Event in Review: Healthcare Private Equity Deals ’22 – Where Have We Been, Where Are We Going?

In a recent live event at our New York office, Venable partner Ari Markenson led a panel discussion that explored the state of middle-market healthcare services investments and the deal environment. The panelists – David Gibbs of CIT Healthcare, Katherine Gibson of the Marwood Group, Eugene Goldenberg from Edgemont, and Todd Squilanti from InTandem Capital Partners – examined the dynamics of navigating major issues that have arisen as a result of the pandemic and a hypercompetitive market, the risks associated with rollercoaster valuations, what the current marketplace for transactions looks like, and which subsectors are of most interest to investors.

The COVID Effect

Among the topics discussed was how the COVID-19 pandemic has disrupted the marketplace and related deal-making opportunities in the healthcare sector. While the demand for elective procedures dropped briefly, the demand for primary care remained consistent, compared to the market for healthcare services continued to be an active one, and the pace of deal-making has picked up considerably. There has been a significant uptick in two areas in particular – urgent care and travel nurse staffing – both of which enjoyed skyrocketing revenues as a result of COVID-19 lab testing and a nursing shortage that was exculpated by the pandemic.

Top Issues for Lenders

Among the issues that are top of mind for healthcare-focused lenders as we move into the second half of 2022 are the possibility of a recession, the fact that borrowing costs are going up by two points over the next year, the rise in inflation, and the impact of the labor shortage in the sector. As healthcare is labor intensive, lenders have to look at companies’ ability to attract and retain staff. They also have to examine the pressure on wage rates and how that affects earnings. On a micro level, lenders are keeping an eye on the regulatory and reimbursement environment related to certain subsectors. One such example is the home health subsector, which may be due for a correction. Also of concern to lenders are normalized earnings and revenue and the durability of earnings in certain subsectors going forward. Finally, lenders are looking at how the end of liquidity support provided by the government during the pandemic will impact free cash flow.

Rollercoaster Valuations

Since the pandemic, we’ve seen a widespread adoption of telehealth and a shift from treatment in hospital settings to home care, hospice, or urgent care centers. As these changes are likely here to stay, that is where the dollars are now flowing. From a valuation perspective, there are currently large pools of capital chasing fewer and fewer assets, and that is driving up valuations. There is a lot of provider relief funding and government funding flowing in to support many federally funds providers and programs, and home care and hospice care have been large beneficiaries of this type of funding. The credit markets also continue to be very strong, and there is liquidity, so it’s possible now with the right capital partner to get more than five times the leverage for the right asset. But given the inflationary environment that we are in, the likelihood of interest rate increases, and the ongoing possibility of changes in government policy, that is a dangerous road to go down.

Operational Challenges

A key operational issue that healthcare companies are experiencing is how staffing and labor costs are cutting into profit margins. A deficit of skilled nurses and other healthcare professionals is driving up salary costs. Addressing payer contracting strategies in a manner that increases reimbursement requires thinking about acquisitions in a more strategic, data-driven way. This means examining claims data for this sector to establish how much reimbursements vary by provider; deciding what the market share should be to achieve more leverage with payers; and correct whether reimbursement can be increased to help offset the pressures on margins arising from operations. It’s also important when forming an acquisition strategy to take a close look at each market in a given sector to identify the key acquisition targets, and to assess payer rates and the target’s referral base.

Popular Subsectors

Along with homecare services and hospice care, the demand for mental health and behavioral health services has risen since the pandemic, so investors are certainly looking at these subsectors. Medicaid as a source of funding has become increasingly stable, and enrollment has greatly expanded, so those businesses that are supported by state Medicaid programs are also very popular. Other subsectors that are hot right now are biotech companies producing drugs and vaccines, telehealth providers, and HIV treatment companies.


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