Private equity (PE), for several years, has had a large presence in the healthcare M&A market. In 2023, there were 766 transactions that were completed by a private equity group, and/or a portfolio company. This equates to roughly 35% of the entire 2,197 healthcare acquisitions that were reported during 2023. This high percentage of PE activity in the healthcare M&A market continued from 2022 which saw 976 PE-backed acquisitions, or approximately 40% of the 2,461 announced deals. Between January 1, 2024 and February 29, 2024, 113 of the 359 deals have been completed by a PE-backed buyer, or 31%.
The sector with the most PE interest was Physician Medical Group (PMG), totaling 337 acquisitions, or 43% of PE interest in 2023. PE’s hold on the PMG space continued in the first two months of 2024 with 57 transactions, or approximately 51% of PE activity.
Harvest Capital Partners’ Dental Care Alliance, LLC (13 deals in 2023 and three in 2024) and Zenyth Partners’ ReFocus Eye Health (seven deals in 2023) are some of the more active investors in the PMG space.
But the most active buyer in the PMG space (and overall) was Charlesbank Capital Partners, which completed 59 transactions in 2023 through its portfolio company, MB2 Dental Solutions. So far, in 2024, MB2 has completed 19 transactions. For more information on why this group has been so incredibly active, read our other spotlights (such as Active Physician Medical Group Buyers in 2023 and Navigating Year Over Year Trends of the Physician Medical Group M&A Market) that discuss the group’s acquisitions in greater detail.
Other Services, which is a catch-all category that includes services like urgent care, ambulatory surgery centers, clinical trials, healthcare staffing and more, is another attractive space for PE investors. In 2022, 156 transactions were completed by a private equity group for Other Services, which is approximately 27% of all Other Services transactions for the year. In 2023, 133 of 545 were completed by a private equity firm, or 24%. In the first two months of 2024, 16 PE deals were announced in the space, which is the equivalent to 17%.
Breaking down Other Services even more, certain subsectors saw activity that played into market trends. Contract development manufacturing organizations (CDMO) have really taken off in the past few years. CDMOs service pharmaceutical and biotechnology companies to provide a range of services from drug development to drug manufacturing. In 2023, 35 CDMOs were purchased by private equity companies. Between January 1, 2024 and February 29, 2024, PE firms have purchased four CDMOs, marking the subsector off to a strong start.
Clinical trials is another Other Services subsector with a rise in activity. In 2022, a PE firm completed 16 clinical trial transactions. By 2023, that number jumped to 25 deals, and in 2024, through February 29, there have been five clinical trial acquisitions. The increase in activity for clinical trial organizations can be attributed to how well-positioned clinical trials services are in the pre-clinical pipeline as a necessity for pharmaceutical companies.
Additionally, eHealth has also seen a fair amount of activity. In 2022, 114 PE acquisitions were announced (roughly 35% of all eHealth deals in 2022), and in 2023, 99 were reported (roughly 36% of all eHealth transactions in 2023). In the first two months of 2024, 50 eHealth acquisitions were announced, and 17 of them were completed by private equity groups.
Active PE firms in the eHealth space include The Corridor Group Holdings, which is backed by HealthEdge Investment Partners, LLC (three deals in 2023) and Polaris Partners’ Phreesia, Inc. (two deals in 2023).
Phreesia, a digital platform that offers revenue cycle management, clinical support, electronic medical record support and analytics and reports, acquired MediFind, a data science and health technology company focusing on connecting patients with clinical trials, health systems and healthcare technologies through analytics, in July 2023. In August 2023. Phreesia bought Access eForms, an electronic forms management and automation provider. These two transactions expand Phreesia’s offerings, showing how important it is for companies to have multiple revenue streams.
In contrast to the PMG industry, the Biotechnology and Pharmaceuticals (more specifically, drug development) markets do not attract a significant amount of PE interest. In 2023, there were 10 transactions completed by a PE group in the Biotechnology sector (out of 161 deals) and 11 in the Pharmaceuticals space (out of 106 deals).
