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Q3 Market Update: Accelerated Pace of Healthcare M&A Activity Shows No Signs of Slowing Down

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Q3 Market Update: Accelerated Pace of Healthcare M&A Activity Shows No Signs of Slowing Down

The 2021 rebound in healthcare services M&A activity continued into the third quarter. Through the efforts of resilient providers and determined management teams, many healthcare services companies are seeing normalized, if not elevated, top and bottom-line financial performance. The uptick in M&A activity can be attributed to a variety of factors, including aggressive vaccine distribution, economic easing, potential increase to capital gains taxes, and pent-up demand for elective provider-based services.

Transaction activity in Q3 2021 was highlighted by private equity firms deploying capital via add-on acquisitions, evidenced by the 148 add-on transactions in the quarter, representing a 2021 high of 39.5% of total M&A volume. Fueled by record levels of dry powder, the transaction activity signals private equity’s appetite for platform growth via multiple arbitrage and an overall shift from pandemic fueled portfolio management to a long-term outlook hinged on growth. As the public markets adjust to Federal Reserve activity and elevated volatility levels, alternative investment firms will see large fund inflows from limited partners limited partners seeking to diversify their risk. Provident believes the combination of a return to normal economic activity, record high dry powder, and increased demand for private equity will continue to drive investment in private markets, particularly surrounding stable sectors such as healthcare services.

In the coming months, Provident expects deal activity to accelerate, culminating to a record-breaking fourth quarter. In light of the lower than expected proposed capital gains rate increase, the surge of deal closings in the final quarter is not expected to be as high as anticipated earlier this year, which should also result in a more steady Q1 2022. Additionally, Provident has seen that some buyers are motivated enough to increase their final purchase price to net exiting owners even on an after-capital gains tax basis. A final note on the proposed tax plan revolves around extending the holding period for private equity companies to receive a long-term capital gain tax benefit, so while average holding periods may extend, private equity firms will look for add-on investments to maintain high returns after tax.

Provident actively tracks and analyzes M&A activity, key developments, and emerging trends among healthcare services verticals. We publish these findings in our quarterly newsletters, which can be accessed here. Provident also invites the readers of our newsletters to view our new Provident Perspectives publications, which focuses on current trends our professionals have identified in a variety of healthcare verticals. You can read some of our new posts here.

To print and download the full Q3 2021 Market Update report, please click below…

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