Private equity and venture capital investments in the healthcare services sector fell 59% year over year in 2023, reaching $7.26 billion, its lowest annual value in three years, according to S&P Global Market intelligence data.
The number of deals also dropped by roughly 33%, falling to 310 from 462 a year prior. Deal count for 2023 was the lowest since at least 2019.
The healthcare services sector encompasses providers of patient care services, lab testing and pharmacy management. It also includes companies offering business support to healthcare providers, such as clerical support, collection agencies, staffing, and outsourced sales and marketing services.
Higher interest rates and tight credit markets have slowed private equity deal activity in the overall healthcare sector. In healthcare services, factors such as workforce availability, the rising cost of services and regulatory scrutiny affected deals, said Dan Shoenholz, private equity leader at EY-Parthenon.
"[S]ervices transactions have accounted for up to 40% of platform deal activity in healthcare, so the impact has been significant on healthcare deal activity as a whole."
Costs for services have increased due to "a persistent undersupply of healthcare givers," Shoenholz said.
"Providers have not been able to fully pass on these costs to insurers, pressuring margins and making it more difficult for private equity investors to achieve their target returns."
In 2024, investment in healthcare services soared to $6.02 billion in the first quarter, driven by one outsized deal: New Mountain Capital LLC's $5.6 billion nonbinding proposal to acquire the remaining stake in healthcare technology-driven solutions provider R1 RCM Inc.
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Largest deals
The New Mountain deal was the largest private equity healthcare services transaction since January 2023, Market Intelligence data shows.
The second largest was Cinven Ltd.'s investment agreement to acquire laboratory and medical diagnostic services SYNLAB AG for roughly $2.97 billion.
It was followed by GED Iberian Private Equity SA SGEIC and IVIRMA Global SL's agreement to acquire fertility clinics operator EUVITRO SLU for $534.6 million from Fresenius SE & Co. KGaA.
Technology outpaces services
The value of private equity investment in the healthcare technology sector grew more than the healthcare services sector in 2023. During the year, healthcare technology companies secured $9.26 billion, compared with $7.26 billion invested in healthcare services companies, data from Market Intelligence shows.
The trend can be attributed to the faster growth and stronger valuations of healthcare IT investments, even in challenging budgetary conditions. However, healthcare services are increasingly integrating technology into workflows and becoming more attractive to tech investors, Shoenholz said.
Outlook for 2024
The deal environment for healthcare services is expected to improve due to expectations that interest rates will start to decline during the year, said Andrew Nicholson, managing director on Baird's global healthcare investment banking team.
"The backlog of transactions is also gradually ratcheting up pressure on investors to return capital [to limited partners] and on [private equity] funds to deploy capital, helping parties to bridge value gaps," Nicholson said.