Are Canadian dental practices the next growth asset?

Reliable income streams, steady demand, and growth prospects. Those are among the chief qualities that any asset manager may look for in an asset class. One firm believes that many of those qualities can be found in a somewhat unlikely place: Canadian dental practices.

Elroy Gust, President & CEO of Newlook Capital, has built a subsidiary business around the acquisition and consolidation of dental practices. The company, called Dentalook now comprises 33 practices nationwide. Newlook has issued access to the dental industry with mutual fund trusts offering either debentures with a 9 per cent yield or an equity stake with some yield. Gust explained why he sees positive prospects for dental practices and how Canadian investors can gain access.

“At Newlook we really focus on essential industries and recurring revenue, and we wanted a healthcare offering because for the most part healthcare is essential, but how do you get the recurring revenue part,” Gust says. “So we looked around and there were a couple other sleeves, but we found that dental had the most recurring revenue and had the biggest upside when it came to consolidation… There’s lots of room to consolidate in the Canadian dental industry.”

To lead those efforts, Gust brought on board Dr. Sam Mazareh, a dentist in Saskatchewan who had already consolidated a few practices. Seven years ago Newlook brought Mazareh on board to lead their dental operations. Gust says the team has functioned as a partnership, with Mazareh’s dentistry and practice management expertise wedded into the asset management and business acumen at Newlook.

Newlook differs somewhat from other consolidators in that they purchase 100% of the practices in their book. Gust notes that this doesn’t mean the dentist leaves their practice, often the selling dentists will stay on, preferring to focus on their dental work and patient care, leaving the business side to the new owners.

From an investment perspective, Gust sees solid growth prospects for primary care dental practices. He cites the rise of Invisalign technology which allows general dental practitioners to take on higher-margin orthodontic work from specialists. Tech developments like that, he says, should continue to drive growth. On the risk side, the only major source of risk he currently sees is the possibility of regulatory changes for the industry.

Arguably, it’s the bread and butter work of the industry that makes it most compelling. In their research Newlook found that most Canadians will not compromise on their dental spending even during an economic downturn. The rise of a national dental care plan, too, poses less regulatory risk in Gust’s view. Instead, he sees the entry of government-funded dental care for lower income Canadians as the introduction of new customers rather than an overhaul of the industry.

Since the outset of their dental venture, Newlook offered debentures in a mutual fund trust package paying out a nine per cent yield. Following six years of paying out that yield, Newlook has now begun offering an equity component in a mutual fund trust package, as well as a 50/50 equity debenture offering. While they are not the only players on the Canadian market offering investors access to dental practices, Gust notes that his firm were early adopters and the trend towards dental consolidation has only just begun in Canada.

Within the advisory space, Gust notes that there are other consolidators now publicly listed. His firm, as well, has been able to give investors access through the exempt market. The allocation, he says, would likely come from the alternatives sleeve of a client portfolio, where it could compliment some of the private equity and real estate holdings typically held in retail investors’ alts allocations. As advisors seek new ways to differentiate returns for their clients, Gust believes that an industry like dentistry with its consistent returns streams and continued opportunity for consolidation may be worth considering.

“There's an opportunity for outsized return and return that is going to be more focused, that's more industry specific,” Gust says. “You can actually see the results of that happening with every practice that we buy.”