- Private equity deals in healthcare services declined last year after a pandemic-era increase, but PE deals still notched the third-highest on record by deal count, according to a Pitchbook report.
- PE sponsors announced or closed an estimated 788 deals in 2023, though the pace of dealmaking declined moderately quarter over quarter.
- Interest rate cuts could boost dealmaking this year, but the threat of increased antitrust enforcement might push investors to be more cautious, the data and research firm wrote.
Labor cost inflation and high interest rates shaped PE deals in healthcare services last year, Pitchbook wrote. Healthcare workers left the industry at an increased pace during the COVID-19 pandemic, pressuring provider operating margins as the cost of labor increased.
Labor constraints eased over the course of 2023, according to the report. But the cost of capital continued to challenge platform companies, or firms bought by PE groups that they plan to grow with more acquisitions.
“Numerous scaled, long-in-the-tooth platforms, including in some of the most acquisitive PPM [physician practice management] categories such as orthopedics and vision, are languishing under significant debt burdens, making few acquisitions—and only small ones,” Pitchbook wrote.
The healthcare sector also faced liquidity issues last year, making up a disproportionate share of leveraged loan defaults. Other reports have pointed to a spike in healthcare bankruptcies in 2023, including high profile filings by staffing firms Envision Healthcare and American Physician Partners.
Large deals were hard to finance last year, and liquidity challenges brought platform deals to a seven-year low, according to Pitchbook.
The key to unlocking larger platform deals is an interest rate cut, which could happen in the back half of the year, the report said. But increased antitrust enforcement could also have an impact on healthcare dealmaking.
The Federal Trade Commission and the Department of Justice also finalized stricter merger guidelines late last year that could slow down merger and acquisition activity in the healthcare sector. The guidelines could help regulators challenge PE roll-ups, where firms buy up and merge smaller companies into a larger business.
Though the Biden’s administration’s antitrust moves are “unprecedented,” the risk to PE dealmaking is also easy to inflate, Pitchbook said. But a number of headlines about increased scrutiny could make investors wary.
“While the interest-rate environment remains the most important driver of the pace of dealmaking, we also believe sponsors will be somewhat more cautious in 2024 about entering any provider categories that primarily serve vulnerable populations, including home-based care, post-acute care, high-acuity behavioral health, intellectual & developmental disabilities (IDD) care, and autism treatment,” the report said.