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PE health care services dip lower amid LBO clouds

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Illustration: Maura Losch/Axios

Private equity health care services activity continues to slump, with Q3 activity 28.7% lower than the previous quarter, according to a recent PitchBook report.

Why it matters: Though the financing environment looked brighter earlier this year, interest rates remain sky-high and sponsors are now struggling to secure debt for leveraged buyouts.

What's happening: "Earlier in 2023, we were hearing reports that lenders were willing to lend up to 5x EBITDA, or maybe 5.25x EBITDA for an excellent candidate," PitchBook analyst Rebecca Springer writes.

  • "More recently, sponsors have been struggling to convince lenders to underwrite 3x to 4x EBITDA," she writes.
  • Accordingly, where the rule of thumb in early 2023 was to value companies at two to three turns below the 2021 market rate, some deals have been priced at four turns lower or more, per PitchBook data.

Of note: "Of course, in many categories, the going rate for a midsize or large platform remains unknown due to lack of deal flow," Springer says.

  • Meanwhile, lenders are looking more closely at marketed EBITDA figures and demanding quality-of-earnings assessments.

By the numbers: There were 151 deals announced or completed in Q3, a 28.7% drop off from Q2.

  • That number is roughly half the average quarterly deal count during the bull market period of Q4 2020 through Q2 2022, but it is slightly above the average quarterly deal count for 2017 through Q1 2020.
  • In Q3, 24.0% of leveraged loans across sectors were financed via broadly syndicated loans, compared with 1.6% in Q4 2022.
  • There still has not been a single recorded syndicated loan issuance for health care services in 2023.

Zoom in: "Large deals simply are not getting done—yet—although bankers are sitting on significant deal pipelines," Springer wrote.

  • Add-on deal count is down significantly in dental, gastroenterology, home-based care, mental health, musculoskeletal (MSK), veterinary, and vision.
  • Risk sensitivity and expensive debt have kept platforms pursuing smaller deals than they would have two years ago, she says.

Between the lines: Structured capital and mezzanine investors are pursuing restructuring deals to help companies struggling with debt service costs and impending maturities.

  • "These transactions often show up as minority (growth) deals in our data," Springer says.

The big picture: Private equity funds are ponying up more of their own cash this year than ever before to fund their deals, Axios reported last month.

  • Loans to companies purchased by PE firms have yielded 11% on average at issuance during Q3, a record high, according to PitchBook LCD.
  • Equity contributions are collectively around 51% this year, PitchBook LCD says — the first time that metric crossed the 50% threshold since the firm began tracking the data back in 1997.

The bottom line: The health care M&A market rebound industry experts anticipated has been deferred to next year at the earliest.

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