What’s the Deal: Private Equity Trends in the Healthcare Industry

By Greg P. Saunders, CPA/ABV, ASA, Valuation & Forensic Services Senior Manager

What’s the Deal: Private Equity Trends in the Healthcare Industry

Growth considerations for Healthcare practices

Growth considerations for healthcare practices were a recent topic of discussion at the 2024 Richmond Healthcare Forum event hosted by Keiter, Prospect Blue, Truist Wealth, and Williams Mullen. The conversations included a look at the private equity (PE) approach to practice expansion and factors that should be considered when deciding to remain independent or take on PE funding. Whether it is getting an understanding of the objectives and goals of PE investors or becoming familiar with the terms “scrape,” “income repair,” or “second bite,” it was evident from the discussions that a trusted team of advisors are necessary to navigate the process so that healthcare providers can maintain their focus on serving the medical needs of the community.

Deal volumes and valuation trends

For those considering PE funding, a deeper look at the current trends affecting deal volumes and valuation multiples in the healthcare industry are important to ensure an informed decision. From a macro level, factors such as inflation concerns, labor supply shortages, interest rate environment, and tighter credit conditions, can all cause investors’ required rates of return to increase and, as a result, valuations to decline.

In 2021, historically low interest rates and ample liquidity created “frothy” deal markets, but this trend began to reverse in the second half of 2022 and 2023 as the Fed raised interest rates to combat rising inflation. As a result, M&A deal volume plummeted across all industries. Healthcare-related PE deal values in the U.S. dropped 60.4% in the same period, from a peak in 2021 to a trough in 2023 (the lowest level since 2016) according to Pitchbook. Moreover, healthcare deal volume as a percentage of total global PE deal volume declined from 13.7% in 2020 to 10.8% in 2023,[1] triggered by the higher interest rate environment discouraging leverage-based deals which were historically the norm in healthcare M&A transactions. Additional pressures impacting deal volume include margin compression due to persistently high wage levels related to skilled labor shortages.

Despite these headwinds, deal volume is anticipated to rebound with inflation trends moderating, Fed rate cuts on the horizon, and a resilient U.S. economy. “Dry powder” or, the level of funds available for investment by U.S. PE investors, has also reached new highs according to Preqin and BCG data.[2] Furthermore, potential rate cuts may reduce the cost of capital, and result in higher valuation multiples for the seller (all else equal).

Which healthcare sectors are catching the eye of PE investors?

Certain sub-sectors and practice-types are becoming more (or less) attractive to PE investors due to shifting industry trends. PE investors are looking for opportunities to complement existing platform investments by seeking acquisitions to increase scale through synergies and cost efficiencies. The sub-sectors listed below have garnered attention by PE investors exhibiting these characteristics:

  • Physician Practices:

    • Practices that can be rolled up or “tucked in” to existing PE platforms, continue to be in demand from PE investors looking to consolidate and recognize cost synergies (regardless of specialty).
    • Practices with a higher proportion of advanced practice providers or physician-extenders, such as nurse practitioners and physician assistants, are often targeted by PE investors.
    • Specialist practices, such as cardiology, orthopedics, and gastroenterology (often offered in acute settings), can be shifted to outpatient settings to reduce costs and provide more convenience to patients. This trend has resulted in significant interest from PE investors.
    • For physicians in the later stages of their careers, the opportunity to sell to PE investors can serve as an exit strategy as owners plan for retirement.
  • Healthcare Information Technology (HCIT):

    • HCIT entities continue to draw PE investments due to their ability to drive revenue generation and cost efficiencies for various types of healthcare practices through innovative solutions, especially given the current inflationary environment. Artificial intelligence (AI) and generative AI may provide significant opportunities for further productivity gains.
    • With certain types of practices implementing value-based care more frequently, HCIT firms will be key in providing those practices with the tools and technology necessary to realize the potential cost savings and manage risks.
  • Biopharma:

    • Growth in the use of Glucagon-like peptide-1 (GLP-1s) is expected to drive increased demand in the biopharma segment, leading to the need for higher manufacturing capacity and, as a result, additional PE investment.
  • Home Healthcare:

    • Uncertainty related to reimbursement from payers for home healthcare services has caused some hesitancy from PE investors.
    • On the other hand, home healthcare costs are expected to increase at a higher pace than overall national health care spending over the next several years due to the aging population, which should boost interest from PE investors.
  • Behavioral Health:

    • Behavioral health services, such as mental health, counseling, and substance abuse services, have been brought to the forefront because of the COVID-19 pandemic and demand for these services has increased tremendously.
    • In addition, insurance coverage and reimbursement rates have improved in recent years. As a result, PE investment has also picked up.

Finally, we would be remiss to exclude discussion of the regulatory environment as it relates to PE’s involvement in the healthcare industry. Recently, various government agencies have increased scrutiny of investors looking to increase profits at the expense of quality health care. Furthermore, certain states have introduced laws to limit investors’ ability to buy practices with high levels of debt and short-term exits in mind. Consequently, it is important to stay apprised of new regulations affecting PE investment in the industry as it may present a headwind for deal volume.

Need business advice for your healthcare practice? Keiter’s Healthcare Opportunity Advisors can help.

Keiter serves over 100 health services, medical, and dental practices, and their physicians, in central Virginia. As a medical professional, you can rely on our comprehensive services to assist you in managing the financial aspects of your business so that you can focus on the practice of healthcare. Whether you are standing strong as a physician-owned independent practice or considering a PE investment to boost growth and help with succession planning, Keiter can assist your practice and physicians navigate important decisions from a financial and accounting perspective. Contact your Keiter Opportunity Advisor or Email | Call: 804.747.0000 to discuss your unique situation and service needs.

[1] Hamlin, Jessica. “Healthcare PE investors proceed with caution in 2024.”  Pitchbook, 10 January 2024, https://pitchbook.com/news/articles/healthcare-private-equity-deal-activity-2024 (date accessed: May 10, 2024).

[2] Lavoie, Bob, Jaclyn Cole, Supriya Jain, Raahul Ramakrishnan, and Alistair Leonard. “The 2024 Outlook for Private Equity in US Health Care.”  BCG, 8 January 2024, https://www.bcg.com/publications/2024/private-equity-in-health-care-2024 (date accessed: May 10, 2024).

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About the Author

Greg P. Saunders

Greg P. Saunders, CPA/ABV, ASA, Valuation & Forensic Services Senior Manager

Greg is a senior manager in Keiter’s Valuation and Forensic Services Group. He performs business valuation services for purposes of mergers and acquisitions; estate, gift, and income taxes; litigation and shareholder disputes; employee stock ownership plans; reorganizations; marital dissolution; business planning; buy/sell agreements; and financial reporting. In addition, he performs litigation consulting services including damages and lost profits calculations.

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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.


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