1. Investment bankers and private equity fund leadership voiced interest in diversifying healthcare investments beyond traditional physician practice management platforms. Facing a difficult-to-predict regulatory environment for physician practice management investments, investment bankers and private equity fund leadership are exploring other healthcare subsectors not subject to the same degree of regulatory scrutiny as direct patient care investments. Healthcare subsectors with increased interest include healthcare IT, payor services and pharma services. Similarly, some investors are searching for nonphysician-led clinics and facilities, such as med spas, as an opportunity to diversify. Discussions across the conference, including panels on value-based care and artificial intelligence, highlighted the positive impact of private investment in the healthcare industry, equipping physicians with clinical data and insights to improve patient outcomes and enabling the adoption of value-based care delivery and payment strategies that enhance the quality and value of services.

2. Despite private equity’s role driving innovation and expanding access to healthcare, various legislative initiatives, regulatory shifts and media narratives negatively depict private equity. Attendees reflected on federal and state policy shifts that could impact healthcare private equity investments. For example, many states (e.g., California, New York, Indiana, Illinois, Minnesota, and Washington) require pre-transaction notice and review periods for certain healthcare transactions. State attorneys general frequently conduct such reviews as part of antitrust and consumer protection efforts. The California Legislature is considering a bill that would limit the ability of management companies with private equity investment to provide various administrative services to medical practices. On the federal side, the Federal Trade Commission (FTC) has proposed changes to the Hart-Scott-Rodino transaction filing requirements, substantially increasing the cost and time to complete an impacted transaction, and a joint request for information (with an extended June 5, 2024, deadline) from the FTC, the Department of Justice’s Antitrust Division, and the U.S. Department of Health and Human Services.

Despite restrictive policymaking and negative press, many HCPE Conference sessions discussed the positive impact of private equity-backed operators and strategies for communicating its impact to stakeholders. From investments in rural areas and increased access to underserved areas via enhanced technology, the private equity industry has a positive story to tell; however, that story is not the headline today. There is a major shortage in data and many investors are unwilling to be the “poster child” for private equity investment. The conference facilitated discussions on how funds and operators can work to defend their role in the industry, including developing strong public outreach teams and supporting advocacy organizations like the American Investment Council, whose president and CEO, Drew Maloney, spoke at the conference.

3. Investment bankers and private equity fund leadership remain optimistic that transaction activity will grow in 2024 and 2025 after last year’s choppier transaction market. Multiple conference sessions reiterated increased optimism for more M&A activity, as many “green shoots” begin to sprout. The unsteady deal volume in 2023 and so far in 2024 largely is related to high interest rates and investors being pickier when it comes to targets, as described below.Considering the uncertainty, many investors may have held onto larger assets they would otherwise have sold to wait out the market. 2024 may be a tale of two different halves as significant private equity dollars remain ready to be deployed and some private equity funds may seek to return capital to their investors.

4. High interest rates impact valuations, but quality assets continue to drive higher valuations. Multiple sessions discussed how realized EBITDA is utilized for valuing deals more than adjusted EBITDA, which was a significant valuation trend in recent years. Sellers still have been slow to adjust to higher interest rates and the pressure it presents on EBITDA multiples. Therefore, buyers are scrutinizing proposed valuation adjustments more carefully and often rejecting adjustments through the quality of earnings process. Quality assets continue to receive premium prices, but the focus likely will remain on the quality of reported EBITDA in deals throughout 2024-2025.

5. Continuation vehicles are on the rise as an alternative transaction structure. As mentioned above, there is increased optimism for an uptick in M&A activity; however, given high interest rates and lower-than-desired valuations for some sellers, healthcare private equity funds are looking to hold onto their best performing assets and management teams that they spent significant time and money to grow over their holding period. Continuation vehicles — whose development and use rose over the past several years — allow investors to sell assets from an existing fund to a new investment vehicle, returning investment to the original fund’s limited partners with new capital as opposed to the traditional third-party transaction sale structure. Commenters at the HCPE Conference noted a shift from utilizing continuation vehicles solely as “runway” for underperforming assets to deliver on financial expectations to now using such vehicles to initiate additional growth opportunities for historically successful assets. Given the state of the market and ongoing deal economics, use of this alternative transaction structure will likely grow throughout 2024 and beyond.

