PitchBook: After a hot 2022, PE healthcare deals expected to decline in coming months. But a rebound is possible

2022 marked the second-best year for private equity deals in healthcare, a new fourth-quarter 2022 report from PitchBook says. 

The year ended with an estimated 863 deals announced or closed, second only to 2021. But despite how well 2022 did overall, the fourth quarter saw about 26% fewer deals than the third quarter. 

“We are seeing things slow down relative to where we were coming off of an unprecedented level of deal activity in 2021,” PitchBook’s senior healthcare analyst Rebecca Springer told Fierce Healthcare. 

The downward trajectory of deals in the last quarter was attributed to uncertain macroeconomic conditions and rising capital costs as well as staffing expenses. Workforce shortages have especially affected skilled care and behavioral health companies, the report said, despite strong demand for those services. 

Though PE is generally bullish on healthcare, Springer said, until the economy stabilizes there will likely be smaller acquisitions rather than major sales to avoid selling portfolio companies at depressed valuations. Looking ahead to 2023, deal volumes may decline in the first half of the year with an increasingly tough fundraising environment and diminishing capital to allocate.

If macroeconomic conditions stabilize, there could be a rebound in deal pace in the second half of the year. 

The outlook for physician practice management companies looks robust as they are less exposed to staffing shortages, the report said. The main barrier to major sales in this area is economic uncertainty. With loan markets closed and demand for private credit really high, a backlog of these companies will likely come back on the market when loan markets open back up. 

An emerging physician practice management category is rheumatology. Physicians in this category are among the lower-paid physician specialists, and margins for a small practice can be tight. Given how fragmented the sector is, with only a handful of scaled practices nationally, there is great opportunity for PE. And, because demand for this field is expected to rise significantly, rheumatology first-time buyouts could rise in the coming years.  

While heightened scrutiny of healthcare deals is not necessarily changing M&A strategy, PE firms do need to be diligent with their transaction execution, Springer noted. Because regulators have finite resources, they are more likely to focus on giant deals, she said: “That sort of incremental M&A growth is not immune to antitrust scrutiny, but is going to fly under the radar.”

In California, the newly created Office of Health Care Affordability will require providers to notify it 90 days in advance of most transactions starting in April 2024. This will likely elongate and add risk to healthcare deals in the state. Massachusetts, Rhode Island, New Hampshire and Washington, D.C., are also active in antitrust enforcement. 

The first wave of value-based care enablers like Privia, Aledade and ApolloMed has proven out that guiding fee-for-service primary care practices into risk contracts can materially improve outcomes, reduce variation and lower the total cost of care. These players are not directly competing for patients or providers despite an increasingly crowded primary care landscape, the report noted. 

A newer wave of venture capital or PE-backed value-based care enablers that has emerged includes Enlace Health, Wellvana, Pearl, UpStream and Rise Health. These will likely be candidates for PE buyouts as they mature, with health system partnerships being one way to grow quickly. PitchBook expects to see more consolidation in this space in the next five years as markets become more competitive and the Centers for Medicare & Medicaid Services tightens rules around Medicare Advantage. 

After companies change between PE owners or are bought out by PE for the first time, they typically accelerate M&A to help with growth. Paying attention to where these deals accumulate could indicate an area of healthcare that is likely to take off, Springer said. The areas where these types of buyouts grew in 2022 are dermatology, gastroenterology, pediatric therapy and infusion.