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VC and PE share health tech sandbox

Mar 11, 2022
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Illustration: Gabriella Turrisi/Axios

With access to public markets shut down and a resetting of valuations in digital health and tech-enabled health care, expect more private equity and venture capitalists to team up on the M&A front, panelists at HPE Miami 2022 say.

What they’re saying: “The next 12 to 18 months will see a massive level of consolidation,” one panelist says, speculating that every SPAC public company will have an activist over the next 12 months. "It’s only a matter of time.”

  • That will force a focus on scale and breadth of products, this person notes. “These are broad companies — [just] not broad enough.”
  • Another panelist adds, "Businesses that are cash-flow negative and that took in equity to fund growth without plan to profitability — those folks have to figure out something."

Yes, and: Private equity firms, which a year ago couldn’t compete with public market valuations and "aggressive" SPACs valuations, enter as a natural participant.

  • Private equity is known for finding consolidation plays: "If there are a number of [VC-backed] point solutions that can be broadly integrated into the care continuum, that’s where we will see PE money come in.”
  • “That valuation euphoria is just not there anymore," another panelist says.

Meanwhile, those driving the mega funding rounds last year, like Tiger Global, are now saying they are only going to do Series A and B deals, one of the panelists says.

  • “‘If I’m wrong, I’d rather be wrong very early or very late [via a take-private]’ — that’s what we’re hearing," the panelist notes.

State of play: Amid today's post-de-SPAC hangover, we’ve already seen one take-private situation and the first major activist targeting of companies that went public during the recent SPAC party.

  • Dan Loeb’s Third Point earlier this week pushed for a sale of Cano Health, the value-based primary care company that went public last year at a $4.4 billion valuation. (Notably, Cano unlike many newly public health care companies is profitable and has met or exceeded the Street's expectations.)
  • And last month, Patient Square Capital agreed to take SOC Telemed private at an implied valuation of approximately $340 million — a significant discount to its initial enterprise value of about $720 million when it went public in Oct. 2020.

Yes, but: While sources at MWE tell Sarah that many undervalued public names are on private equity buyers’ watchlists, stock prices in many cases haven’t spiraled far enough yet.

  • "They’re still too expensive,” to make it work, one sponsor says. In time, that may change.
  • Also, the public-private valuation disconnect may be shutting down series D rounds and beyond (with more talk of down rounds creeping in), but the public market price environment hasn’t quite carried down to private equity markets, conference attendees say.

The bottom line: The market might be volatile and confused, but there appears to be a consistent reversion to profitability and durability for many.

  • "The art of the possible is losing favor and execution and cash flow is back in favor. There's a flight to quality taking place."
  • “Last year, it was: grow top line at all costs and drive aggressively towards a TAM at expense of EBITDA. That’s going to change.”
  • This environment “will start to create more focus on sustainability of growth, underlying economics of businesses and what it will look like at scale.”
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