There are already big players in the pediatric and orthodontic space, so what inspired Ananya Shah and Will MacInnis to launch their own dental service organization in the same arena? The answer lies in untapped markets and “a ton of opportunity.”

With host Geoff Cockrell, Ananya and Will outline their journey from a tech-focused healthcare start-up in Silicon Valley to co-founding Cliff Ridge Specialty Partners about a year ago. They explain what differentiates Cliff Ridge. One is their strategy of giving full clinical autonomy to providers. The other is their operational and technological playbook to make the lives of the doctors and office managers easier. Tune in to hear their insights about how they manage labor pressures, the factors that are more important to doctor retention than non-competes, and why their greatest opportunity in the next year may be acquiring more pediatric practices.

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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 McGuire Woods series exploring business and legal issues prevalent in today's private equity industry. Tune in with McGuire Woods' 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, a partner at McGuire Woods. Here at The Corner Series, we try to bring together deal makers and thought leaders at the intersection of healthcare and private equity. Today, I'm joined by the co-CEOs of Cliff Ridge Specialty, Ananya Shah and Will MacInnis. Ananya and Will, if you could give a quick introduction of yourself and Cliff Ridge Specialty, we can jump into some questions after that.

Sure. I'm happy to go first. So my name's Will MacInnis, and Ananya and I have been running Cliff Ridge Specialty Partners for just over a year. We met at our last job working together, which was at a company called Vial, and we were building clinical trial software and services for dermatology and ophthalmology clinics across the us. I was the CFO of that company and Ananya was the COO, and we decided to leave that company and start our own venture together. And before that, I was in finance for a number of years and private equity at a company called TPG. And before that, I started my career in investment banking and Credit Suisse.

Yeah, just to add to that, like Will said, we met at our last company called Vial, helped run our network of clinical research sites and got that up to about 40 something clinics. Before that, was at BCG doing consulting primarily in healthcare, and obviously now working with Will on Cliff Ridge.

Maybe Ananya, we'll start with you. Dental consolidation is probably 15 plus years in. There are some large platforms in the orthodontic space and in the pediatric space. What, from your view, made an opening for Cliff Ridge Specialty Partners in that kind of competitive environment?

Yeah, great question. So I would say a couple things. First and foremost, I think that even with sort of the emergence of the big players out there, like Smile Doctors in orthodontics, you do see quite a bit of opportunity in terms of fragmentation across the US. I think Smile Doctors, while they've done a really good job of consolidating some areas, have left a lot of untapped markets, including areas that we kind of go after on the West Coast and some parts of the East Coast. So I think there's just a ton of opportunity. I think Smile Doctors has also done a really good job of just giving orthodontists some pediatric dentists out there, some education into what the process looks like. A lot of the big players are at conferences, teaching doctors about the process of selling their business, why it might be valuable, and I think a lot of doctors out there are very happy with their sale and what opportunities have come to them from that.

So I think Will and I saw that opportunity. I think orthodontics and pediatric dentistry is probably a number of years behind more consolidated spaces like general dentistry, dermatology, ophthalmology. So I think we were excited about that area. I also think that just our backgrounds, coming from Silicon Valley, working for a tech-based healthcare startup, we have a little bit of a fresh mindset in the area. We try to do a lot of tech driven growth initiatives on the operation side and definitely on the marketing side, which I think, with our early clinics, has gone very well.

Will, when you're out competing in the market, what's the value proposition to doctors that you present?

Yeah, it's a couple things. There's some of the core tenants of the DSI value proposition that are not unique to us. It's the large cash payment upfront. We typically ask doctors to roll a decent amount of equity in our deals. We have more of what I would describe as a partnership oriented model than some of our counterparts in the market, which I think for us is really important, tying in the incentives between us and doctors, making sure that everyone is aligned around growth goals, and of course, allowing our doctor partners to share in the upside that we're all collectively generating. The core model is not too dissimilar from what some of our competitors are doing. We're taking out back office functions, we're centralizing key work streams, and injecting a fair bit of operational know-how into the existing locations that we're working with. The two areas that we have highlighted as areas of differentiation relative to others is, number one, we like frame it as the DSO that doctors want to partner with.

