McDermott Will & Emery’s annual HPE NYC conference gathers healthcare executives, investors, bankers, lawyers, and more to discuss trends in healthcare private equity (PE) and share insights. ECG was honored to be this year’s marquee sponsor.
More than 500 attendees congregated in New York City to network and listen to a lineup of 30-plus speakers. Below are three key takeaways from this year’s event.
1. Market Outlook
Decreasing Deal Volume
Healthcare PE deal volume is down in 2023. Many believe the US is entering a lengthy slowdown, potentially even a recession. Coupled with higher interest rates, deal volume is likely to remain relatively low in 2024 compared to recent years, although there is potential for deal count to slightly increase from 2023 levels. In a poll of conference attendees, 77% of survey respondents believe transaction activity will pick up from 2023, but at a slow pace.
Valuation Misalignment
As a result of lower deal volume in 2023, firms have record levels of dry powder to put toward investment opportunities, which likely explains the sentiment that volume will slowly increase in 2024. Although transactions will be completed, valuations are expected to be lower.
Sixty-one percent of survey respondents cite buyer-seller valuation misalignment as the greatest factor affecting healthcare PE deal activity in 2023, and this will likely continue to be an issue in 2024.
Evolving Role of Portfolio Company Executives
Although multiples are projected to be lower in the coming years, there will be a handful of outliers that will be able to field investments at higher valuations. Organizations in this category will be those that have a demonstrated history of strong cash flows in recent years, which will be a strong focal point of PE investors. Because of this, investors are looking for CEOs of their portfolio companies that have deep operational expertise. Instead of looking to guide their organizations to the next transaction, executives will have to act with long-term interests in mind and weather the storm of a potential looming recession.
2. Increased Regulatory Scrutiny
The regulatory environment in the healthcare provider space is creating growing difficulty in closing transactions.
Antitrust Activity
The majority of survey respondents say they are just starting to think about how much antitrust activity is affecting their investment strategy, but PE firms and healthcare organizations need to keep a close eye on the antitrust environment and adapt accordingly.
Investors understand the need for antitrust enforcement, but the general sentiment is that antitrust enforcement is increasingly inconsistent. Investors are unclear on what the regulations currently are and feel that precedent has been thrown out of the window. A recent example of this can be seen through U.S. Anesthesia Partners’ transaction with Welsh, Carson, Anderson & Stowe. In September, the FTC sued the two organizations, alleging the execution of an anticompetitive scheme to consolidate anesthesiology practices in Texas and increase the price of services.
"Mini-HSR Acts”
In addition to the increased antitrust scrutiny, many states are enacting “mini-HSR acts” for healthcare transactions. California, Illinois, and Minnesota are the most recent of around 10 states to enact these policies, requiring merging organizations to notify state agencies and observe waiting periods before closing. Although these requirements will likely not extend to all 50 states, it will be a reality in a number of large states and put a damper on the ability to close deals. Transactors will push to have all necessary agreements signed before regulatory reviews. PE investors believe this will likely slow down the pace of deals, but most will likely still get done.
Noncompete Bans
The push for noncompete bans is also growing, potentially adding to an already difficult regulatory landscape. While noncompete bans can make the business case for a transaction more difficult, they’re not expected to have a large effect on the ability to close transactions. Many organizations already operate in states that have banned noncompete agreements. Ultimately, investors understand that keeping providers happy is a better option than locking them into noncompete agreements.
3. Shifting Investment Focus
In recent years, PE investors have noticed a shift in the investment focus of the market. Survey respondents at HPE NYC see investors interested in pharmaceutical services, followed by AI-enhanced healthcare IT and value-based care.
- Digital health is still a strong focus of investors, but technology-enabled services without an AI play are becoming less attractive. If you are a technology-focused organization without an AI component, what is stopping you from being replaced by an organization that specializes in AI?
- Though value-based care remains an attractive investment opportunity, investor sentiment surrounding the sector is evolving. PE firms are seeking organizations that have demonstrated a track record of success in value-based arrangements, not just large networks of primary care providers. Investors are also focusing on what is driving success in value-based arrangements. Is it a one-time fix of coding issues? Or is the organization fundamentally changing the cost structure?
Did you attend HPE NYC? To learn more or share your thoughts, please reach out to a member of ECG’s mergers and acquisitions practice.
Edited by: Matt Maslin
Published October 29, 2023
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