Key Takeaways From the 2023 Healthcare Private Equity and Finance Conference

March 7, 2023

McGuireWoods recently held its 19th Annual Healthcare Private Equity and Finance Conference (HCPE Conference) at The Ritz-Carlton in Chicago. The HCPE Conference drew registration of more than 1,000 professionals from private equity funds, senior and mezzanine lenders, and investment banks, as well as C-level executives, consultants and principals in the healthcare industry. The premier, two-day conference held March 1-2, 2023, provided content-rich programming that explored the current economic and legislative environments, various approaches for navigating alignment strategies, and current trends impacting healthcare companies, lending institutions and private equity firms.

This year, former U.S. Attorney General Bill Barr and former U.S. Sen. Claire McCaskill, keynote speakers at the event, discussed their respective pathways from law to public service, as well as their views of American politics, foreign affairs and health policy. Panels of lending leaders, fund leaders, investment bankers and other industry leaders gave deep insights into the overall state of the regulatory, lending and investment environments. While interest rates and inflation continue to create anxiety in the lending markets, there are still many reasons for optimism in the healthcare private equity sector due, in part, to the continuing need for innovation in healthcare.

The HCPE Conference continues to deliver as one of the best networking conferences of its kind. The deep-dive, extensive discussions into various sectors (as well as the industry and deal-making generally) generated thought-provoking discussions across the board. Below are some key takeaways from those discussions and the HCPE Conference as a whole.