And this is full clinical autonomy, not rip and replacing, practice management software, working very closely with our doctor partners to jointly align on goals at the clinic level and not saying, "Hey, here's your growth target. Go and hit it." It's, what do we need to do at the clinic? What are the best five things that we can do to improve performance and how can we achieve those goals together? So that's bucket number one. And then bucket number two is what Ananya was talking about. It's, hey, we come from backgrounds of building and scaling technology. We have a lot of experience injecting technology into various operational processes throughout healthcare at different companies that we've worked with and for in the past, and so bringing that operational and technological playbook into dental and into orthodontics and pediatric dentistry and basically reevaluating, hey, here are the 30 steps of the process for everything from getting patients in the door to revenue cycle management, claims denial on the Medicaid side, all these different processes, and how can we leverage technology every step to drive performance.

Ananya, there are obviously some large platforms, given your tech background, as Will was mentioning. What are some of the tech advantages that you think have been underemployed in the DSO environment?

Yeah, great question. So I would say I think there's just a number of tools out there in Silicon Valley, and especially in the startup world, that really accelerate growth for small businesses. And I think that a lot of DSOs come from finance old school background into these areas, and they'll go with the legacy platforms to help out with things like HR, accounting, finance, training, whereas I think that we are more familiar and our DNA just exists in the space of more automated tools. And I think our thesis on technology in general is, how do I make the life of the office manager and the doctor easier?

And how do I make the online presence of the clinic that we have acquired more suitable for new patients? And without going into very detailed specifics on the tools that we use, a lot of our HR systems, training, it's all automated, which basically takes it off the office manager's plate who is calling insurance companies up directly and trying to get everyone on the same benefits, manage 401k, which really takes out a lot from what they need to be doing on the ground with patients. And I think even on the finance side, just automating things like spend management, integration into closing the month, and even developing analytics tools. So we've sort of brought on new tech that exists in Silicon Valley but really hasn't existed in broader private equity roll-ups, so we sort of brought that into the clinics that we've purchased.

Will, you mentioned having a thesis sharing some of the upside with providers. One of the lines of demarcation that I see in the DSO world, and this is true whether or not you're doing alignment through a compensation apparatus or direct ownership apparatus, but the line of separation is around proximity, meaning do you view alignment as needing to be close to the local practice or more centralized at a Topco, Holdco level? How do you think about those dynamics around alignment?

Yeah, I think it's a great question. I think we feel strongly that depending on the desires of the individual practitioner, I think both could be attractive forms of equity for the doctors to take. What I would say is we typically like to push what we call the JV model, which is local practice equity. There's a couple of reasons for that. One is it's the equity, as you mentioned in terms of proximity, that the doctor has the most impact on. And so the day-to-day, "Hey, here are the growth initiatives that we have at the site, how are we seeing the returns on that?" It flows through one-to-one when you're getting cash distributions based on your local role, JV practice equity. And so it's very one-to-one with the work that they're doing day to day. The other reason we like it is, as with any healthcare roll-up or practice management, business, however you want to frame it, one of the things that we like to think a lot about is this concept of income repair, where if you're a doctor, you're typically making a pretty decent sum of annual take home cash pre-selling your practice.

Depending on how much equity and how much distributions you're getting in the business post deal, that dollar amount comes down quite a bit. And our goal is to essentially, over some period of time, get the doctor back to what they were making pre-deal on an all and annual cash basis. And the way to do that is to promote a large amount of local practice equity role, which has distributions associated with it, and then growing the business back to a level where it's kicking off enough cash that the doctor is seeing a good chunk of that. And we feel strongly that doctors react very positively to that, and so are very focused on creating that dynamic within our network.

The local JV model is very popular in the DSO arena. And I think I heard part of an answer to my question in what you're just describing, but I'll ask you to comment on it anyway. One of the differentiators or different approaches that DSOs take is creating that JV model through direct ownership in a kind of sub DSO JV, and some do it through a compensation apparatus. The upside, obviously, of direct JV equity is that you've got all the trappings of ownership that can be attractive, but it interjects a lot of complexity, whereas recreating those same economics through a compensation apparatus, you've got flexibility but not direct ownership. How do you think about those two approaches?

I'm trying to pin down exactly what you might be referring to. When you say compensation apparatus, is that just a different form of legal structure or is it more individual and things like that?

Yeah, no, the idea would be rather than having a sub DSO that has net cash flow from a local practice run to that kind of subsidiary DSO, the cash flow that that would generate can also be replicated within a compensation apparatus within that practice. And if you created that cash flow through a compensation apparatus, you can be a little bit more surgical as to how you carve that up, you can be a little freer in how you dole out those rewards and hooks on it if someone were to leave, but you don't have direct ownership in that sub.

