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Healthcare Services - Consistent Revenue Growth

  • Oppenheimer & Co. Inc.
  • August 3, 2022

Big tech likely to dramatically impact healthcare going forward.

While 2021 was a record year for healthcare private equity (PE) deal volume and value, the inflationary risks that emerged in 2022 as well as lingering COVID challenges have spawned storm clouds on the horizon. Although healthcare services deal volume in 2022 may appear muted compared to 2021, actual deal volume increased 5% for the 12 months ending May 31 (compared to the prior period) across all healthcare services sectors, according to PWC. Investors appreciate the healthcare industry's long-term macro trends and recession-resistant profile. New sources of capital have increasingly entered the $4 trillion sector, intensifying competition for platforms and driving up valuations.

PE returns in healthcare services have historically achieved a material premium compared to IRRs across all other industries, and platform and add-on deal activity remains strong across most health services sectors. A substantial driver of value creation in healthcare is the sector's consistent revenue growth above inflation. The median compound annual growth rate for healthcare was 11.1% over the past decade, compared with 7.6% for all other industries (according to Bain).

Long-Term Macro Trends Driving Deal-Making are Very Much Intact

Noteworthy trends include continued consolidation of fragmented provider sectors by specialty MSOs, expansion of disruptive home-based care models, and cross-sector investment by large payors. While COVID impacted specific health services segments, such as those with a high portion of elective procedures, demand for primary and urgent care remained consistent while telehealth increased dramatically. COVID also stimulated increased demand for services such as mental health counseling. And then there’s the headline news about deals like Amazon acquiring One Medical and Apple’s new health tech strategy. Big tech is going to dramatically impact healthcare and so it’s no surprise that the past two years saw a whole universe of tech-enabled services models receive record funding support from venture capital firms seeking to disrupt legacy healthcare models.

However, The Storm Clouds are Real

A significant challenge across all health services sectors is the tight labor market, with long-term shortages in high-level clinical staff still acute. Staffing shortages and rising labor costs represent a critical operational challenge, especially for provider-centric health services businesses.

Significant concerns over a recession and its impact on various health services sectors have caused lenders to the PE community to tighten their underwriting and loan terms. On a micro level, lenders continue to monitor the regulatory and reimbursement environment related to specific subsectors most at risk for rate cuts by CMS and Medicaid.

Despite Decent Deal Volume, Caution Abounds

Though aggregate deal volume may have increased nominally in 2022, there is a tangible caution by institutional investors as they grapple with the pending storm front. One PE partner I spoke with recently scheduled a month-long summer vacation to Europe with a stated intention "only to pick up his cell phone every few days."


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This notice may contain statistical data cited from third-party sources believed to be reliable, but Oppenheimer & Co. Inc. does not represent that any such third-party statistical information is accurate or complete, and it should not be relied upon as such. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice.

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