Deal activity in healthcare is under pressure but pockets of optimism are appearing

This year’s Q3 private equity (PE) deal activity count has remained under pressure in both Europe and the US, with deal count since 2022 Q3 down 21% and 40% respectively for all sectors. The healthcare space has not been immune to these pressures. 

Acquisitions by PE-backed businesses (known as ‘add-ons’) have been hardest hit and they continued downwards this last quarter from 837 in Q2 in Europe to 729 across all sectors, while there was a welcome levelling off of platform deals seen in the last quarter with 428 deals completed. Add-ons are, however, still materially ahead of 2019’s quarterly averages (pre-pandemic) with this value creation strategy still popular and platform deals are at their pre-pandemic levels. Add-ons and platform deals in the US are both below 2019’s quarterly levels.

For the healthcare sector, European PE buyouts in Q3 2023 were down 34% (from 163 to 108) from a year before, with both add-ons and platform deals under pressure. US-based deal count was down 37% to 177. Europe’s activity in the last two quarters has, however, been flat while US count has continued a fall that started early 2022 after the record peak of 466 deals in Q4 2021.

A mix of headwinds impacting deal flow... 

In April this year we looked at the negative impact of interest rates and the other economic headwinds on sellers’ willingness to sell, and on the viability for leveraged transactions and how this translated into pressures on different PE buyout types. We expect interest rates to stay ‘elevated’ (essentially back to the historical average). 

Tighter monetary policy still needs to fully feed through to the economy and the UK, along with the rest of Europe and will remain under pressure into 2024. As an illustration, Germany, which made up 14% of Europe’s buyout deal count in the first half of this year, has seen its IFO Business Confidence Index fall for three consecutive months. July’s figure of 87 was worse than economists expected and below the 10-year average of 96.

Fund raising will remain under pressure for the majority of PE firms as limited partners continue to rebalance their asset allocations.  As a consequence, we are now starting to see some private equity investors holding back from deploying their capital especially those with a high proportion already invested. They are doing this to avoid having to go into fund-raising mode during this economic climate. Fundraising can be a long and tough at the best of times, and brutal when the markets are down. 

With a mix of tailwinds too

New funds are still being raised however, but that is being increasingly concentrated into the hands of larger funds that typically have better known track records. For example, CVCs announced in July this year that they had raised a European record of €26 bn for their latest fund. As PitchBook Data Inc described the concentration: ‘megafunds get more mega’.

We are seeing active interest in the most attractive assets and pressure remains on PE investors on the whole to deploy their ‘dry powder’ which still remains at near record levels.  For example, IK Partners’ acquisition of listed teleradiotherapy solutions provider Medica Group PLC, announced in May 2023 saw a premium of 41% offered to the average share price of the preceding 12 months. That valued the business at £269m with IK’s investment to be used to in the company’s technology, people and capabilities, both organically and through M&A. 

The UK NHS’s inability to meet demand continues to form the basis of investment cases in healthcare, especially in services. And that demand will be supported over the longer term by the ageing population. Further, irrespective of the elected party in UK general election in 2024, we expect healthcare to remain a high priority with solutions sought to meet that demand. 

The general election may lead to the introduction of a capital gains tax which would spur owner-managed businesses into a sale. We are unlikely to see a similar spike in deal activity to that seen in 2021 Q1, as that was supported by post pandemic optimism and ultra-low interest rate, but it could lead to an uplift nonetheless.

Also, the easing of inflation in key countries like the UK, Germany and the US and our expectation that interest rates will not need to rise further is helping provide certainty for projections – a key ingredient for the confidence in decisions made by sellers and buyers.

Overall, considering the mix of headwinds and tailwinds impacting investors, deal count in the healthcare space is likely to remain approximately at Q3’s levels for Q42023, and possibly into 2024, with add-on acquisitions remaining the predominant transaction type.

How can RSM help?

For further information, please contact Jasper van Heesch, private equity senior analyst.

To discuss finance options for your healthcare business, please contact Suneel Gupta, head of private healthcare.