I attended the McDermott Will & Emery HPE New York event last week and learned a lot about private equity firms’ healthcare M&A strategies, and how valuations, deal processes, terms and their targeted sectors are changing in a rising interest rate world and in a recession. Healthcare companies are going through many of the same woes as senior care: fraught sponsor/lender relationships, wide bid-ask spreads, increased deal scrutiny from buyers and capital providers. That last one doesn’t sound bad. And there were always the optimistic comments around demographics and healthcare’s recession-resistance. But the general observation was that the party has ended, and the M&A boom of the last one and a half years is fizzling because of frozen credit markets and too-high pricing.
Wage inflation, and the uncertainty around future levels of wage inflation, is making many investors skittish on deals too, prompting a panelist to say that they have become very cautious around acquisitions of healthcare service businesses, especially those with high levels of non-skilled labor, and that the share of transaction volume would drop significantly compared with healthcare tech deals. So, home health would be out, but also most levels of senior care, at least according to these PE panelists.
That comment is not a shock, and investors should scrutinize businesses with 60% to 70% to 80% of their expenses coming from labor in this economy. But it reiterates the realities of operating within senior care today; wages can only go up from here, and the pool of potential residents shrinks with every rent hike. A recession could alleviate some labor concerns, but residents’ (and their adult children’s) ability to pay also diminishes. And pray we avoid stagflation and a weak housing market. Sorry, it just never ends.
