Market uncertainty is causing challenges in private equity dealmaking in the US healthcare sector, but deals are still getting done, bankers told investors at a New York investor conference last week.   

Rising interest rates, inflation, a downward stock market trend and geopolitical uncertainty have prompted some private equity investors to delay or stop buying and selling companies altogether over valuation and outlook concerns, but there is still strong appetite for asset sales among higher-quality target companies, dealmakers said at the annual McDermott Will & Emery Healthcare and Private Equity conference.  

“We are seeing as much interest across all categories (of the healthcare market) as we have seen in the last 10 years, but there is more focus on companies with a track record of organic growth,” said the managing director of one New York-based investment bank. Under conference rules, bankers could not be quoted by name.

Private equity firms have long invested in various subsectors of healthcare, including everything from doctor groups, information technology, hospitals, contract research organizations, diagnostics firms and a spate of others. But compared to last year at this time, there are fewer auctions and more busted processes, posing challenges for investment banks and lenders active in the sector, bankers said.  

This has led to more targeted auctions that include lining up fewer potential buyers for companies looking to sell, they said. In some cases, bankers will conduct only bilateral discussions with a single potential buyer to get deals over the finish line, they said. Some large buyers have even stopped lining up debt syndicates to finance buyouts and are saying “we’ll equitize the whole thing and deal with the debt later,” when financing is cheaper, one banker said.   

“We are doing more informal pre-auction work to identify buyers,” rather than launch large scale auctions like last year, said another banker. In some cases, those buyers can be non-US strategic and financial buyers looking to gain a foothold in the US healthcare market, he added.  

As some US private equity firms stay on the sidelines and wait for better market conditions to buy and sell assets, bankers are reaching out to European, Canadian and other potential buyers, although Chinese buyers can pose challenges with CFIUS reviews, said one banker. “You will see a lot of new entrants from different geographies,” he predicted. Some foreign buyers, he said, “are still living in 2021,”  when markets were robust.

One key sector seeing an increased level of M&A activity is in hospitals, which have to contend with high capex and labor expenses, payer reimbursement challenges, an increase in outsourced competitors such as free-standing emergency room groups and ambulatory surgical centers, bankers said. This is leading to more restructuring and asset sales among hospital systems, they said. 

“Hospitals are in a tough spot right now,” said one banker. Nurse shortages in particular have driven up hospital costs, said another banker, noting that temporary “travel nurses” can command three times the salaries of staff nurses at the same hospital, a situation he called “unsustainable.”  

Still, even with a slumping stock market and higher interest rates depressing private valuations, “deals are still getting done,” said one banker, often for prices that approach 2021 valuations, although deals are often taking longer to complete. 

The banker said continuation vehicles, in which a PE firm sets up a new fund with new investors, are becoming more prevalent as a means for existing investors to gain liquidity. “We’re very bullish on continuation vehicles. They are here to stay,” said the banker, pointing out that the secondary fund market which can invest in continuation vehicles is large and liquid, offering a means to achieve gains for exiting investors short of a traditional M&A deal.  

For some buyers, conviction over the investment thesis has been able to surmount the higher costs of debt required to complete a deal, another banker noted. “Conviction on the opportunity” is still driving the best deals, “not the last dollar of the debt.”  

The bankers were speaking at a panel discussion entitled “Getting your Deals to the Finish Line in an Evolving Environment.” Panelists included Michael Dodds, Jefferies managing director; Ryan Bell, Moelis & Co. managing director: Mark Francis, Houlihan Lokey managing director, along with three McDermott Will & Emery partners, David Ivill, Fred Levenson and Krist Werling, who moderated.