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Valuation gap closing in health care M&A, PE dealmakers say

Illustration of a person looking over the edge of a large cliff chasm shaped like a medical cross

Illustration: Annelise Capossela/Axios

The bid-ask spread is finally narrowing as private equity dealmakers hope for a better 2024 in health care M&A.

Why it matters: LPs are laser-focused on DPI (distributed to paid-in capital), which has become increasingly important amid a slowdown in deploying dry powder.

  • Dealmakers discussed the 2024 M&A outlook at McDermott Will & Emery's Healthcare Private Equity conference in Miami. Panelists were speaking under the Chatham House rule.

What they're saying: Buyers and sellers have been holding strong with both sides having "logical reasons for being stuck at their views on value," says one managing director of a Boston-based firm.

  • Sponsors have been willing to hold onto assets longer than typical amid a down market — but "ultimately the private equity industry needs to recycle capital," he adds.
  • "Our LPs, they all want distributions. They don't care that your fund is marketed at 3x. How much money have you actually sent back to us?" says one senior managing director at a NYC-based firm.

Yes, but: There are chills in the air, not the least of which is increased regulatory scrutiny on health care dealmaking — impacting both PE and strategics.

  • "Optum in specific is obviously really in the crosshairs of the DOJ," says the senior MD.
  • "I know a couple of live situations that they backed away from only recently," he adds.

Between the lines: "Because of what happened in 2023, a lot of companies went to market and they ended up with broken deal processes," says a senior partner at a Chicago firm.

  • "And so there's a lot of gun-shy nature going on, where if you're a good company, you don't want to go out and go through a broken deal process," the partner adds.

What's next: Don't expect co-investing to stop, says a partner at a NYC middle-market firm.

  • "I think we're going to see a lot more of those deals this year," the partner added. "That is one way to get some capital back but not all of it, and still be able to ride it out to justify what you paid for it."
  • That structure is a way of bridging the bid-ask gap, says the NYC-based senior MD, adding, "These are the sort of deals I think we're seeing in '24."

The bottom line: "This deal environment is an opportunity to get to know the people who might not trade until 2025," says the Chicago senior partner.

  • Prospective buyers can now ask "deeper-level questions that a three-weeks diligence process didn't afford you a few years back."
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