The reason PE is not interested in making majority investments in these sectors to nearly the same extent as they are in the PMG and the services is because Biotechnology and Pharmaceuticals are risky businesses. It can take several years for products to come to market, and many private equity firms may not always want to wait that long to see a profit. So, more often than not, private equity groups make minor investments into Biotechnology and Pharmaceutical companies to still get a slice of the pie but not risk as much capital.
We spoke with Scott Davis, Managing Director at Provident Healthcare Partners. He further addressed why PE groups are more interested in PMG, and other services, over Biotechnology and Pharmaceuticals, saying, “Most of this interest has been around outpatient physician practices, so those not owned or working exclusively within a hospital. Alongside the basic investment themes of an aging population and growing demand for clinical services, is the level of fragmentation found in the practice management space, allowing for a high volume of add-on transactions and the ability to gain scale rapidly, while also professionalizing those businesses to unlock their organic growth potential.”
According to our data, the number of physicians on staff for the acquired practices, regardless of sector, averaged 13 providers in 2023. It should be noted that there were several practices with more than 1,000 physicians, but those were removed from the average as that is an extremely rare outlier and does not properly reflect the size of practices being purchased.
With such a high level of fragmentation in the market, there’s inherently more room for consolidation, leading to a plethora of acquisition opportunities for PE groups. The same opportunities are not as present in Biotechnology and Pharmaceuticals.
One of the more active PE groups during 2023 is Webster Equity Partners, which completed 21 transactions. While the group has made no acquisitions in 2024, so far, its recent activity highlights one of Davis’ points that outpatient services are attracting a great deal of PE attention. Outpatient services are lucrative because they offer a wide range of ancillary services that allow investors to have multiple revenue streams. Plus, it encourages value-based reimbursement models which are rising in popularity, too.
Of Webster’s 21 transactions, 14 were in the Physician Medical Group sector; three were Home Health & Hospice; and four were Other Services. The firm’s most active portfolio company was Cardiovascular Associates of America, which completed nine acquisitions, expanding Webster’s footprint by more than 140 cardiologists.
In 2022, Webster Equity divested Epic Staffing Group to The Pritzker Organization (TPO). According to reporting done by Axios, the deal was valued at $675 million, which translates to a 4.7x multiple on investment and 68% internal rate of return. With this divestment, Webster was able to focus more on the outpatient services, as evidenced by its activity in 2023.
Mark Siegel, CEO of Epic, commented, “We are truly excited to be partnering with TPO for the next chapter of Epic’s growth story. We have enjoyed outstanding organic growth, completed several successful acquisitions during our time with Webster Equity Partners, and our business has never been better positioned to help our clients across healthcare, life sciences and schools.”
But this divestment is unusual. In regard to PE selling their companies, Davis said, “we’ve seen PE investors be less active over the past 12 plus months on the exit of their portfolio companies. Instead, they’re taking the time to conduct meaningful add-on acquisitions and refine their business infrastructure.”
With PE firms holding onto their portfolio companies for longer periods of time, waiting for more favorable markets, M&A activity favored ‘tuck in’ acquisitions instead of large platform transactions. This goes hand in hand with the fact that the market is fragmented, and PE groups are searching for areas to expand their footprint.
But what about for the rest of 2024? Industry experts predict that 2024 will have strong M&A volume, like 2023, but probably not as high as 2021 or 2022 as those years were exemplary. Factors such as high interest rates and regulatory pressures have the power to limit activity.
Additionally, the Biden Administration has announced its plans to scrutinize private equity firms. An article published by Bloomberg said that The Federal Trade Commission, Justice Department and Department of Health and Human Services have put in a request that “mergers valued at more than $119.5 million must notify the federal antitrust authorities and wait at least 30 days before closing.”
This is targeted towards ‘roll-up’ acquisitions, which is when a company makes one initial purchase and then, in a timely manner, proceeds to make smaller purchases in the same sector. The Biden Administration’s additional focus on private equity transactions is bound to impact how investors proceed.
According to Davis, M&A activity will remain robust on the ‘tuck in’ acquisition front and there’s a growing expectation for private equity exits and overall platform creation to begin picking up in the second half of the year and into 2025. So, we remain hopeful that private equity interest in 2024 will be strong as more companies rely on PE’s ability to expand services and increase revenue.
