November 29, 2023

Healthcare private equity deals in 2022 aren’t living up to last year’s red-hot performance, but investors still want in on specialty care.

More than 740 deals occurred in healthcare services in the first half of the year, down 20% from the same period in 2021 but an increase of 16% from 2019, according to an Oliver Wyman report. Private equity deals continue to play a significant role in healthcare, even as inflation and higher costs change the landscape. 

Investors’ interest in physician practices began years ago, starting in areas such as urgent care, dermatology and anesthesia. Healthcare’s recession resilience is attractive to investors. There is also money to be made on such a large portion of the economy – about 20% of U.S. gross domestic product, according to the Centers for Medicare & Medicaid Services.

Investors today are increasingly interested in the “-ologies,” higher-level care services including cardiology, neurology and radiology, said Ashraf Shehata, partner and U.S. national sector leader for healthcare and life sciences at consultancy KPMG. Orthopedics is another area garnering attention.

Physician practices historically have been fragmented and often inefficient, creating additional opportunities for private equity firms to step in.

“Any ability to include or have a value-based component around those practices is very attractive to private equity firms,” said Angela Humphreys, co-chair of the healthcare private equity team at Nashville, Tennessee-based Bass, Berry & Sims. “They are able to bring to bear efficiencies that of course help with the bottom line but also improve patient care.”

In late 2021, private equity firm Welsh, Carson, Anderson & Stowe acquired Resurgens Orthopaedics, Georgia’s largest orthopedic group serving roughly 800,000 patients, to form a new physician-owned company. Silver Oak Services Partners invested in Integrated Oncology Network in 2018, a deal followed by additional cancer-related acquisitions, and in 2021, the creation of a new platform for urology services. Financial terms were not disclosed.

Shehata also noted a renewed interest in home health services, such as physical therapy or skilled nursing.

However, some private equity investors have recently come under fire for implementing cost-cutting measures that critics say ultimately jeopardize patient care. Englewood Cliffs, New Jersey-based investment company Portopiccolo Group, which began investing in nursing facilities several years ago, has been accused of mishandling the COVID-19 response in some of its 100-plus facilities. Employees and family members alleged the company failed to follow protocols or obtain supplies needed to stem the pandemic, while employing too few workers. 

A common thread running through the wide-ranging investor interest in specialty care is healthcare organizations’ own push to operate more efficiently. That is especially important in the current environment, as providers try to navigate high labor costs, rising prices and patient volumes not yet back to pre-pandemic levels.

Chet Hosch, partner at law firm Burr & Forman, said he understands the scrutiny associated with private equity investments in healthcare, but he thinks these deals can improve patient care. The firms are not as constrained by quarterly profits and can make necessary infrastructure and technology investments, he said.

“The perception is – and I don’t think it’s fair – but the perception is that private equity will always sacrifice patient care for profit,” Hosch said. “I think both of those things can be served, and I think they’re enhanced in private equity anyway because they can take the long-term.”

Massachusetts-based Webster Equity Partners’ investments focus on healthcare specialties that haven’t had heavy investor interest – avoiding the herd mentality that often occurs in the private equity space, said David Malm, the firm’s managing partner. Webster’s portfolio includes investments in specialty retina care and oncology-focused plastic surgery.

With roughly $7 billion in assets under management, Webster is also in the early stages of establishing a new focus area for cardiology, as more cardiac procedures move from acute-care hospitals and into ambulatory surgery centers or physician offices. In 2021, Webster helped launch a new provider network, Cardiovascular Associates of America.

Malm said his team operates on a five- to 10-year investment horizon and potentially longer through continuation funds. Webster at first provides operating resources to new portfolio companies to help improve their clinical and back-office processes, and then shifts to strategy-level involvement.

“Healthcare is not a game for generalists,” Malm said. “I think one of the reasons that pricing remains elevated in healthcare, even in a challenging environment, is because you do have a lot of generalist firms that do a lot of other things. … They see healthcare as ‘it’s a great place to get in,’ so they’ll do the 30-second dermatology roll-up. That will not end well.” 

Private equity firms investing in healthcare generally expect to see returns on investment in three to five years, Hosch said.

Competition for physician practices between firms is intense, and additional competition comes from infrastructure funds and sovereign wealth, Hosch said. Humphreys said she expects to see more transactions between private-equity players, or sponsor-to-sponsor transactions.

Some investors are taking a pause amid the broader market uncertainty. Buying now could mean purchasing an entity with unknown staffing costs, as healthcare organizations remain largely reliant on contract workers to fill shortages. Despite this, the cost-cutting opportunities will continue to drive transactions.

Hosch thinks demand for healthcare deals will continue to outpace other areas of the market, especially given the increased opportunities to use technology and artificial intelligence for patient care and more seamless monetization.

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