For years, private equity firms have been the dominant players in the healthcare investment market, but the macroeconomic headwinds and high interest rates have finally forced private equity firms and platform companies (collectively, PE Buyers) to slow their investment strategies. According to data captured in our LevinPro HC platform, PE buyers have publicly announced 434 transactions this year through August 25. That total compares to 535 transactions posted through the same period in 2023, representing an 18% year-over-year decrease in volume.
“Beginning in Q4 of 2023, the private equity market began to feel the effects of an economic slowdown that continued into the first half of 2024,” said Dana L. Jacoby, the CEO of Vector Medical Group, LLC. “Several factors weighed heavily on the market, starting with the interest rate increases from the Federal Reserve.”
“When the Fed raises [rates], the cost of borrowing is increased and the rate of return on transactions is reduced. Few, if any, private equity firms are investing without additional debt capital. The increase in the interest rate was a macro-economic factor that impacted all private equity across the board.”
Since PE buyers are usually so active across the healthcare spectrum, their pullback in investments has dragged down overall healthcare M&A volume. Deal activity this year includes 1,280 transactions through August 25, compared with 1,506 acquisitions through the same period in 2023, representing a 19% decrease. Throughout 2023, there were nearly 2,200 deals on the books, so unless there is a wave of announcements during the fourth quarter, anticipate a significant decline in annual activity for 2024.
Since high borrowing costs are weighing down investment activity, PE buyers have turned toward the life science and digital health markets; these industries aren’t weighed down by other headwinds such as labor and reimbursement issues.
Some significant deals this year include:
- The $8.9 billion acquisition in August of Chicago-based R1 RCM Inc., a revenue cycle management provider of technology-driven solutions. The acquirers included TowerBrook Capital Partners, LP and New York-based Clayton Dubilier & Rice.
- The Carlyle Group’s purchase of Baxter International‘s kidney care segment for $3.5 billion.
- A $2.5 billion acquisition on May 7 by Thomas H. Lee Partners, L.P. of Eden Prairie, Minnesota-based medical device company Agiliti, Inc.
While the billion-dollar-plus acquisitions in 2023 included:
- A $7.1 billion acquisition of Morrisville, North Carolina-based Syneos Health, Inc., a multinational contract research organization. The buyers on May 10 included Elliott Investment Management, Patient Square Capital and Veritas Capital.
- The $4.25 billion purchase on May 26 of Baxter‘s BioPharma Solutions, a Deerfield, Illinois-based contract development manufacturing organization. The acquirers were Advent International and Warburg Pincus.
- A $2.1 billion acquisition on April 20 of Orlando, Florida-based OneOncology Inc., which is a national network of oncologists assisting partner practices to expand their cancer care services. The acquirers included TPG Capital and AmerisourceBergen.
- A $1.4 billion purchase of Tampa, Florida-based Nextech Systems, which provides healthcare technology solutions (EHR, practice management, patient engagement and revenue management software) for physician practices. The July 19 acquisition was made by TPG.
“There are fewer large private equity investors that are interested in purchasing a smaller asset due to the higher cost of borrowing,” Jacoby said. “The assets are likely to be underperforming expectations because of a slowing economy that has impacted revenue, and higher expenses resulting from inflation. The EBITDA on the underlying assets is lower. The cost of capital is higher, so fewer deals are being completed. A typical investment horizon of three to five years is likely extending beyond the target date and private equity firms may be feeling pressured to return investors’ capital but are unable to do so.”
In terms of the healthcare sectors that private equity is still targeting, the most dramatic change from last year to 2024 has come in the Physician Medical Groups sector.
PE buyers completed 183 acquisitions for Physician Medical Groups through August 25 of this year. That total puts the sector ahead of Other Services (88), eHealth (60), Medical Devices (19), Home Health & Hospice (27), Behavioral Health Care (14), and Laboratories, MRI, and Dialysis (16).
Through the same period last year, the top three targeted sectors were Other Services (85), eHealth (73) and Physician Medical Groups (230).
“Private equity transactions in the healthcare space are more difficult and taking longer in 2024,” Jacoby said. “As a consequence, private equity firms are changing their focus to different asset categories within the healthcare space. During 2021, private equity investment in private medical practices was at an all-time high. Double-digit multiples on EBITDA were more the rule than the exception. In 2024, many of the most productive practice platforms have already been acquired, leaving the remaining, smaller practices as ‘bolt-on’ opportunities. In a more macroeconomic environment, private equity will look for opportunities that are faster and simpler. Some of those opportunities are found in technology and early-stage investments. Certainly, the recent interest in artificial intelligence within the healthcare community, combined with the value and accessibility of personal data, have combined to make healthcare technology investing very attractive to private equity investors.”
Despite the falloff in transaction totals, Jacoby is optimistic that the outlook for healthcare M&A activity will improve in 2025 with the anticipated reduction in interest rates that is expected later this year.
“A reduction in the interest rate in 2025 should positively impact both the cost of capital by lowering interest rates, and it should help to increase spending across the economy, which drives up revenue,” Jacoby said. “This is true for health care as well as other businesses.
“Health care will continue to be a significant force in the economy. The population is aging, and people are living longer. And the Baby Boom generation has more discretionary savings than any generation in history. They will continue to spend their resources on healthcare and quality-of-life purchases, resulting in growth in healthcare spending. That will continue well beyond 2025.”
Glenn Kalinoski is a writer for Levin Associates. Levin Associates provides comprehensive coverage of the deals, companies, and trends shaping the healthcare industry. Clients access proprietary M&A transaction data and daily news/analysis through the LevinPro platform. Schedule a demo today to see what LevinPro can do for your team.