Yeah, no, I think are more in the former camp, so we do give direct ownership in the sub DSOs that we're setting up. I think that, as you mentioned, fully allows the doctors to participate in the upside. I think it allows... I'm not exactly a hundred percent familiar with the different compensation apparatus that some of our competitors might be using, but I imagine there could be implications for ordinary income versus capital gains tax in terms of how those distributions are paid out. So we want to make sure that our doctors feel like full equal partners, which they are, and as such, have set it up where they have direct ownership in the sub DSOs that we've organized for each practice that we're acquiring.

Ananya, obviously a lot of consolidation in general dentistry and a decade headstart on that versus some of the specialties. As you get to have larger general dentistry platforms, that opens up the possibility of those large platforms internalizing some of the specialists. Do you view that as risk or opportunity? Or how do you describe the competitive landscape of some of these larger general dentistry platforms?

Yeah, so I would say there's definitely an opportunity for general dentists to get into the orthodontic space. I think we view it in a couple ways. So first, I think the key referral pathway that we look at is not general dentist to orthodontists, but rather pediatric dentists to orthodontists. And both pediatric dentist and orthodontists obviously require a special degree, a special residency to qualify to practice those specialties. So when we think about it, we think less about our GPS going to steal our business and more about our pediatric dentist going to steal our business. And I think that was a lot of sort of the thesis that went into, let's build regional density across pediatric dentists and orthodontists, such that we have sort of a captive patient pool, but also can kind of standardize the patient experience across them coming into a pediatric dentist when they're incredibly young to when they are pre-teen and getting braces on. So I think we think more about that rather than general dentist.

And I think also, when we think about general dentists getting into the orthodontic space, I think the standard of care that exists in a specialized orthodontic practice has, at least what we've observed, has seemed to be quite a bit better than what you're getting out of a general dentist that's giving you Invisalign or maybe even putting on braces. We believe in orthodontist to execute that maybe a little bit better.

In DSO growth models, there's usually some combination of acquisitions and de novos. How do you think of that balance? And where would you place your emphasis?

I would say actually beyond those two buckets, the thing that we focus on the most is organic growth. And I think that if you look at some of the DSOs that have been most successful versus others that have maybe been less successful over the past five to 10 years, the main... In my opinion, and I think in folks that we're chatting with, one of the largest differentiators across the competitive landscape is, what does your organic growth engine actually look like? And is there a special sauce to what you're building, and are you actually driving above market organic performance at clinic?

So regardless of whether it's de novo or acquisition, and I'll talk a little bit more about our model as it pertains to those two approaches, the key thing, kind of the driving North Star above all that for us is really organic growth. But to dive into what you asked our model, if we fast forward five years, looking back, our hope is that it'll be a mixture of both acquisition and de novo. Upfront, the capital that we have, and I would say more importantly, the experience that we bring has geared us more towards doing acquisitions out of the gate. So we've done a series of acquisitions to get us off the ground here.

I think our goal is to move into de novo as an additional growth lever in the next 12 to 18 months, but that's a skill that we are in the process of building out and not something that... It is something that has its own challenges and a different skillset is required to be successful in that growth model, so we want to make sure we do it the right way. But yeah, to answer the question, it's more acquisition today and likely shifting to a mix of acquisition in de novo over time.

Ananya, looking at healthcare providers more generally, one of the main headwinds that they've experienced over the last 12, 18 months has been labor pressures, and that's obviously economy wide, but pretty focused in a number of healthcare sectors. How have you been able to overcome some of the labor pressures in dental?

That is probably what I spend the most time on, if I'm being honest, in terms of operating. I think it's a couple of answers. First and foremost, I think it's understanding what your goals are at the clinic and what is the service level needed to provide accurate staffing to actually hit those goals. It's kind of just keeping the main thing. If we need X amount of starts and X amount of exams and X amount of patients in the patient base, how much staffing do we need actually to hit that? And if the staff is complaining about some of the items that they're working on that's eating up a lot of their time, like we said, we try to inject technology into those areas to make their life a little bit easier and take a task that take five hours and eats up a whole day and make it one hour every other week.

So I think we've done a really good job at that at our practices to make the lives of the existing staff a lot easier. And I think the second part of it is rather inescapable to have staffing issues. You're going to experience that in any sector of healthcare, any small business that you're operating right now. So it's making sure that you're listening to the needs of the staff that's there, you're having active and open communication with them at a higher frequency than you would normally be used to, and understanding why they're feeling pressured to stay, leave, or what their complaints are. And then also in the background, just making sure that you have a robust recruiting pipeline. In the event that there is turnover, are you able to get a highly trained person to backfill that slot very quickly? I think we think of it just as sort of a plan B option, but I think all of those things are things that we do on a day-to-day basis.