6. Healthcare executives and investment bankers said organic growth and labor force optimization are critical to expanding and creating value, particularly in a time with high interest rates. Healthcare investors and executives are focusing on organic growth by expanding ancillary service lines and creating efficiencies within the service lines to maximize value while growth by add-on acquisitions is more limited due to the cost of borrowing capital. Speakers in conference sessions, including the panel on delivery of post-acute care, emphasized that optimizing the labor force and containing costs by ensuring providers operate at the top of their license and scope of practice also has been key to maximizing value.

7. Industry participants see improvements in the labor market for healthcare employers since the “Great Resignation” (a/k/a the “Big Quit” or “Great Reshuffle”). While recent polling suggests more people nationally are considering leaving their jobs in 2024 than in 2022 when the labor market was challenging, healthcare investors at the conference observed that the labor pool and hiring trends improved for their healthcare platforms after the COVID years. This gave healthcare investors more confidence that they can build new service lines, particularly in recruiting clinical positions under the physician level for their physician practice management businesses. In doing so, industry participants believed that recruiting could occur without increasing compensation beyond levels supportable by the new service line’s earnings.

8. Healthcare investors indicated interest in investment sectors intended to create value for providers, such as equipment repair and maintenance and workforce IT solutions. In addition to those investments referenced in No. 1 above, businesses that provide services to healthcare providers without direct reimbursement risk are appealing. These investments provide significant opportunities to create more efficiencies for providers and enable them to spend more time delivering quality care to patients, rather than spending time and resources managing the noncore administrative burdens of operating a business. Staffing and equipment repair companies and certain healthcare IT solutions have seen significant interest. These types of investments are well positioned to scale efficiently and are not overly complex when compared to direct care models, thereby providing opportunities for rapid development and implementation.

9. Hospital-private equity partnerships can successfully support local healthcare systems, while opening new investment opportunities. A conference panel of hospital leaders discussed the challenges of delivering healthcare to their communities and ways they partner to innovate solutions. There is growing interest and willingness by health systems and private equity and venture capital investors to develop successful partnerships that utilize the best parts of each of these industry participants. The panel discussion highlighted how inspirational leaders execute on such arrangements. One hospital CEO discussed the importance for investors to understand hospital reimbursement and potential lost revenue for a health system in the shift to outpatient care as a critical competency to allow an investor to speak the same language as hospital leadership and make a successful partnership.

10. The past several years brought renewed discussion about diversity, equity and inclusion in private equity and a new energy to make change. The conference continued and elevated this discussion through McGuireWoods’ Women in Private Equity & Finance (WPEF) networking breakfast with Toni Hardy-Walker, chief executive officer of the Leverage Network, a nonprofit organization dedicated to promoting the advancement of Black executives on boards and in senior leadership roles in all sectors of the healthcare industry, and Johnese Spisso, president of UCLA Health. Hardy-Walker and Spisso discussed the importance of creating a culture of inclusion and emphasized the value women on boards bring to an organization, citing statistics illustrating such value. McGuireWoods’ Black Professionals in Private Equity & Finance (BPE) networking breakfast featured a panel discussion with Bryan Berry, account executive at AON, and Brandon Oliver, executive director, middle market healthcare, at JPMorgan. Among other topics, Berry and Oliver discussed the importance of building connections and remaining intentional in advocating and advancing community initiatives that support the next generation of diverse leaders.

11. Lenders expect increased deal volume and discussed the status of the debt market. Consistent with discussions from investors, lender panelists commented at the conference that while deal flow remains choppy, they see more engagement coming out of a slow 2023 and are optimistic about deal volume for the rest of 2024 and going into 2025. Lenders see an increased market for dividend recaps with respect to all-equity acquisitions made over the past 12-18 months. Lenders also see increased demand for delayed draw term loan facilities to support future acquisitions, with private equity sponsors looking for more certainty in the availability of capital to support growth. Lenders also indicated there is a stronger emphasis on the quality of EBITDA and that they are keeping an eye on how regulatory pressures and hurdles might affect execution and performance. The consensus is that deal volume will materially increase once interest rates settle within a level of certainty, especially considering the high degree of competition in the market and the readily available debt capital.