PE healthcare deals drop significantly this year

According to data from Bain and Company, PE firms were at the top of almost all measures of growth in 2021, reaching new highs in global deal counts, exit values, and buyout capital raised. That same year, Pitchbook found that PE firms closed over 1,000 healthcare deals.

However, PE deals, along with healthcare mergers and acquisitions, have largely declined this year amid rising interest rates, inflation, and recession concerns. According to a new report from PitchBook, around 164 deals were either recorded or announced last quarter — a 23% decline compared to the first quarter of the year and the sixth straight quarter of declining deals.

There were also fewer large platform deals, or initial acquisitions by PE firms. In the first quarter of 2023, there were seven platform deals, and in the second quarter, there were 11 platform deals. These numbers were the lowest of any quarter since 2017, excluding the second quarter of 2020 when the COVID-19 pandemic hit. 

However, even with the current decline in deals, PitchBook said the number of deals is still over 12% higher than the quarterly averages in 2018 and 2019. The organization also expects a "gradual reversal" toward more normal PE dealmaking trends as inflation eases and economists move away from recession concerns.

With labor cost inflations potentially easing, management teams have been able to "closely attend to operational efficiencies," including improving worker retention. This increased focus has allowed platforms to utilize seller motivation to go after cheaper deals.

Overall, PitchBook said deal activity will likely remain flat or be slightly elevated for the rest of the year. "Despite challenges, the general sentiment from dealmakers is that things are headed in a positive direction," PitchBook wrote.

Hospital investments are also on the decline

PE firms are not the only ones pulling back from healthcare investments. Many hospitals that had previously invested heavily in venture capital are now pulling back, especially as they faced reduced operating margins and other financial difficulties.

"Most hospitals can't get enough dollars to it for it to make a whole lot of sense," said Parth Desai, a former investor at NewYork-Presbyterian's venture firm who now works at Flare Capital Partners. Many hospitals are downsizing their venture arms, halting investments, or turning to PE firms instead.

"For some boards, some executives, some systems, these high-risk, high-reward investments that at some point made sense don't anymore," said Matt Wolf, a healthcare senior analyst at RSM.

According to STAT+, declining investments from hospitals could cause difficulties for startups that had previously relied on hospitals to be their key customers. It could also make it more difficult for patients to access breakthrough care technologies.

"There is going to be disruptive innovation in health care," Wolf said. "Health systems need to position themselves to effectively navigate that change. They used to do that by investing in venture capital. Maybe they'll participate in a different way, but ultimately they have to participate."

So far, many of the largest health systems in the country are still making significant venture investments, but they are also moving away from internal investment teams in favor of partnerships with established firms.

According to James Nicholls, a partner and managing director at Fitzroy Health, hospitals will likely move toward working with PE firms on deals because they are considered safer and more experienced. "That's going to require partnerships with investment firms or advisory firms," Nicholls said, "and they're less likely to be done by the internal team." (Bannow, STAT+ [subscription required], 8/14; Halleman, Healthcare Dive, 8/14; PitchBook Healthcare Services Report, 8/11)

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