Healthcare PE Deals Remain Strong, But Expect a Slowdown Next Year

Despite continuing market turmoil, healthcare deal activities have remained relatively robust in 2022. 

The estimated deal count reached 725 through the first three quarters, which has already surpassed the full-year figure for 2020, according to the latest industry research by PitchBook. Year-to-date through September, the value of all deals was estimated to be $94 billion, on pace to match the levels reached between 2017 and 2020. Exits are also close to the numbers reached in those years, which by almost all metrics were record-breaking years for private markets. 

Rebecca Springer, senior analyst at PitchBook and the author of the report, said that dealmaking in the healthcare sector have been “well-aligned” with those in the overall market. Private equity deal value reached $819 billion in the first three quarters of 2022, a figure that has surpassed every other annual sum on record except for 2021, according to a previous report from PitchBook. 

But moving forward, Springer expects some differentiation between healthcare and other industries. “If we move into more [of] a recession macroeconomically, investors are likely going to be looking at healthcare and trying to understand where they can park cash,” she said, adding that the recession-resistant characteristics of the healthcare industry will become very attractive to investors in a sluggish deal environment. 

The high amount of capital available in the healthcare industry should also help fuel deals. PE firms are sitting on an estimated $62 billion in dry powder that they can invest in the healthcare services sector, an amount that can support companies with a combined enterprise value of $150 billion, according to the report. “That’s a lot of healthcare companies,” Springer said. “We do expect dry powder to carry dealmaking forward, just perhaps not [at] the same rapid pace as we saw in 2021.” Dry powder in the whole PE industry reached $2.5 trillion as of 2021, Institutional Investor previously reported. 

According to Springer, the strongest headwind for dealmakers in the healthcare sector will come from the lack of staff, especially among the lower-skilled workers who provide care and hospitality services within hospitals. “Due to a lot of Covid burnout [and] nursing dynamics…the staffing costs are sky-high right now,” she said. “[Even] one of the leading hospital systems is posting net operating losses as a result, [although] their revenue is strong.”

Rising interest rates are not helping. “They have some effects in terms of making deals a little bit more expensive,” Springer said. But she added that labor shortages are still the major challenge. “I think you’re going to see dealmakers slow down a little [and become] more cautious,” she said. “[They] will scrutinize deals more carefully.”