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BPOC's Greg Moerschel on the PE deal backlog

Photo illustration of Greg Moerschel surrounded by abstract shapes.

Photo illustration: Gabriella Turrisi/Axios. Photo: Courtesy of BPOC

Chicago-based sponsor BPOC is steering clear of provider investments as it navigates a hamstrung deal environment, managing partner Greg Moerschel tells Axios.

Why it matters: Though debt markets are slowly improving, private equity doesn't have access to the cheap leverage that buoyed physician roll-up growth.

Axios spoke with Moerschel as part of the Expert Voices series. This interview was edited for length and clarity.

Will deal flow pick up in 2024?

  • "Debt capital is still pretty expensive, you know. It's 10% or 11% for senior debt. So there's two effects: the cost of the stream rate, which has risen with interest rates, then there's the spreads over SOFR, which we actually anticipate narrowing modestly over the course of the next six to nine months.
  • I think the quantum of leverage, which probably matters the most to us, right now — it's a good turn and a half lower than it was 18 months ago. So three-and-a-half times is a decent amount of leverage on a business in the middle market."

What themes are you looking to invest in this year?

  • "We are de-emphasizing provider-based businesses and really focusing on companies that are controlling costs.
  • That means manufacturing near-shoring, onshoring, which is broadly about cost containment ... It means it enabled services to payers and providers. It means innovative pharmacy solutions that are either delivering pharmaceuticals at lower costs, manufacturing them at a lower cost, or providing innovative payment schemes to reduce out-of-pocket expenses.

What are your thoughts on current valuations?

  • "We do anticipate a bit of a shakeout in the provider world. A lot of transactions done in 2021 and '22 at very high valuations ... those business models were predicated on buying down multiples with acquisitions, and access to cheap leverage.
  • Provider companies don't necessarily grow organically at a pace that can generate an adequate return. So there's a lot of businesses in portfolios — sponsor portfolios that were purchased at very high values and the access to credit, the cost of credit has affected their value creation plans, and you're going to see more issues with lenders across the board. It's a bit of a race against time because your rates start to moderate."

Will the PE exit backlog change anytime soon?

  • "We're in this period of seller, buyer, cat-and-mouse valuation standoff and that typically takes a couple of years to work through. Whether it's a founder, who was hoping for a higher valuation clean to 2021 valuations, or a sponsor who needs liquidity, all those things factor into the question of when it kind of unclogs.
  • Valuation expectations will adjust downward and the backlog will start to clear. But there's lots of motivations which could contribute to a pickup in the second half of the year. We've been told that, though, for the last two years."

What do you think about General Catalyst's plan to buy a hospital?

  • "It's an interesting strategy, that they're not buying it for the bricks and mortar. My guess is they're buying it as a lab. It's a lab for new ideas, whether it be technology or payment schemes, reimbursement schemes ... they're going to make their money on incubating new ideas.
  • It's ambitious because value-based care is a very localized phenomenon. People forget that it's not a new idea. And it means a lot of different things to different people."
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