Private equity dealmaking in healthcare stalls amid persistent bid-ask gap, negative regulatory environment
Private equity dealmaking in healthcare has stalled in 2024 amid a persistent bid-ask gap, a “decidedly negative” regulatory environment and signals interest rates will remain high for the foreseeable future.
That’s according to a new report from data firm Pitchbook, published earlier this month. Private equity healthcare sponsors announced or closed about 158 deals in the first quarter (including five in imaging), a “downward trend even from 2023’s sluggish pace.” During the same three months last year, PE healthcare services investors closed 200 transactions, representing a 20% year-over-year drop.
However, more sponsors are at least looking to deploy capital, with financing easier to come by than mid-2023, wrote Rebecca Springer, PhD, lead analyst in healthcare for Pitchbook.
“Firms have deals in the pipeline, to be sure, but we expect most of these processes to progress slowly, with announcements trickling in toward the end of the year and activity picking back up in earnest in 2025,” the report noted, adding that “buyers continue to hold the upper hand amid elongated deal processes.”
Various factors combined to bring “additional headwinds” during the three months ending March 31. The Change Healthcare cyberattack in February has caused delays in active deal processes, with targeted companies “scrambling” to reconfigure billing while buyers have sought assurances that revenue would eventually normalize. On March 5, the federal government also announced the launch of an inquiry to assess the “impact of corporate greed in healthcare.”
Antitrust enforcement risk remains low, the report noted. However, Pitchbook has charted an uptick in media requests from journalists investigating private equity-related healthcare consolidation, with inquiries sometimes involving “quite modestly sized platforms.”
“Even if the public spotlight drifts elsewhere post-election, we fear a lasting effect on perceptions of PE’s interests and approaches among potential sellers and partners in the provider landscape, including physician groups and health systems,” the report noted.
In addition, the Federal Trade Commission on April 23 voted to ban noncompete clauses, a tool “widely used” among the clinical workforce. The rule carved out exceptions for nonprofits, transaction-related noncompetes and upper-level executives. But Pitchbook expects the ban to impact private equity deals in healthcare (provided it isn’t overturned in court).
“If implemented, a noncompete ban would theoretically advantage health systems over PE-backed physician groups in physician and clinical staff retention and could also result in further wage inflation in the industry,” the report noted. “For now, it introduces an additional element of uncertainty into the dealmaking environment.”
Opportunities for private equity firms to exit their investments in physician practice management companies “appear limited” thus far in 2024. That’s, in part, because the pool of large-cap PE buyers “has likely shrunk considerably” amid antitrust scrutiny. Pitchbook’s latest data show that the median age of a current PE-backed platform is between four and five years in imaging, similar to emergency medical transportation and specialty pharmacy. About 20% of current PE-backed platforms in imaging have been held for 0-3 years since the first buyout, Pitchbook reported. Investors have held another 40% for 4-7 years since the first buyout, and the remaining 40% for 12-plus years.
Meanwhile, vision and urgent care are seeing median hold times north of five years. Categories with burgeoning PE interest, such as cardiovascular care, have hold times of two years “and are under little pressure to turn over quickly.” Compared to imaging’s 20% share, more than 80% of current PE-backed platforms in cardiovascular care have been held for three years or fewer since the first buyout.
“We find it remarkable that the narrative in the PE healthcare industry has shifted to the extent that serious market players are asking out loud whether there is a future for investing in [physician practice management companies],” the report noted. “To be sure, inorganic growth strategies play best in low interest-rate environments—a state we may not return to for some time—and the healthcare services industry has weathered a systemic workforce reduction post-pandemic. The regulatory landscape has also become much more complex over the past year or so. Deals done at elevated multiples on generously adjusted [earnings before interest, taxes, depreciation and amortization] in 2018-2021 will in many cases yield weak returns when sponsors finally bite the bullet and sell. But the fundamental tailwinds—aging population, scale opportunity, physician generational turnover, and the need for operational investment to increase access and care quality—remain unchanged.”
You can find the full report from Pitchbook for free here and read previous coverage of private equity in radiology at the links below.
Marty Stempniak has covered healthcare since 2012, with his byline appearing in the American Hospital Association's member magazine, Modern Healthcare and McKnight's. Prior to that, he wrote about village government and local business for his hometown newspaper in Oak Park, Illinois. He won a Peter Lisagor and Gold EXCEL awards in 2017 for his coverage of the opioid epidemic.