In 2024, the healthcare mergers and acquisitions (M&A) landscape experienced a notable slowdown, leaving industry stakeholders pondering the contributing factors and anticipating future trends. To shed light on this complex scenario, we sat down with Raheel Khan, Managing Director at Alvarez & Marsal Transaction Advisory Group. With extensive experience advising both buyers and sellers in the healthcare sector, Khan offers valuable insights into the forces shaping M&A activity, the challenges faced by market participants, and the opportunities that lie ahead in 2025.
This interview delves into the intricate dynamics of valuation discrepancies, regulatory pressures, and macroeconomic influences that have defined the recent dealmaking environment, providing a comprehensive overview for anyone navigating the evolving healthcare M&A landscape.
Healthcare M&A activity has seen a decline in 2024. What are the primary factors you attribute this slowdown to?
Raheel Khan, Managing Director at Alvarez & Marsal Transaction Advisory Group: Several factors contributed to the slowdown in healthcare M&A activity in 2024. Economic uncertainty, driven by a higher interest rate environment that only saw reductions late in the year, coupled with election-related uncertainties, played a significant role. Additionally, the market struggled to reconcile valuation expectations between buyers and sellers, with sellers often shelving processes rather than accepting lower valuations. Lastly, increased regulatory scrutiny at both the federal and state levels created uncertainty that dampened deal-making in specific market segments.
How have valuation discrepancies and the challenging dealmaking environment specifically impacted transaction volume?
Raheel Khan: Valuation discrepancies significantly impacted transaction volume in the past year. Private equity general partners (GPs), who can sometimes be incentivized by Multiple on Invested Capital (MOIC), often chose not to transact and instead hoped for better cash-on-cash returns in the future. Additionally, founder-owned businesses struggled to accept lower valuations, recalling the higher prices achieved by their peers in 2021 and 2022. The challenging interest rate and regulatory environment further contributed to the decline in transaction volume.
What role have regulatory pressures played in shaping M&A activity in 2024?
Raheel Khan: Regulatory pressures introduced uncertainty in certain healthcare subsectors, making it challenging for buyers to fully commit to deals. Under the previous administration, the Federal Trade Commission (FTC) was more active in reviewing healthcare transactions, particularly those involving large hospital systems and physician practices. This increased scrutiny extended to several states, affecting smaller, regionally focused businesses. The resulting uncertainty acted as a headwind to deal activity throughout 2024.
From your experience working with buyers and sellers, what were some key challenges each side faced in 2024?
Raheel Khan: Buyers faced significant challenges in deploying capital, as identifying attractive, quality assets at reasonable valuations proved difficult. Strong assets often attracted valuations similar to those in 2022, which many private equity firms found challenging to underwrite given the current interest rate and market environment. Sellers, on the other hand, struggled to achieve acceptable valuations, highlighting the misalignment between buyer and seller expectations in 2024. Additionally, sellers had difficulty preparing their businesses for sale in a way that addressed buyers’ concerns about regulatory and reimbursement outlooks. In many instances, headline risk prevented sellers from transacting at their desired valuations.
What key factors do you anticipate will influence healthcare M&A activity in 2025?
Raheel Khan: We anticipate that several macroeconomic factors will contribute to increased deal activity in 2025 compared to the previous two years. With the US federal elections decided, a less restrictive regulatory environment is likely to emerge. Additionally, technological advancements, including generative AI, will continue to improve the profitability of existing enterprises and create new opportunities for innovation within healthcare, leading to investment opportunities. Furthermore, the lack of transaction volume over the past couple of years has resulted in significant dry powder that needs to be deployed. This, combined with the focus from limited partners (LPs) on increasing Distributions to Paid-In Capital (DPI) in the near term, should act as a tailwind for transaction activity in 2025.
Which healthcare sectors do you believe will present the most promising opportunities?
Raheel Khan: Significant interest exists in several healthcare subsectors, including pharma services, particularly site management, CDMOs, CROs, and technology-enabled services assisting with clinical trials. Within healthcare services, behavioral health, especially mental health, continues to attract interest due to favorable patient volume dynamics and strong reimbursement trends. Healthcare Information Technology (HCIT) and revenue cycle management have become highly attractive sectors for private equity sponsors, given the potential for generative AI to disrupt these businesses and capture market share over time. Additionally, post-acute businesses, including home health, hospice, and others, have gained attractiveness as they offer opportunities to reduce care costs outside of the hospital setting, thereby decreasing overall healthcare expenses.
Conversely, which sectors might face significant headwinds or challenges?
Raheel Khan: Physician practice management is likely to continue facing headwinds. Over the past five to eight years, significant investments have been made in this sector, resulting in many platforms of size built through acquisitions. Factors such as wage pressures, challenges in achieving de novo growth, and acquisition integration complications have limited the ability to exit these platforms at favorable valuations. This has dampened buyer appetite for existing assets from sponsors or for building new platforms. Additionally, hospitals and health systems have faced significant financial pressures in recent years, including rising labor costs and flat to declining reimbursement rates. These businesses are generally more challenging to underwrite due to their complexity, and the recent financial headwinds have made it even harder for buyers to feel confident.
What advice would you give healthcare companies considering a transaction in the current market environment?
Raheel Khan: Preparing your business for sale should be an effort that begins early and is done thoroughly. We’ve seen many transactions where preparations were not started early enough, leading to a scramble to prepare the company for market in a short period. Often this resulted in shortcuts and a lack of rigor that had major implications later in the process. First, ensure you’ve chosen a seasoned investment banker with ample experience in your healthcare subsector, as this is invaluable. Second, engage other relevant advisors to understand all the risks of your specific business and related sub-industry, so there are no surprises during buy-side diligence. You may consider getting a reimbursement outlook or market study performed for the sub-industry. For your specific business, engage with a firm to perform a sell-side financial due diligence analysis to understand how buyers will view your EBITDA. Your investment banking partner can help you identify all the other advisors you should consider engaging.
Lastly, don’t lose focus on operations. Operating the business optimally should be your priority. The considerable time requirements of engaging in a sell-side process can often detract from focusing on operations, leading to sub-optimal performance. One of the biggest factors that can derail a sell-side deal process is a company’s financial operating results underperforming expectations. Keep your eye on the business first, hire the right advisors, and prepare well to optimize the opportunity for a successful exit.