Private equity often carries a negative connotation in the healthcare industry. However, if you are considering selling your business, it's crucial to understand the impact private equity has on the overall deal market and the sale of your company. At VERTESS, we focus exclusively on transactions in various healthcare sectors. By tracking the activity of private equity groups, or PEGs, we gain insights into the current market dynamics, allowing us to better advise our clients on what to expect when selling their businesses.
In this column, we will briefly define private equity, then dive into the influence of it on the sale of healthcare businesses, current trends in healthcare private equity activity, and what business owners should consider when planning to sell their companies.
What Is Private Equity?
Private equity is an alternative investment strategy that allows institutional and accredited investors to invest in private markets. These groups invest in private businesses to increase their value over a holding period — one typically lasting 5 to 7 years. PEGs have an ultimate goal of selling the businesses for a profit.
One strategy for increasing the value of these portfolio companies is through mergers and acquisitions (M+A), where companies consolidate multiple businesses under a single entity. By acquiring regional and national competitors or businesses with synergistic lines, these portfolio companies can add revenue and earnings, thereby increasing their value when sold.
What Influence Does Private Equity Have on Selling Your Healthcare Business?
Why is private equity important for business owners? When you decide to sell your healthcare business, you will likely receive offers from multiple entities, potentially including private equity-backed portfolio companies and private equity funds. Tracking their activity in the market can help you understand what to expect when selling your business. While private equity groups are not the only buyers in the market, knowing how they acquire and invest in companies provides valuable insights into the market as a whole.
Where Things Stand: A Closer Look at Private Equity Activity in 2024
In 2023, M+A activity was sluggish across most sectors and especially in healthcare. High interest rates lowered business valuations, creating a gap between owners' expectations and buyers' valuations.
In the first half of 2024, private equity showed signs of recovery in the global M+A market. After a slow start, private equity deal activity increased, stabilizing its market share and alleviating concerns about private equity's role in the anticipated M+A rebound. Exit activity, crucial for healthcare industry growth, improved significantly after a long period of stagnation, elevating fundraising and capital availability for future investments.
Private equity fundraising exceeded expectations, showcasing the healthcare industry's resilience and continued investor confidence, despite an anticipated slowdown in the latter half of the year. Middle-market funds performed well, in contrast to the more challenging environment for megafunds.
As the stock market includes more smaller cap stocks, private equity valuations and exit opportunities are expected to improve further. The healthcare industry's adaptability and forward momentum amid challenging conditions highlight its potential for continued growth and success.
Looking at the more recent quarter of 2024 (Q2), healthcare private equity activity showed promise despite a lighter quarter overall. The healthcare sector accounted for a substantial portion of deal activity, with numerous transactions reflecting strong down-market deal flow. Notable deals included Cotiviti's recapitalization by KKR and Veritas and Thomas H. Lee Partners' acquisition of Agiliti, indicating ongoing interest in healthcare investments. Healthcare services dominated private equity deals, while pharma services also attracted significant interest, with multiple platform deals closing.
The demand for weight-loss drugs sparked interest in peptide manufacturing, aligning well with private equity's focus on consistent business models. Despite high valuations and economic uncertainties, the healthcare sector remains robust for private equity investment, driven by strategic acquisitions and divestments.
In conclusion, the first half of 2024 has shown encouraging signs of recovery and growth for private equity in both the general M+A market and the healthcare sector. Improved deal activity, strong fundraising, and strategic investments indicate a resilient and adaptable industry poised for continued success. The healthcare sector, in particular, remains a key area of interest for investment groups, with ongoing investment opportunities driven by market demand and strategic divestments.
Current Private Equity Activity Is Good News for Healthcare Business Owners
Understanding private equity activity is crucial for healthcare business owners considering selling their companies. The current market conditions in the first half of 2024 have shown recovery and growth in private equity, particularly in the healthcare sector. Improved deal activity, strong fundraising, and strategic investments indicate a resilient and adaptable industry poised for continued success.
As deal activity increases for private equity firms, this signals that buyers will be actively seeking investments in the healthcare market. Private equity firms aim to increase the value of their investments through market consolidation and eventually exit from these investments in the coming years. This positive trend in deal activity among private equity firms suggests favorable conditions ahead for the sale of healthcare businesses, regardless of their size. For business owners, staying informed about private equity trends and market dynamics can provide valuable insights and better prepare them for potential sales, ensuring they achieve the best possible outcomes in a competitive market.
At VERTESS, we specialize in healthcare M+A transactions by working with business owners to capitalize on these market opportunities and negotiate the best deal possible for their business. We have built a network of relationships with buyers in our key verticals to ensure we bring the right pool of buyers to any client. This will help not only achieve the best outcome in purchase price but also the best post-transaction fit for their business, employees, and clients. If you would like to learn more about the state of healthcare M+A and investing or how VERTESS is particularly well-suited to help sell your healthcare business, please reach out to us.