Understand the value you bring to the table and have a long-term strategy, says one CFO.
After historic levels of private equity (PE) deal-making in 2021 and 2022, activity dipped in the first half of this year as firms dealt with debt service costs and other economic challenges—but that doesn’t necessarily mean your organization is safe from the PE disruption.
PE deals are expected to rise though in the second half of the year and into 2024 as the debt market recovers and inflationary pressures settle.
This just goes to show that PE’s presence in healthcare isn’t diminishing anytime soon, even if the level of activity doesn’t return to the record-breaking highs during the peak of the COVID-19 pandemic.
CFOs have decidedly realized that if you can’t fight PE, you might as well partner if necessary, so reading the market and recognizing the ebbs and flows of PE is critical providers who are considering partnerships with firms.
What is the state of PE now?
As it stands, hospitals aren’t the only ones under financial stress—investors are also dealing with economic pressures that are causing them to move cautiously.
The result has been a slowdown in PE deal-making in the first half of 2023 following two straight years of historic investing. Thanks in part to the trillions in monetary stimulus the economy received to offset the effects of the pandemic, 2020 saw a record $151 billion in total deal value, according to research from Bain & Company. That breakneck pace didn’t sustain in 2022 as market forces in the second half of the year caused a dip to $90 billion, but it was still more than $10 billion greater than the next-closest year.
Recent research by PitchBook, revealed that private equity deals in healthcare declined “unexpectedly” in the second quarter of 2023. An estimated 164 deals took place in 2023, the lowest figure since the second quarter of 2020 and a decrease of 23.7% from the first quarter of 2023. While it marks the sixth straight quarter of deal count declines, the second quarter was still 12.3% higher than the average quarterly deal count in 2018 and 2019.
Much of the deceleration is due to heavily leveraged platforms feeling squeezed by growing debt service costs and upcoming maturity walls from the federal funds rate being set at 5.5%, Pitchbook notes.
It’s not all downhill though.
It’s expected that PE activity will steadily climb again in the second half of the year and into 2024. Pitchbook believes a “gradual reversal” is coming with buyers more willing to accept prices lower than those from the past two years. As the economy stabilizes, inflationary pressures settle, and the debt market recovers, PE deal-making should pick up as firms have their dry powder at the ready.
What does this PE activity mean for CFOs?
It’s not out of the question for CFOs to consider partnering with PE firms, especially when there are minimal financial alternatives.
Janet Carbary, CFO at IRG Physical Hand & Therapy, shares with HealthLeaders her advice for providers considering partnerships with PE firms.
“When private equity acquires a healthcare company, they have a very strategic endgame in mind,” Janet Carbary, CFO at IRG Physical & Hand Therapy, told HealthLeaders. “Whether that’s making it part of a portfolio that they sell to a larger publicly traded company for more money or they want the company to get acquired by a like company.
“They can help a company grow. They can bring in some expertise on the ground that the company doesn’t have, especially in the finance and marketing area. And they certainly give the company access to capital. But they aren’t in it for the long term. Private equity is rarely in it for longer than five years.”
Still, some providers may see a PE deal as an opportunity to shed management and administrative responsibilities to focus all their efforts on delivering high-value care. PE firms can provide financial relief or allow a practice owner to exit on their own terms.
“There are so many owner-operators who don’t have a really good exit strategy for when they retire and no longer want to be an owner-operator,” Carbary said. “It does potentially give the owner-operator a way to transition their company into a little bit longer term exit strategy for the company and the employees.”
So how can providers capitalize if they are looking to partner? Carbary offers two pieces of advice: know your worth and know what you want to accomplish, both in the short- and long-term.
“You have to understand your value as a provider,” Carbary said. “Too often owner-operators out there don’t have a good idea of what their company is worth. It’s really important that you feel like you’re in control and that you know you’re valuable coming in and that private equity is interested in you because they feel like they can continue to add value.
“Do you want to remain independent? In that case private equity is probably not the way to go. Or do you want to sell a minority share that’s going to bring in capital to allow you to grow to a point where you can essentially buy them out again. You as a provider have to have a very clear understanding of what your relationship is going to be with private equity.”
Private practices can also take steps to make themselves more attractive to PE firms, such as auditing workflow processes and implementing new technology.
Regardless of whether providers ever make the leap into PE, being ready to jump at the right opportunity will be an advantage during the new normal of healthcare.
Jay Asser is an associate editor for HealthLeaders.