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Health services deals, although down, continue to show resilience
Health services deal volumes through November 15 declined by 9 percent from 2023 levels but continued to show resilience from peak volumes of 2022. Regulatory scrutiny remains top of mind for dealmakers and a level of valuation misalignment continues between buyers and sellers. However, health services deals continue to get done. We expect that the significant amount of available corporate and private equity capital, the prospect of further interest rate cuts and lengthening hold periods for which there is a need to realize a return on investment will all continue to accelerate deal activity into and throughout 2025.
- Despite the decline in volumes through November 15, activity has stayed robust, with annual deal volume through November 15 remaining nearly 70% higher than the pre-COVID trendline.
- Public company enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA) multiples have largely remained consistent over the course of the year, increasing slightly from 13.5x as of December 31, 2023, to 14.0x as of November 15, 2024.
- Megadeals, defined as those greater than $5 billion in value, remain subdued relative to 2021 and 2022 levels, illustrating the impact of regulatory-driven hesitation towards larger scale transactions. Only one such deal was completed in the 12 months ended November 15, 2024.
- While policy decisions remain to be seen, uncertainty surrounding the presidential election has eased, and the generally pro-business stance expected from the incoming administration is providing additional optimism for increased deal activity into 2025.
Strategic thinking
Many assets held by sponsors were acquired during the vintage of higher multiples ending in 2022, which has led to sponsors holding onto assets acquired during this period for longer while at the same time needing to demonstrate returns to their limited partners. This, along with large levels of undeployed capital and elevated interest rates, is requiring artful approaches by investors to get deals done and justify valuations. Sponsors are deploying capital through private credit-like investments that involve junior debt or preferred equity in lieu of traditional leveraged buyouts (LBOs), enabling flexibility in capital structure and deferment of potential divestitures that would yield underperformance against targeted returns on capital.
Regulatory uncertainty has resulted in some shift in focus away from physician practice management models toward technology and other ecosystem supports that benefit from the broader sector tailwinds while limiting direct exposure to regulatory changes. Larger health systems continue strategic rationalization of their portfolios and favor tuck-in approaches of ancillary services in current markets versus larger scale geographic expansions as they focus more on the core and continue returning to operating margins that are beginning to approach pre-COVID levels. Payers continue to focus on expanding the “payvider” model, combining payer and provider functions, and evaluating geographic expansion opportunities aligned to their strategic missions.
“Dealmakers within health services continue to demonstrate the sector’s resilience despite regulatory uncertainty and broader reimbursement headwinds.”
The bottom line
Uncertainty surrounding regulatory scrutiny and persisting valuation gaps between buyers and sellers have led to hesitation in the market and an overall increasing hold period for investments in the sector. Despite these headwinds, deal volumes have remained resilient and continue to trend significantly ahead of pre-COVID levels. Dealmakers have also adapted by deploying capital via new investment models in lieu of the traditional LBO. The growing pipeline of assets to be brought to market, significant levels of available capital for both corporate and private equity players, expectations for further interest rate cuts and optimism around the incoming administration’s pro-business stance are all anticipated to drive increased health services deal activity throughout 2025.
About the data
LevinPro HC: The merger and acquisition data contained in various charts and tables in this report have been included only with the permission of the publisher, Irving Levin Associates LLC. All rights reserved.
S&P Capital IQ: Information provided by or through third parties is provided “as is,” without any representations or warranties by PwC or such third party. PwC and such third parties disclaim any contractual or other duty, responsibility or liability to client and any person or entity that receives such information.
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