Will, as you look over the next 12 months, what are risks that keep you up at night?

Oh, this is a good question. What are the risks that keep me up at night? Look, one of the things that's unique to orthodontics, or I would say is different in orthodontics relative to general dentistry, is the concentration that you have in each clinic from a doctor perspective. So in general dentistry, you might have five to 10 practitioners generating revenue in any given setting, whereas in orthodontics or pediatrics, you might have one or two generating the vast majority of the revenue in a clinic. So making sure that our doctors are safe and happy and healthy and showing up to work is obviously super important for us. And especially given where we are today in our growth trajectory, which is still early, we're hyper attuned to that more so than we will be hopefully in a couple of years as we grow and have more clinics. And then that aside, I would say any unforeseen changes in the regulatory environment, any unforeseen changes in the competitive environment, which we don't really anticipate, but those would be the things that be most focused on and are the things that probably came up at night.

Ananya, speaking of kind of changes in the legal environment, everyone is waiting to see if the FTC rules peeling back, restrictive covenants comes fully into effect. And even if it doesn't, the tide on that entire topic is moving away from restrictive covenants. How do you think of the blending of carrots and sticks as you try to keep providers engaged?

I would say something that I've spent personally quite a bit of time on is chatting with our lawyers, and happy to jump in. I would say two things. One, I guess I don't need to speculate too much on the final form of that release that's come out from the FTC. I do think it's going to work it straight through the courts. And my guess is the final rule does look quite different than what was initially proposed for better or for worse. So that's probably part one of what I would say. But much more importantly than that is the fact that while we do use non-competes in our business, I think the much more important as it pertains to doctor retention are all the other things that we have in place with the doctors. So it's the way that we structure our compensation, it's the way that we structure our equity, it's the way that we think about organic growth at the clinic and how that performance accrues back to the doctors and how they share in that upside.

I think if you're any business and you're relying on a non-compete, you're probably doing something wrong. Especially in the DSO space, having spent time looking at DSOs during my time in private equity, the first question we would always ask is, what is doctor retention post expiration of the non-compete? And so looking even beyond the non-compete and saying, "Okay, well, what percentage of those doctors are electing on their own accord to stay on post that five or seven year lockup period?" is such an important statistic. So we are focused on setting up a model that promotes doctor retention, putting all those legal documents aside. So it's definitely something we're focused on. I think the entire industry is focused on it beyond just dental, but hopefully setting our business up in a way where it isn't going to be a massive impact on our success.

I think just to maybe add to that, I would say our model is pretty operationally, hands on, and the folks that we're talking to, sort of the ideal partner for us is someone that wants to grow. So I think that when we give our pitch to doctors, it's, "Hey, we're going to help you grow. We're going to be hands on in the areas that you don't want to necessarily spend a ton of time on." So I think that going back to the carrot or stick point, our doctors are incentivized because they want to grow and they see us as an operationally hands-on partner that can take off a lot of burden that they don't want to work on. It's more of a clearly aligned incentives model.

And Ananya, following up on some of the discussion of the risk points, what are the areas of greatest opportunities you look in the next 12 months?

I think that two things that stick out to me. One, if you're able to sort of solve the staffing problem that seems to plague a lot of these clinics, there is just a ton of spare capacity. It's very rare that you see an orthodontic practice that's running a hundred percent capacity, a hundred percent chair time across the board. So just even in clinics that we're acquiring, I think there's just a lot of opportunity if you can get the staffing right and if you can get everything to sort of click just to expand those clinics tremendously. And I think the second point on de novos, I think from model specifically, if we're able to sort of acquire pediatric practices, we have a great marketing flywheel that's operating in the background. So we're very excited about the volume we're able to generate, and de novos are obviously a very cost-effective way to get people access to braces and Invisalign and aligners in general. So I think that's a massive opportunity for us if we're able to close some pediatric dentists.

With that, I think we'll probably bring this to a close. Thank you for spending a little time with me. It sounds like you're building a tremendous company, and this has been a ton of fun.

Awesome. Well, thanks so much, Geoff. Really appreciate you having us on. Hope everyone has a great rest of today.

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 McGuire Woods for informational purposes only. By accessing this series, you acknowledge that McGuire Woods 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 McGuire Woods. 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.