Last week I attended McDermott Will & Emery’s Healthcare Private Equity (HPE) Miami with colleagues and old friends/clients. It was great seeing everyone in one place.

Outlined below are a few of the takeaways I found most compelling from panel sessions:

Diligence is more important – once again

Across panels it was very clear that in today’s market the diligence is heavier, and the diligence process is elongated – as compared to what it was during the speed dating period that peaked during 2021. Buyers are snapping back to the “good old days” - applying more diligence in early phases of deal processes and pushing back when and however they can on bankers and sellers. Stakes are too high and the mistakes too painful. Investors and investment committees want to have conviction because if they win, they are purchasing an asset at a very high price. This theme, combined with the pressure to deploy capital, will likely lead to competitive, but we believe more effective, processes throughout the year. Here at GRAPH, we hope this proves to be a genuine trend that sticks, as haste does make waste – and we have all witnessed what running too fast leads to.

Continuation funds are increasingly common and considered less of a problem

Without an enticing IPO market and valuation pressure growing and holding, many investors and presumably LPs have sufficient comfort with continuation funds to be able to continue compounding capital with an asset for longer. Obviously, sponsors don’t want to sell in an uncertain auction environment, and continuation vehicles allow them to hold onto their chips (and we think for both great assets, as well as those that need a lot more work, unfortunately). If this truly results in more flexibility and the best that private equity advantages can bring to the table, then it may prove to be a good thing. This all said, we also heard a lot of conversation around the pool about the need to drive more exits, and hopefully that will serve as a stimulant for more market activity.

Stick to subsectors you know

Many investors highlighted that they plan (and are advocating) to stick to areas they know and that they’ve studied closely – subsectors where they’ve spent a number of years looking at businesses, likely know the management teams of those businesses, and know how to find ways those businesses can scale to generate meaningful growth. Again, private equity bringing its advantages as a non-passive investor base to the table.

There’s expected to be increased momentum in deal flow Q2 and Q3

The debt markets are wide open and there is pressure to deploy capital across the board along with a long list of companies who are ready to exit. Interest rates are expected to drop in Q2. Some people are anxious to get a deal closed ahead of the presidential election in the U.S. in November. All of these factors point to expectations of an active deal flow in Q2 and Q3.

Bid-ask price convergence is one of the biggest keys to unlocking healthcare PE deal flow in 2024

The audience was surveyed for their opinion about the biggest keys to unlocking healthcare PE deal flow in 2024 and the vast majority cited bid-ask price convergence. Investors have been paying high prices for assets to add to their portfolio, and for the first time in 10 years we (GRAPH) are seeing greater convergence on a common theme (and we hear it from investment committees): the bar is high and “we are going to be more disciplined.” We find this to be another big positive – mitigating a structural impediment to make your returns on the timeline expected by LPs.

Hot Panel Themes

Value-Based Care Investments: There is a notable focus on investments geared toward value-based care – both direct assets and supporting assets. This strategic approach emphasizes the delivery of high-quality care while controlling costs, aligning incentives, and improving patient outcomes – a clear unabating (GRAPH’s added editorial) payor mandate.

Pharma Services and HealthTech: The intersection of pharmaceutical services and health technology continues to be a significant area of interest. Innovations in this realm are driving efficiencies, enhancing patient engagement, and reshaping traditional healthcare delivery models.

Provider Platforms: Providers are increasingly leveraging platforms to streamline operations, enhance collaboration, and improve patient care. These platforms serve as comprehensive solutions, integrating various aspects of healthcare delivery and management. This said, we engaged in discussions indicating that certain provider platforms might not yield the expected return on investment, potentially prompting scrutiny during an exit process and the possibility of a decrease in the number of exits.

Deal Financing through Strategic and Flexible Structures: Financing strategies are evolving to accommodate the diverse needs of healthcare deals. From strategic partnerships to flexible financing structures, stakeholders are highly active in bringing creative options to the table to support growth and innovation in the industry.