PitchBook is a reliable firm that deals with market data. According to one of its published reports, the year 2022 private equity investment in dollars targeted the healthcare space objectively.
Equity Funds In 2022
2021, the year preceding 2022 was particularly favorable for equity investments in the healthcare sector the trend continued in 2022 up until the Federal government hiked the rate of interest by the end of the year.
Despite such moves, the year 2022 managed to secure the second position in the list of years when equity investment deals in the healthcare sector were substantial. The report further cleared that around 863 deals were either closed or announced in 2022.
However, the fourth quarter of the year witnessed a significant downfall in this size to 158 deals for the rate of interest hike. This was a straight 24.6% drop from the previous three quarters.
When it comes to the overall volume of healthcare deals involving private equity, the extent of transactions registered in 2022 was still higher than the volumes of 2018 and 2019.
The Analysis
Pitchbook analysts attributed these slow-paced deals by the end of 2022 to certain macroeconomic factors and soaring capital costs. When the rate of interest increased, borrowing capital became a more expensive affair.
Therefore, both the buyers and the sellers began to consider the risks associated with overleveraging by the end of 2022 which they did not account for during the first three-quarters of the year.
On the other hand, the sellers were anticipating the short-run deals and valuations to resemble 2021 standards. Unfortunately, nothing like this happened and the sellers were left with no other choice but to accept the harsh realities of the time. Additionally, the quality of the deal mix struggled to be as high as they were in the pre-interest-hike regime in 2020 and 2021.
Another factor that contributed to this slowdown of deals by the end of 2022 was the rising cost of staffing. While inflation is a widespread phenomenon hitting almost all sectors of the economy, the healthcare sector was one to get the strongest blow.
Therefore, the rise in the cost of staffing in the healthcare sector rose alarmingly. During the pandemic phase, contract workers turned out to be valuable assets. As a result, the total cost of hiring increased.
Additionally, the COVID-19 response in the USA also burdened the healthcare sector as many healthcare sector workers left their job, got laid off, or at least thought of leaving the domain. This change in attitude certainly impacted the domain.
The report further highlighted that the demand for workers in the healthcare sector does not get severely impacted due to adverse economic factors. Most healthcare domain businesses continue to demand the same number of workers even when fewer people intend to join the domain.
This is why the price of hiring goes up invariable following the basic tenets of economic principles. Another pressing concern for the domain was that the experts did not expect the situation to improve within the next two years.
This means both hiring prices and reimbursement processes will take a long time to return to their usual levels.
As a result, several healthcare institutions faced acute staffing pressure since 2021. Therefore, numerous healthcare providers had to slow down their growth processes as well.
In such situations, it would be advisable to hold the assets rather than sell them at a lower value. This slow-down process was not unique to a particular domain of medical care. In fact, almost all domains like SUD treatment, mental health, and home health experienced the same fortune.
The Exceptions
However, all was not dark and gloomy. The situation of the PPMs or the Physician Practice Management companies seemed more promising. The experts attributed the resilience of this domain to its maintained levels of staffing conditions.
Unlike many other medical care domains, this one did not face any acute staffing shortage. Even for musculoskeletal categories and ENT wings, the volumes were almost equal to or more than that of the year 2021.
However, all these subspecialties also had to face their share of financial limitations and adversities as well.
The PitchBook report predicted that in 2023, the deal volumes may continue to plunge deeper as the economic winds are expected to blow in an unpropitious direction this year as well.
The report further clarified that the first half of 2023 may witness a decline in deal volumes as a result of staffing and leverage-related adversities. For a few platforms, the rising liquidity constraint can be another imposing issue of the slowdown.
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