  1. Lenders noted that while 2022 was not a terrible year due to a strong first half, there has been a notable decline in transaction volume and an increased focus on deal quality since the Federal Reserve increased interest rates. The increase in interest rates fundamentally changed the math on transactions, leading to several different impacts. While still relatively high, valuations are “reverting to the mean” and the frothier valuations are cooling off, causing some sellers to step back from the deal market, or to at least reset their expectations. Lenders are looking much harder at borrower quality to reduce risk of default. Lender panelists also noted that portfolio management will create differentiation in the space (i.e., will lenders look for a “pound of flesh” or look to partner with a borrower where covenant compliance is in question).
  1. Investment bankers and private equity fund leadership noted that 2023 is shaping up to be “the year of the add-on transaction.” In part due to the trends noted by lenders, multiple sessions included comments that fewer platform deals would likely come to fruition — at least in the first half of 2023. For example, a panel of leading healthcare investment bankers noted that they were marketing more add-on transactions, even if platform players were stepping back. One panelist said this could make 2023 “the year of the add-on.” With significant private equity capital to deploy, funds supporting their existing platforms with strategic transactions to add regional density or additional markets may be a larger part of the transaction space in 2023.
  1. Given today’s landscape, key leaders in the private equity space addressed the need to be nimble. While discussing the need for dealmakers and operators to remember the human element behind deals, investors agreed that key areas of importance for 2023 include investing more in value-based businesses, lowering the cost of care (including through workforce innovation) and expanding technology to better meet staffing needs. While investors have always considered technological efficiencies, tech solutions such as artificial intelligence (AI) and automation/augmentation are key focus areas not only to drive down costs, but also to combat staff shortages and address the burnout providers across the various healthcare sectors have felt since COVID-19. Further, the shift to value-based care, lowering costs in ambulatory settings and figuring out additional tools physician practice management (PPM) platforms can provide to targets likely will shape the deal market.
  1. Although all recognize the need to implement cutting-edge technologies and ancillaries, investors look to “double down” on traditional ancillary service lines to drive value. As noted above, the introduction and practical implementation of advanced technologies and AI were heavily discussed during the HCPE Conference, but speakers on some breakout panels, including the gastroenterology (GI) panel, emphasized a new focus on traditional ancillary service lines to grow platforms. Despite attractive new ancillary service lines coming to market — such as infusion, specialty pharmacy and wellness — panelists hypothesized that many platforms, specifically in the GI space, will concentrate on growing traditional ancillary service lines (pathology, anesthesia, etc.) in 2023, compared to shifting investments into exotic, differentiating ancillaries to demonstrate growth potential to a buyer.
  1. ASC leaders expect to see collaboration and consolidation trending throughout 2023. Various leaders and investors in the ambulatory surgery center (ASC) space noted that the sector continues to see a lot of vertical integration among the various specialties. When discussing ASCs in the context of the larger healthcare ecosystem, many commenters noted that they expect to see more ASC partnerships and joint ventures with larger health systems, but that those deals need to be aligned and focused on value. Panelists all agreed that alignment strategies will be key for ASCs in 2023 — whether that means leveraging technology to lower workforce costs, better engage the patient and provide a better care experience, or aligning with payors as it relates to value-based care.
  1. Investors are still looking for platforms in “hot” subsectors, such as cardiology and behavioral health. While there may be fewer platform deals this year, attendees were confident that certain subsectors will continue to see strong interest among investors. Specifically, a standing-room-only crowd listened to various investors and consultants discuss their knowledge in the cardiology space, which has seen significant interest recently as it lends itself well to the PPM model (causing some commenters to note the valuations may already be too high). There was similar interest in the panel on behavioral health, another sector frequently referenced throughout the conference as garnering significant demand and attention. Presenters on the behavioral health panel noted that the continuing supply and demand imbalance for behavioral health, increased interest in the space from more generalized healthcare providers and the increased discussion of behavioral health coming to the forefront make this sector ripe for investment.
  1. The evolving regulatory climate continues to influence investor decisions. Investors and healthcare company executives continue to closely watch several evolving regulatory issues to better assess their impact on deal opportunities and preferred structure options. At this year’s HCPE Conference, key focal points were the Federal Trade Commission’s proposed rule and related state actions regarding noncompetition covenants, state actions to more closely regulate even smaller healthcare transactions (in some cases, introducing notification and waiting periods for physician practice deals), corporate practice of medicine enforcement and antitrust investigations, among others. While federal regulations have always impacted healthcare private equity and lending transactions, there is a growing view that state attention to healthcare transactions and business operations is becoming more impactful, and more investors are weaving state regulation into their growth strategies. 
  1. The past several years have brought renewed discussion about diversity, equity and inclusion in private equity and a new energy for making change. The conference continued and elevated this discussion through the Women in Private Equity & Finance (WPEF) networking breakfast with former U.S. Sen. Claire McCaskill and the Black Professionals in Private Equity & Finance (BPE) networking breakfast. The BPE Breakfast included a panel discussion titled “Investing in Us: Harnessing Diversity to Create Value” featuring David Brown, director, BDO USA, LLP; Dennis Butts, partner, Guidehouse; Regina Cross, vice president, Goldman Sachs; and Kenneth Saffold, managing partner, o15 Capital Partners. Private equity firms recognize that in the shifting landscape of new limited partner players, evolving target company leadership and focus, and a shifting role of diverse professionals generally in the U.S. economy, long-term success hinges on the recruitment, advancement and retention of diverse professionals and on access to capital for companies led by and serving diverse professionals and communities.

    For the WPEF and BPE initiatives, the best way to hear about upcoming regional events, podcast episodes and their spotlight series is to join the mailing list. WPEF features a Deal Us In podcast as well as Women in PE to Know (a spotlight series). WPEF will host its next breakfast at the Emerging Manager Conference (see discussion below). Similarly, BPE will launch its Accessing the Pipeline podcast later this month and will distribute related communications to those on the mailing list. The Dealmaker Spotlight highlights Black professionals in the private equity and finance space. BPE will host a handful of regional events this year in addition to its annual networking happy hour at the Independent Sponsor Conference in Dallas, Oct. 3-4, 2023.
  1. The current fundraising environment for emerging managers is increasingly competitive, particularly in the healthcare sector. Limited partners are seeking managers who have shown expertise and success in this niche area. McGuireWoods is playing a pivotal role in facilitating introductions through its deep relationships with investors (such as institutional investors and family offices), including through its Emerging Manager Program. The centerpiece of this program is the upcoming national Emerging Manager Conference, which will take place in Dallas on May 16-17, 2023. The conference will be two days of speed-networking, panels and other opportunities for emerging managers to connect with limited partners and showcase their investment strategies and expertise. For more information about the McGuireWoods emerging manager program, email [email protected]

Thanks to everyone who attended the HCPE Conference — McGuireWoods looks forward to continuing the dialogue.