Healthcare private equity deal activity continues to lag other sectors, defying narratives of the industry's counter cyclicality, according to a July 23 report from capital market company PitchBook.
Four things to know:
1. In the second quarter 14.4 percent of U.S. private equity deals were in healthcare, down 1.8 percentage points from the five-year average, according to the report.
2. Cost inflation, particularly for labor, was the main story in healthcare in 2022, according to Pitchbook. This year, however, there have been signs of the labor market cooling — albeit incrementally — because of efficiency gains at the company level and reduced turnover in the labor pool.
3. Pitchbook analysts argue that if 2022 was the year of staffing pressures in healthcare, 2023 is the year of debt burden. Envision Healthcare filing for Chapter 11 bankruptcy in May and TeamHealth exploring options to repay $1 billion in debt due next year, are the most extreme examples, according to Pitchbook. Both companies are backed by private equity, in addition to American Physician Partners, which is shutting down operations at the end of July.
4. Many other healthcare platforms have seen growth slow significantly because debt service — combined with margin erosion — is eating into free cash flow, according to the report. Analysts expect the Federal Reserve to raise rates another 50 basis points, which will provide opportunities for conservatively-leveraged platforms to grow market share.
Click here to access the Pitchbook report.