During the second week of January, members of the Provident team met with over 75 private equity groups nd strategic acquirers at the JP Morgan Healthcare Conference in San Francisco with the goal of exchanging insights on anticipated healthcare M&A and industry trends for 2016. The general consensus was a continued, positive outlook for all verticals of healthcare services, reflected by common themes of competition for acquisitions, high valuations, and unique approaches for shareholder value creation. Key topics of conversation included:
1) Companies affecting the cost curve – investors paid attention to companies that create value for patients, payors, and providers. Post-acute care, healthcare IT, revenue cycle management, behavioral health, outsourced physician services, payor services, and outpatient clinic services were all singled out as key areas of focus.
2) Risk – providers positioned for risk-based models were highly sought after, as healthcare spend will increasingly be directed towards bundled payments, capitation, and managed care.
3) Retail Healthcare – retail settings were key topics of conversation, especially as medicine becomes more consumer-centric. By understanding unit-level economics, private equity firms seek to successfully scale businesses through an infusion of capital and experience with other retail-driven businesses.
4) Competition – as new private equity groups form and additional funds are raised more quickly than ever, competition for deals is at an all-time high. When they cannot secure majority acquisitions, investors have increasingly been willing to become minority partners or provide mezzanine debt in order to facilitate the relationship. Others have focused their efforts on paying market premiums for fewer platforms, but allocating more capital towards de novo growth and bolt-on acquisitions to those opportunities.
5) Operating Partners – as capital continues to be commoditized, groups have leaned on industry executives as operating partners to differentiate themselves from other investors/buyers, and to bring a deep rolodex of relationships to help grow their portfolio companies.
6) Valuations – valuations have been at historic levels for initial platforms as well as exits. Private equity firms have been able to achieve significant returns on their invested capital in record timeframes – given the significant premiums being paid in the market, returns that previously took 4-10 years to achieve have now been effected in as few as 2-5 years. Many groups cautioned that we are experiencing a valuation “bubble”, however no indications were made that it will subside anytime soon.
7) No current interest rate concern – despite recent announcements from the Federal Reserve raising interest rates, most private equity firms did not show immediate concern over their ability to finance leveraged buyouts in the middle market. To the extent interest rates continue to rise however, valuations may fall given the increase in transaction expenses and ability for PE firms to obtain competitive financing rates to fuel portfolio expansion.
8) Fundraising – given continued turmoil in public equity markets, institutional investors, high net worth individuals, and other qualified investors have continued to allocate capital to private equity to secure above average returns on invested capital. Many of the private equity firms Provident met had either closed on a new, larger fund, or was in the process of raising another.
9) Focus on lower-middle market – despite increases in fund sizes, PE groups have continued to prioritize the lower-middle market, which Provident defines as deals valued between $10 million – $400 million. This is due to the greater number of opportunities within this size-range, as well as greater lower-middle market expertise from PE in creating significant value for portfolio companies.
10) Improving profit margins – in order to improve the profitability of their portfolio companies, PE firms continue to focus on renegotiating payor contracts upwards, orchestrating group purchasing initiatives, and consolidating back office operations. Certain PE groups demonstrated interest in offshoring certain processes in order to increase turnaround times & cut costs.
From the perspective of providers and operators, bullish private equity attitudes towards healthcare offers significant short-term opportunities for business expansion and personal liquidity. To the extent that it is of interest, members of the Provident team would be happy to elaborate on any of these trends & provide specific insights on particular healthcare niches, specialties, and industry verticals. Please feel free to call (617) 742-9800 for additional information.