January 11, 2023
Happy Hump Day, Health Tech Readers.
1 big thing: PE navigates new dealmaking normal
Private equity dealmakers are refilling deal pipelines, eyeing carveouts and pursuing add-ons like gangbusters despite market uncertainty, panelists said at a JPM session this week.
Why it matters: The LBO playbook of pre-COVID health care M&A isn't as applicable now, especially when debt is more expensive.
What they're saying: Panelists spoke at a discussion on private equity dealmaking.
- "There’s an empty-cupboard dynamic right now, where a lot of quality businesses ready for sale ended up getting sold in 2021 and first half of 2022," said a partner at one investment management firm.
- Another private equity firm partner predicted "more carveouts, more minority investments, increasing rollover."
- "We’ve done more add-on acquisitions in the last six months than we’ve done in the history of the firm, and I don’t see that stopping in 2023," said a third private equity investor. "Founder-owned businesses not tied to specific valuation or exit multiple. They’ve waited a long time, and we’re finding success in that market."
- The fourth member of the panel noted an increase in partnership deals and partial buyouts, or transactions wherein "a firm or fund that needs to return capital to owner or LPs to get to next fundraise."
Between the lines: Timing has always been an art when it comes to sponsor-led dealmaking, but it's become even more important amid current volatility.
- "If you’re an owner of a high-quality business, why would you sell right now?" one investor said. "If you look at elevated business rates for two years, it doesn’t affect returns as much."
- When it comes to valuation expectations, existing deal comps are "starting to get stale," another added.
- "To the extent new deals are happening at lower multiples, folks are gonna need to grow into their returns," that partner added. "We’d been seeing shorter holds. I think that’s gonna shift to longer holds."
Zoom in: Private equity has spent the last five years rolling up physician practice management businesses, fueled with cheap and widely available debt.
- COVID chilled activity considerably in 2020 and continues to have echoes on operating performance of most physician practices, particularly felt with the ongoing labor crisis.
The intrigue: Panelists were (perhaps predictably) at odds on how well-positioned strategics are in today's market.
- Although private equity buyers have been increasingly aggressive in recent years, "cheap capital has now gone away. The strategics have been waiting for this moment in time where they can pounce, where they can find businesses they want to own cheaper."
- "I think strategics are in worse position now than they were," countered another investor. "The bar is higher for them to do the same acquisition, and they may have taken some heat too from their quarterly reporting."
- That speaker added that strategic-led M&A is happening more slowly now. "Now there’s more patience. You don’t really get calls today saying 'We’re starting a four-week process.'"
The bottom line: "There's a long-held belief around the 'recession-proofness' of healthcare, and we've largely seen that," one concluded. "But it's not inflation-proof."