Healthcare may see more divestures and realignment going forward, says PwC.
After a decline in 2023, healthcare deal volumes may be on the rise in the coming year.
Financial headwinds such as interest rates and regulatory concerns have slowed down dealmaking, but thanks to factors indicating increased activity in the near future, the outlook for 2024 health services deals is “cautiously optimistic,” according to PwC.
The professional services firm’s deals outlook report noted that transaction volume through November 15, 2023, fell 13% year-over-year. However, 2021 and 2022 are considered outlier years for the record volume they experienced. When compared to the annual levels seen from 2018 through 2020, this past year’s volume was nearly twice the average.
“The declines in sector transaction volumes are consistent with the broader macroenvironment but remain generally in line with 2021 levels,” said Nick Donkar, US Health Services Deals Leader for PwC. “Non-traditional cross-sector partnerships continue to be a strategic focus of many health systems and strategic assessments persist in driving more divestitures and realignment in the sector. While financing challenges persist, the sector’s resilience continues to make it ripe for increased transaction volumes in 2024.”
Here are three deal drivers in 2024 highlighted by PwC:
Opportunistic funding
Though financial challenges persist, investors are finding creative ways to fund and execute deals. PwC reports that it has seen increased use of continuation funds and special purpose vehicles through which sponsors are exiting some of their equity.
Meanwhile, healthcare venture capital fundraising is on pace to exceed 2022 levels and private equity sector fundraising is flowing freely. Cash levels also remain significant, even if public valuations have underperformed.
Need for reinvention
Traditional providers and organizations are feeling the heat from disruptors, but it’s forcing them to strategize and identify ways to grow. More value is being placed on deals that invest in speed and resiliency to respond to convenient retail offerings.
Nonprofit organizations like health systems are cross-collaborating with for-profit entities in areas such as value-based care and less intensive services to shift care outside the hospital.
Regulatory effect
While increased regulatory scrutiny of deals has the potential to derail some transactions, other regulatory impacts could create opportunities for investment. For example, inadequate reimbursements rates coupled with reduced Medicaid enrollment and rising costs may put providers in a precarious position, making them targets for acquisition.
How regulations influence Generative AI is yet to be seen, however. Depending on how patent rights are shaped, GenAI could drive deal activity in its own right.
Jay Asser is the contributing editor for strategy at HealthLeaders.