As Health Care Deal Volume Declines, What are the Takeaways for Valuations?

The decline in total health care services volume, now eight quarters in duration since its peak in the fourth quarter of 2021, has contributed to an industry-wide mental reset on seller valuation expectations. Deal volume has declined significantly from elevated levels in recent years and has yet to find a bottom or find a steady, sustainable level. It may be too soon to find positives for the future, but as lower volume typically equates to lower valuations, it is plausible to envision scenarios that point to a more stable and sustainable future transaction environment.

By the Numbers

Source: Pitchbook

This graphic based on Pitchbook data indicates the following about deal volume:

1. The first quarter of 2024 marked the lowest deal volume since the second quarter of 2020, reflecting a notable decline. Compared to the preceding quarter, deal volume plummeted by nearly 35%, highlighting a significant downturn in market activity.
2. Transaction volume also decreased substantially in the first quarter of 2024, down 50% from its peak in the fourth quarter of 2021. Specifically, the health care services sector saw approximately 158 private equity deals during the first quarter of 2024, indicating a 20% reduction compared to the same period in 2022.
3. Since 2021, the trend in private equity deals within the health care sector has been downward, with transaction volumes showing a consistent decline. The first quarter of 2024 continued this trend, demonstrating a further decrease compared to the slow-moving pace observed throughout 2023.

Yes, But…

1. The lower transaction volume actually reflects more normal, pre-pandemic levels following the surge in 2021–2022. This suggests a potential flight to quality. In this selective market environment, buyers are increasingly drawn to resilient, high-quality assets. This trend may favor well-managed businesses that emphasize value-based care or innovative technology solutions targeting escalating health care costs.
2. Corporate and private equity players continue to hold high levels of capital that needs to be deployed, with financing now more accessible than it was in mid-2023. M&A is seen as leading the way for corporate entities to drive business reinvention and portfolio transformation.
3. The emergence of non-traditional deal structures may provide momentum for health care services deal activity by offering flexibility, risk mitigation and strategic alignment tailored to evolving stakeholder needs. These innovative approaches may also foster long-term value creation and operational synergies amidst market uncertainties.
4. A higher supply of portfolio companies for sale in the future may help a consolidator buy similar businesses in adjacent markets. The availability of one type of company makes a similar company more attractive to buyers looking to expand their footprint.
5. Company owners may take advantage of the opportunity to sell divisions of the same company located in different markets. In this scenario, the parts create more value than the whole.
6. The United States already spends a significant portion of its GDP on health care, at roughly 17%, and that number is expected to rise dramatically. Analysts predict a near 20% annual increase, translating to a staggering 67% growth in health care expenditure by 2031 (Source: CLA Connect Chart).

Health Care Valuation Takeaways

• The valuator should resist overreacting to the current transaction environment while also avoiding comparisons to previous, unprecedented, “boom time” when transaction volumes were elevated
• Comparable transactions should be adjusted to account for the transaction environment; valuation is for the long term and takes into account the long-term prospects of the business, rather than short-term market anomalies
• The recent period of market dislocation makes it difficult for valuation professionals to rely on recent transaction data as a benchmark

Weaver will monitor the market and continue to offer insights as we look ahead and consider future scenarios for health care valuation and transactions. Contact us for information.

Authored by Sam Betsill and Lauren Tollison

©2024

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