Private Equity deal activity continues to decline in the healthcare services sector, but pipelines remain robust for future activity when market conditions turn.

In its Q3 2023 Healthcare Services Report, Pitchbook noted that private equity (PE) healthcare services deal activity experienced a significant decline in Q3 2023, with a 28.7% drop in deals compared to the previous quarter, marking a notable decrease from the bull market of Q4 2020 through Q2 2022. Despite the decrease, the number of deals is still slightly higher than the average count between 2017 and early 2020. The market faces challenges, such as the absence of syndicated loan issuances for healthcare services in 2023 and large deals not being executed. However, there is optimism due to the slight reanimation of the broadly syndicated loan market and significant deal pipelines held by bankers.

Current healthcare deal flows are shaped by three trends:

1. The expansion of existing platforms through mergers and acquisitions at a reduced rate
2. The increase in restructuring deals by structured capital and mezzanine investors aiding companies with debt issues
3. The emergence of smaller platforms by sponsors who are opting for smaller deals due to financing and asset availability constraints

For instance, SurgNet Health Partners formed through collaboration by Fulcrum Equity Partners, Leavitt Equity Partners, and Harpeth Capital, has been focusing on acquiring ambulatory surgical centers (ASCs) with an eye on growing them into attractive acquisition targets for larger aggregators.

The financial landscape in Q3 2023 has been challenging, with lenders showing hesitance to underwrite beyond 3x to 4x EBITDA, contrasting with the more generous terms available earlier in the year. This has led to a decrease in company valuations and more cautious lending practices, demanding thorough valuation analyses and quality-of-earnings assessments. There is also a resurgence of earnouts and seller notes in transactions. The report also touches upon the potential industry disruptions due to new weight loss drugs, which could influence procedure volumes and chronic condition management. Despite positive fundraising environments for healthcare-focused PE firms, deal recovery is uncertain and might not occur until 2024 due to geopolitical and financing challenges, suggesting a continuation of the current trend of small buyouts and minority stakes.

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Source: Pitchbook.