, and I look to our seller partners for their guidance and coaching here. So one of our partners, Amy Hatcher, at AWSkin in Nashville had been delivering GLP-1s as well as delivering hormone replacement therapy services to her clients before Empower partnered with her.

There was another partner of ours in Houston, DTRN, DermaTouch RN, that had been delivering HRT but not medical weight loss. And then there are others in our ecosystem that when we initially partnered didn't have either service offering and are now working slowly but carefully to launch pilots for medical weight loss.

Here's how I feel about it. I think that fads are dangerous, and this is still very, very serious clinical business we're doing, so we take it very, very seriously when you prescribe and manage and monitor medical weight loss as a service line.

I think the revolution is real. I have a nine-year-old who's an equestrian. I was taking her to a competition four months ago in Ohio, ordering my ritual chai tea latte, and on the chalkboard it said at the bottom, "And you can get GLP-1s here too," which made me almost want to drop the cup. It was so staggering that people are handing them out with that little regard for health and care.

And then there are people with whom we are partnering currently that are launching it in a pilot format so thoughtfully, so carefully, so holistically that I'm proud of how we're doing it even if we didn't rush to the fad and we did it more slowly even at the risk of short-term profit in order to make sure we're doing it in a long-term sustainable way.

And then there are those with whom we're going to be partnering, a woman in Austin in particular, who again is doing deca-sans and managing the muscle and fat and water weight of her clients every week when they come in for their injection, which is helping address a whole host of body whole health issues, as I mentioned in my initial comments.

So the degree to which medical spas are becoming that entry point for people looking for healthier lives and healthier bodies, and GLP-1s are a tool in that regard, I'm incredibly and emphatically supportive. To the degree that they're being dispensed like coffees at a Starbucks with no regard for the care of the patients, the side effects, and the deleterious side effects if not managed carefully, I'm wildly against.

I know we're doing it carefully and in the right way in the places where we're doing it, which aren't all of our clinics. No one in Empower is ever required to do something. The decisions on a clinic-by-clinic basis are clinic-led. For those that saw the trend, they said, "Hey, can you help us stand up a pilot and eventually a service line?" And we have, because that's our job in service to our partners.

But the answer to your question is I feel very good about the revolution in obesity management that GLP-1s can help solve for America. I feel very conflicted about how they're being dispensed, knowing that we will always do it in the best-in-class way, but having concern that not all are.

Alyssa, you mentioned that you partner with aggressively growing owners. How do you think of alignment going forward with them, the incentive apparatus around rollover, whether or not that should be topco, equity, JV structures? How do you think about long-term equity alignment?

I think this is a key differentiation into partnering with Empower, and I'm sure Logan would argue Shore as a whole. We don't provide 100% cash payouts on deals upfront. We are at Shore, as a Shore-backed platform, we're very heavy on the equity, right? Whether it's 50 or 60% upfront in cash in a balance and seller rollover equity in the form of a seller note and or shares in the platform, Shore's track record on that rollover equity is second to none and average of 6.7 times and one of the many reasons I said yes to the CEO role and why our partners say yes to working with us.

But the incentive alignment therefore is meaningful on the backend, meaningful on the front end, and then the midpoint we add often, not always, often earnouts for that same-store growth to ensure incentive alignment in the 12 to 24 months out of the gate when the deal is consummated.

So we want to make sure. And this is the best explained when we're looking at partners who have built one flagship location or two with a second or third location that's beginning to scale. A seller partner in that situation may be hesitant to transact now because she's, "Oh, well, I just launched this second or third location, I haven't fully actualized it. I'm not going to get the full value of that today or tomorrow." Or you're going to receive all the value of it on the backend, to your point.

And the question and the answer for our structure standpoint is there's cash upfront which satisfies the why right now. There's meaningful backend equity, meaningful, so you're really hoping that the second bite of the apple's bigger than the first, as the saying goes. And then there's this midpoint potential pop if you grow aggressively out of the gates, which I think is how I believe we're trying to help both de-risk and incentivize our partners to row in the same direction as we do. Logan, I don't know if there's anything you'd add further.

The only last thing that I would say is we do, as you refer to it, topco equity. So everyone's rollover equity is going in at the holding company level.

So instead of owning a rollover portion of just their med spa, our partners own a smaller share but of a much larger pie of our diversified holdings of med spas all over the country. Right?

And that's really important from a short perspective. One, from a seller perspective, it's great from a diversification standpoint, but two, where we see a ton of value broadly speaking across all of our portfolio companies is, as Alyssa said, we want to bring this consortium of all-stars together.

And part of the value of that is sharing of best practices, right? There's something great that Med Spa A in New York is doing that Med Spa B in Tennessee could learn from, and we really want to encourage that collaboration. And we've found that the best way to do that is, again, just ensuring that everyone's running in the same direction and that everyone's focused on creating equity value everywhere, not just in their individual practice.

Businesses are not all tailwinds all the time, there are headwinds. As I talk to folks in the med spa and broader provider services-type arena, some of the headwinds that here discussed are acute challenges around labor. Some of that is kind of macroeconomic, some of it is more specific kind of fallout from pandemic, but also impact of higher interest rates for access to capital, which puts pressure on pricing. How do you navigate some of those headwinds and what other ones would you add to that list?

I'll answer the labor piece, and Logan, if you want to speak to the interest rate environment, feel free. We are in an environment where some of these top clinicians in the med spa space are really generating a tremendous amount of economic value and used to being compensated well for it, and we want that to continue to be the case while also incentivizing their ongoing growth as individual contributors and as teams.

So we have put a lot of thought in the last six months in particular around revising our own internal compensation plan, but my goal with our clinicians is going to be two-pronged. Both make Empower Aesthetics a destination where people can both plant and grow, where we are continuing to reinvest in their education and their training so this is a place where they feel well taken care of. And if they grow, we're they're best compensated.

So if you're going to be city-state status quo, if you don't aspire to keep growing once you partner with us as a clinician, then your comp may not jump dramatically. If you want to grow and you want to partner with us on tools and tactics to grow your book of business and grow the clinics, then we want you to participate in the upside there meaningfully, just like we would our seller partners. And I think that I hope will help attract high-performing clinicians to us over the next several years.

But plant and grow our existing people and retain our top performers by giving them growth incentives is really the two-pronged strategy from a labor management standpoint. And Logan, I'll let you speak to the interest rate environment.

Yeah. Geoff, candidly, we haven't experienced much of an issue from interest rate standpoint for Empower, and I think that's largely where we are in our platform evolution, right? We're still in the early innings.

And one of the things Shore always endeavors to do is over-equitize our deals, which just means we use a very conservative amount of debt. So much of what we want to be able to do is invest in growth avenues that Alyssa's discussed ad nauseam, and so it's important for us to ensure that we're not putting handcuffs on our business by putting too much debt on them. In a high interest rate environment, that's also helpful from the dynamic you noted.

I think we could talk for quite a while, but let's call it a wrap there. You guys have a ton of great insights, and this has been a ton of fun. Thank you for joining.

Thank you for having us. Really appreciate the invitation.

Thanks, Geoff.

Thank you for joining us on this installment of The Corner Series. To learn more about today's discussion, please email host, Geoff Cockrell, at gcockrell@mcguirewoods.com. We look forward to hearing from you.

This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in this installment.

The views, information, or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state, and should not be construed as an offer to make or consider any investment or course of action.