Taking the Pulse of the Healthcare PE Space

A Healthcare Market Update Heading into Q4 2021

It’s hard to believe, but we’re heading into the final quarter of our second year battling the COVID-19 pandemic. This event—the likes of which none of us has ever experienced before—has had a profound impact on the overall healthcare market, which underscores significant challenges in this sector and presents some incredible opportunities for private equity.

Right now, and at least through the balance of 2021, these opportunities are manifesting themselves in robust Healthcare Services M&A activity that is occurring thanks to a confluence of factors: the low cost of capital, accessible debt markets, large balance sheets, and dry powder availability. On top of that, incumbent organizations are being pushed to consider new acquisitions or divestitures due to rising cost pressures and the continued challenges of COVID-19.

There’s a deal to be made.

From 2010 to 2021, healthcare private equity deals totaled about $750 billion. Today, the amount of money earmarked for healthcare acquisitions is increasing faster than groups are being formed.

Over the last twelve months, the healthcare services industry has shown revenue multiples at 3.8x and 15x LTM EBITDA. The fastest-growing sectors within the industry are faring even better:

  • Healthcare IT (HCIT):98x LTM revenue, 26.8x LTM EBITDA
  • Contract Research Organizations (CROs):17x LTM revenue, 24.8x LTM EBITDA
  • Home Health/Hospice:86x LTM revenue, 23.9x LTM EBITDA
  • Consumer Directed Health/Wellness:75x LTM revenue, 23.7x LTM EBITDA

Overall, deal valuations and EBITDA multiples remain high, with excess capital seeking fewer quality deals. Of course, some deals have unsupported valuations, but potential buyers have shown that they’re willing to terminate such deals and walk away when the numbers don’t work.

Extenuating circumstances up the ante.

Baby boomers—who still make up the largest population of business owners—are ready to liquidate and enjoy the fruits of their labor. After all, they survived the dot-com bubble, the Great Recession, and now COVID-19. Is it any wonder that we’re seeing an acceleration of liquidity events by this generation? It makes sense that they’re ready to pass the torch on to someone else.

Equally important is the eager push to close deals before any potential changes are made to the capital gains or carried interest tax codes. Add-on activity is intense, and buyout firms have felt comfortable plowing capital into known entities rather than buying new ones.

What does the future of healthcare hold?

The healthcare services industry will continue to expand as we move closer toward universal coverage, and healthcare spending is expected to grow at an average annual rate of 5.5% through 2027.

The COVID-19 pandemic revealed some apparent weaknesses lurking in the public health system, the long-term health impacts of which will be felt for years to come. Add to that the continued aging of the population, and you have a recipe for substantial expansion of the healthcare sector and healthcare spending.

PE needs the talent to feed the spending frenzy.

Although it’s incredible to watch private equity firms continue to deploy capital at record-setting levels, that frenzy creates its unique challenge: It’s never been more challenging for private equity to acquire tier-one talent.

The pent-up demand for great transformational business leaders is undeniable, and that’s where I come in. Healthcare Services continues to be a healthy practice area of our firm with growth prospects and attractive business-building opportunities.