Health-Care Investors Should Be Optimistic Despite Equity Shifts

Recent upheavals in health-care private equity investment raised concerns among industry stakeholders. Changes in interest rates, availability of debt, and inflation have made it challenging for private equity fund investment committees to deploy capital based on clearly defined target valuations.

Simultaneously, state and federal government oversight—particularly potential antitrust enforcement—prompted questions about how much private equity investment might change.

After speaking with investors and managers from major private investment companies and firms, we found that health-care industry investors still have reasons for optimism.

Management’s Critical Role

Declining deal flow in 2023 represents a dramatic shift from continuously rising deal valuations the industry has enjoyed for the last five to 10 years, leading health-care private equity participants to search for answers.

Some point to interest rates, some to debt-market constraints, and others to rising inflation as factors dampening investment committees’ willingness to deploy their capital. As uncertainty abounds, investors continue to hold assets until forced to sell at unenviable prices, if at all.

Industry experts note that all these factors—interest rates, debt-market constraints, and inflation—are part of the same inquiry: how to pinpoint a potential investment’s terminal value. Initial public offering markets are drying or have dried up, and a historical trend of increasing transaction valuations is unlikely to be predictive of valuations in the years to come.

There’s also a human element amplifying the financial uncertainty: People are impatient.

Limited partners apply pressure to deploy capital, but with no clear way to assign valuations to assets and targets, there’s no consistent or coherent set of incentives on which to act. Investor uncertainty means assets will be held until an exit is productive, and what will matter most in coming months is how assets are managed until that exit.

The longer investors wait to exit, and the longer deals take to close, the more investment committees will need to work with their management teams. Skilled management will be very important in the first quarter.

Management teams that know how to hold and grow assets will be rewarded as the prospect of a bear market comes into clearer focus, and their ability and talent will carry the market more than investment acumen.

Antitrust Enforcement

Recent chatter in the private equity space indicates the current administration is on board with proposed increased antitrust enforcement. Notwithstanding potential for a rising tide of enforcement actions, industry participants are only just starting to think about consequences of this new federal interest in antitrust law.

Federal support for increased antitrust enforcement, absent a simultaneous development of legal theory, has left industry participants wondering if they should either take the judicial posturing seriously or alternatively take a wait-and-see approach.

Health-Care Investor Interest

Given the compression in the deal market, uncertain prices, and changing multiples, industries that lend themselves to a buy-and-hold strategy have become more attractive to investors.

As a result, health-care industry investors are moving from a profit-oriented to a revenue-oriented approach. They’re currently shifting their focus to pharmaceuticals, value-based care, and artificial intelligence-enhanced health-care services.

Despite market changes and related concerns, investors are optimistic. Health-care investments have been prudent portfolio choices through decades of inflation and recession.

Now, although investors are evolving their strategies and investment committees are increasingly turning to management teams for guidance, the lending markets are beginning to open.

Capital is more available than in previous months—it’s simply expensive. The market hasn’t yet cleared the present macroeconomic hurdles, but the sector remains ripe for investment, and rewarding exit opportunities are on the horizon.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jonathan D. Salm is partner at McDermott Will & Emery with focus on health-care transactions, including mergers, acquisitions, and joint ventures.

Benjamin Glass is an associate at McDermott Will & Emery, focused on private equity and the health-care industry.