Last Year Private Equity Couldn’t Get Enough Healthcare. Now Deals Have Dried Up.

Higher supply costs and investors laying low after a rough first quarter are among the drivers.

Paul Yeung/Bloomberg

Paul Yeung/Bloomberg

M&A dealmaking activity in the healthcare sector slowed drastically in the first quarter of 2022, and this cautious approach could continue for the rest of the year.

In the first quarter of 2022, the total number of healthcare M&A transactions declined by 34 percent from the last quarter of 2021, according to a KPMG report released Tuesday. Specifically, the report said that over that same time period, private equity transactions with healthcare companies fell by half, while deals involving strategic buyers dropping by 13 percent.

The slowdown comes just a year after a record year of deal making between private equity and health care, driven by an aging population, digital innovations, and other factors, according to Bain & Co. In 2020, digital health companies alone received $35 billion of investments from private equity firms, as II previously reported. Healthcare represented 14 percent of deal activity in PE in 2020.

The report attributed the overall decline to multiple factors, including a rush to complete transactions started in 2021 in order to beat tax deadlines, Covid-19 concerns, high multiples, and geopolitical uncertainty driven in large part by the war between Russia and Ukraine. Rising interest rates and inflation concerns also contributed to the slowdown.

“Several factors came together at the same time,” Jeff Whitcomb, a managing director at KPMG’s healthcare and life sciences strategy practice, told Institutional Investor. “Within the industry, higher supply costs and [a lack of clarity] around Covid led to a lot of uncertainty.”

Whitcomb said that as the first quarter of 2022 progressed, investors became more cautious about where they put their money. This meant that instead of rushing to make deals before their competitors, they’ve decided to take their time and lay low. “They’re recalibrating expectations based on the new economic outlook and are looking more deeply into each opportunity, extending [the] duration of negotiations and due diligence,” Ross Nelson, a principle and national healthcare strategy leader at KPMG, wrote in the report.

The report also broke down the declining deal volumes by healthcare subsectors. According to the report, private equity funds decreased their deal volumes in hospital and health systems by 61 percent in the first quarter of 2022. While the decline in strategic deal volume wasn’t as drastic as the decline in PE deals, strategic dealmaking also experienced a decline in all healthcare subsectors, with the exception of behavioral health.

In the coming quarters, KPMG expects healthcare and private equity players to continue their dealmaking pursuits, but they anticipate that the volume in 2022 won’t reach anything close to the numbers put up in 2021. The report said that this means that buyers and sellers will approach each deal with more caution than before and will be tempted to explore more “creative” dealmaking.

“We’re going to have to look for more than just the traditional synergy or operational improvements,” Whitcomb said. “There’s going to have to be more thought behind how to drive value through some of these deals, to really drive that ROI [return on investment].”