Dealmaking in the first quarter was down, "even from 2023's sluggish pace," analysts revealed.
Private equity’s impact on healthcare has been in the headlines of late, but actual investment activity by firms continues to slow down, according to a new report.
Research by market data firm PitchBook found that a tough regulatory climate, price differences between buyers and sellers, and signs that the Federal Reserve will hold rates higher or longer has depressed private equity dealmaking.
In the first quarter of the year, 158 estimated deals were announced or closed by private equity sponsors, which marked a decrease from 2023’s rate and a 20% decline from the 200 deal count over the same period last year.
While private equity investment has been trailing off since the end of 2021, PitchBook notes that it expects activity to ramp back up in 2025 and that more deals will be announced toward the end of this year.
Though more firms are actively looking to invest and financing is easier than it was in 2023, certain factors are driving down numbers at the moment.
Chief among those causes is regulatory concern, which was heightened as a result of the Change Healthcare cybersecurity attack. The breach, which occurred in February, “caused temporary delays in active deal processes as target companies scrambled to reconfigure their billing processes and buyers looked for assurance that revenue would normalize at previous levels,” the report stated. Additionally, the event created heightened awareness for buyers over cybersecurity compliance and HIPAA compliance risk.
PitchBook also highlighted that while antitrust enforcement remains low, the increase in chatter about private equity trends in the news cycle is resulting in a cooler market. For example, the struggles of Steward Health Care have been well documented and brought more attention from lawmakers to private equity’s role in healthcare.
“Even if the public spotlight drifts elsewhere post-election, we fear a lasting effect on perceptions of PE’s interests and approaches among potential sellers and partners in the provider landscape, including physician groups and health systems,” the report said.
From a state perspective, California now has a deal review process that gone into effect, which could lead to extended deal timelines, extra review costs, and the publicizing of information on the parties involved. Other states have followed California’s lead, such as Connecticut, Illinois, Indiana, Massachusetts, Minnesota, Nevada, New York, Oregon, and Washington.
Finally, the report shed light on the ramifications of the Federal Trade Commission’s vote to ban noncompetes in April.
“If implemented, a noncompete ban would theoretically advantage health systems over PE-backed physician groups in physician and clinical staff retention, and could also result in further wage inflation in the industry,” the report said.
Despite private equity investment in healthcare trending downward, a recent report by the Private Equity Stakeholder Project found that more bankruptcies in the industry are coming from private equity-backed companies.
Even more bankruptcies and defaults are expected this year due to many organizations suffering from significant debt and downgraded credit ratings.
Jay Asser is the contributing editor for strategy at HealthLeaders.
KEY TAKEAWAYS
PitchBook’s report on the first quarter of healthcare services shows a continued downtrend in private equity dealmaking, stemming largely from regulatory pressures.
Through the first three months of this year, 158 estimated deals were announced or closed by private equity entities, which is a 20% decrease from Q1 2023.
The Change Healthcare cybersecurity attack, as well as new deal review processes at the state level, have contributed to investment hesitancy.