2022 was a big year for private equity funds in healthcare

The healthcare space was a big target for private equity dollars in 2022, according to a recent report from market data firm PitchBook.

In fact, 2022 was “easily” the second-best year for private equity healthcare services dealmaking, behind 2021. The result for 2022 was despite a slowdown in deals toward the end of the year, as the Federal Reserve moved interest rates higher. There were 863 deals announced or closed in 2022, according to the report, though the drop off in the final three months of the year was substantial. The fourth quarter of 2022 saw 158 deals, a 26.4% drop from the previous three-month period. 

However, compared to the number of deals in 2018 and 2019, 2022’s final quarter was still a strong month for private equity healthcare transactions. Though, the fourth quarter 2022 deal figure is less than one-third than the average quarterly deal count in 2021. 

According to PitchBook, the slowdown in deals is likely attributed “to macroeconomic uncertainty and rising capital costs.” The risk of overleveraging is top of mind for both buyers and sellers, as borrowing capital became more expensive in the tail end of 2022 with interest rates sharply rising. At the same time, sellers are still hoping for 2021-like valuations and short-term deal processes. Instead, sellers will “need to accept the reality of multiples a couple turns lower than the peak,” PitchBook noted. In addition, the deal mix quality may not be as high quality as those that were sold during the 2020-2021 transaction frenzy. 

Secondly, deal volume has been impacted by staffing cost inflation that has hit the healthcare sector particularly hard. Contract workers became extremely valuable during the pandemic, driving up staffing costs. Healthcare organizations have also been strained due to the COVID-19 response in the United States, and many healthcare workers have become burned out and left or considered leaving the field. 

“Here, the acyclical nature of many healthcare businesses is a double-edged sword because the demand for workers remains unaffected by tightening economic conditions,” the report said.  “Healthcare operators do not foresee a material change in labor costs for the next 18 to 24 months, and reimbursement rates will take far longer than that to catch up.”

That staffing pressure that many healthcare organizations have faced since last year has led “many skilled care and behavioral health businesses to slow their growth considerably despite seemingly limitless demand,” PitchBook said. Instead of selling at depressed levels, private equity firms may hold onto these assets before selling. In other subspecialties, such as mental health and substance use disorder (SUD) treatment, as well as home health, deals slowed by the end of 2022. 

On the bright side, the physician practice management companies (PPMs) landscape looks robust, in part because these businesses are less impacted by staffing shortages. Ear, nose, and throat (ENT) and musculoskeletal (MSK) categories both saw deal volume on par with 2021 levels, “meaning that 2022’s deal activity in these categories will likely exceed 2021’s once data collection is complete.” Despite the rosy end to last year, these subspecialties also face economic uncertainties and financial constraints. 

For 2023, deal volume is likely to continue taking a dive, PitchBook predicted, with economic headwinds squarely in the face for private equity healthcare deals.

“Looking ahead to the rest of 2023, we believe deal volumes may continue to decline in the first half of the year due to continued leverage- and staffing-related financial distress for some platforms, growing liquidity constraints, and the dwindling of war chests raised in 2020 and 2021,” PitchBook concluded. 

Amy Baxter

Amy joined TriMed Media as a Senior Writer for HealthExec after covering home care for three years. When not writing about all things healthcare, she fulfills her lifelong dream of becoming a pirate by sailing in regattas and enjoying rum. Fun fact: she sailed 333 miles across Lake Michigan in the Chicago Yacht Club "Race to Mackinac."

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