With the first quarter behind us, we want to share some insights after talking with several healthcare investors since the beginning of the year. Here are some commonalities:
1. By many accounts, the same number of potential investment opportunities were reviewed between 2022 and 2023. However, the quality of those opportunities was markedly lower in 2023 versus 2022.
- Investors stressed that, by “quality”, they meant quality of the business overall: revenue cycle, business model, earnings/profitability, staffing mix, management, etc.
- This suggests to me that some of the headwinds that have been blowing since 2022 had a cumulative impact on business operations. We hesitate to talk much about timing, but it might also suggest that businesses that read the tea leaves correctly in 2022 made a hastened push for the M&A markets before things slowed down.
- As a consequence of the perceived decrease in quality, a great many sell-side processes stalled in 2023. We heard as high as 80% of the potential deals went uncompleted in 2023 in some markets. Some of those processes were reignited early 2024 with improved utilization and volumes but there hasn’t been much of a shift in response.
2. As a result of the overall market, many healthcare investors expect deal volumes to be flat compared to 2023 in 2024.
- We have heard an expectation that deal volumes will pick back up 3-4 quarters from now; however, we have been hearing a similar expectation for the past 3-4 quarters.
- Some investor groups have held on to businesses for a couple of years past the anticipated exit timeline to see if market conditions improve. It will be interesting to see if any large-scale platform exit activity breaks through in the remaining months of the year. We have heard rumblings of different groups hiring investment bankers and kicking off sell-side processes towards this end. An uptick in platform exit activity could materially shift the outlook for the remainder of the year.
- We suspect many investors will reach for other tools in the toolbox to create liquidity and achieve exits, albeit partial exits in some cases. Technology such as GP and LP stakes investing has taken off in the past few years and by all accounts is expected to continue to proliferate as a more bespoke portfolio management tool for those involved.
3. Not all sub-verticals are expected to remain flat in terms of deal activity. Behavioral health, ASCs, tech-enabled RCM, payer services, pharma services, and home health seem to be in high demand.
4. There seems to be some ongoing tension for private equity in particular, as dry powder levels continue to rise, to stand up new platform investments. Private equity firms have been successfully raising new funds since 2021, and as the size of the funds increases (which is almost assuredly has for all PE firms), the size of each investment needs to increase as well. Large pension funds have enjoyed the strong returns PE has generated in the past two decades, and they are now counting on those higher returns to persist in order to subsidize performance in the bond market and aging pension system participants within the pension’s investment portfolio.
