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The healthcare sector’s share of global private equity (PE) deal volume peaked at 13.7% in 2020. Three years later, that number fell to 10.8%, the lowest level since 2015.
Compared to the bustling activity of 2021, home care deals were mostly subdued in 2023 and followed the same trend.
The year’s slow growth was largely due to private equity firms’ reluctance to re-engage in the market. By 2024, these trends may change slightly, making it an interesting year.
“From an events perspective, what we expect to see depends largely on [Federal Reserve] Adjust interest rates,” Rebecca Springer, chief healthcare analyst at PitchBook, told Home Healthcare News. “Higher interest rates may impact the value of future cash flows and exit valuations. “
While 2023 was a down year for home care deals, it was a relatively strong year for the private health care specialist in terms of cumulative deal value, according to Pitchbook data. However, the fundraising is not expected to translate into an increase in the number of deals in 2024.
“Dry powder or available capital is not always indicative of future deals,” Springer said. “Ten-year funds have a typical investment horizon of five years and provide some additional flexibility with some technicalities. Through 2024, we expect private equity healthcare managers to focus on allocating funds into existing portfolios companies, lower-middle-market platforms, and occasionally pursue opportunistic divestitures.”
Expect a slow start
Cory Mertz, managing partner at Mertz Taggart, told HHCN that home care is in a particularly interesting position when it comes to deals involving M&A and private equity.
There are differences in financial strategies between physician groups and home care companies.
Mertz explained that physician groups relied heavily on growth through acquisitions and accumulated large amounts of debt in the process.
“Once you buy a physician practice, it’s difficult to grow significantly organically,” Mertz said. “You just have to keep buying them, so it’s almost entirely an aggregation strategy. They’re dealing with organic growth, so you accumulate more debt from deal to deal.”
In contrast, established home care companies—especially those owned by established private equity groups—often have cash reserves due to early investments and successful organic growth.
This financial stability allows them to expand without relying heavily on debt financing, giving them a competitive advantage in terms of deals.
“There are buyers who are strapped for cash when it comes to home care,” Mertz said. “Especially those who paid too much for the platform in 2020 to 2021. A lot of them were probably a little cash strapped or highly leveraged because they paid too much. They were heavily in debt and didn’t have the opportunity to really grow organically, either. There’s no opportunity to put a lot of cash on the balance sheet.”
Mertz and Springer both mentioned that it’s not a question of quantity, but of quality.
“Not all, but the recent portfolio platform deals we’ve seen in the last year or two – if they’re looking for quality companies, it’s going to be difficult for them to be aggressive,” Mertz said.
Springer said macroeconomic factors will continue to play a huge role in PE participation in home care through 2024.
“The decline in provider add-on activity we saw last year was due to two reasons,” Springer said. “First, the industry has been hit hard by rising labor costs. That is improving slightly as macroeconomic conditions change, but it’s clear that the pandemic will only exacerbate everything from urology to dental hygiene to home health care and persistent labor shortages in various sectors. Secondly, and most importantly, high interest rates and cumulative interest rates do not mix well.”
For private equity firms, relying on borrowed money to fuel rapid growth through acquisitions is becoming increasingly risky. As a result, the industry is turning its focus in different directions, as Pitchbook notes, behavioral health and aesthetics.
Others are moving away from traditional healthcare providers and investing more in technology and pharmaceutical services.
two and a half years
Private equity investors told HHCN that despite investor caution, the second half of the year is likely to be busier.
Investors and analysts are calling it a “mixed bag” when it comes to forecasts for 2024.
Mertz received a similar message when talking to other investors.
“Those companies that are part of the same ownership group and even some of the public companies have a lot of cash and they’re looking for quality opportunities,” Mertz said. “But there’s also people saying, ‘Now, we have to focus on organic growth and integrating what we’ve done in the past. These deals are done within 12 months.'” At least in the first half of this year. That’s the general feeling I get. “
As will be the case in 2024 and subsequent years, one of the biggest obstacles facing private equity investors is the lack of high-quality deals. Another, as Springer points out, is capital markets.
“The first thing they said was high-quality deal flow,” Mertz said. “They’re going to say, ‘There aren’t enough quality opportunities out there for us to go all-in.'” And, as far as capital markets are concerned, the consensus is that the Fed will start cutting interest rates in the second quarter of 2024. Buyers, especially those relying on debt, are waiting for conditions to ease a bit before they start making acquisitions. “