Bubble talk is back. Anyone who’s bought a healthcare services company in 2018 has hit a hard reality. Depending on the sector, multiples are the highest they’ve ever been, crazy or insane.
We attended the ACG New York chapter’s annual healthcare deal conference, titled “Health Care Deals 2018: Where Have We Been and Where Are We Going…” (ellipsis theirs) on a recent May morning.
With a title like that, and a market as it is now, the question “Who’s investing in health care these days?” elicited the response, “Who isn’t investing in health care now?” The universe of investors has broadened to include Amazon (NASDAQ: AMZN), CVS Health (NYSE: CVS) and perhaps even Walmart (NYSE; WMT). And it’s obvious these outsiders are bringing knowledge of consumers and their behaviors into the healthcare arena.
Which sectors are working? Right now, Behavioral Health Care is seeing a surge investor interest, thanks to the Affordable Care Act, parity laws and broader public awareness of opioid addiction, mental health issues and autism. Companies focused on autism and opioid treatment programs in particular are going for 17x, 18x, and even 19x trailing EBITDA more often now, according to one panelist.
The Long-Term Care sector, which includes skilled nursing facilities, assisted living, independent living and other senior housing options, had a great run going for the past five years, all agreed. Lately, however, the market for SNFs has softened as buyers look to other areas of the post-acute care market. The paucity of A-level properties on the market is another factor. While this subsector may be slow now, “it’s probably a medium-turn trend.”
Physician Medical Groups have been consolidating at a great rate in recent years, and private equity has had a lot to do with that. Large physician groups have greater power over payors, and any practice with an “-ology” in it is hot right now. The federal government’s changes in capitation have created more opportunities, and PE firms are looking for small players to build larger platforms.
Who would have thought that Medicare and Medicaid, once shunned by investors, would now be considered great assets? another panelist asked. Mega-funds are going down-market, with Blackstone‘s (NYSE: BX) recent acquisition of the Center for Autism and Related Disorders cited as one example. Much of behavioral health care is funded by Medicaid. Multiples for Medicaid home health businesses were 4x-5x EBITDA about five years ago, but are now hitting 8x and 9x.
Still, “there’s an incredible amount of garbage on the market being sold for 17x,” one presenter commented. But the fact is, a lot of large funds have to deploy capital, and in a hot market, even garbage can sell for higher multiples.
“We’re over-bidding because we have to in this market,” one panelist said, adding that
Buying small companies at high multiples and expecting them to grow isn’t sustainable, another panelist warned. “We’re in a little bit of a bubble,” he said, adding that the U.S. budget is in terrible shape, a fact that isn’t being talked about openly.
The upshot? Buyers should be modeling in a contraction in multiples in a few years’ time, realizing this hot market is bound to cool off. The bubble doesn’t have to burst for multiples to come down, the end may be near. According to one panelist’s crystal ball, that’s 2023. Get ready.