Resilience Amid Decline
The health services sector demonstrated resilience in dealmaking through November 15, 2024, despite a 9% decline in deal volumes compared to 2023. While volumes remain below the peak levels of 2022, they are still nearly 70% higher than pre-COVID trends. Regulatory scrutiny and valuation misalignment between buyers and sellers remain key hurdles, yet deals continue to materialize. Factors such as ample corporate and private equity capital, anticipated interest rate cuts, and the need to realize returns on lengthening hold periods are expected to drive deal activity throughout 2025.
Valuations and Market Dynamics
Enterprise value to EBITDA multiples for public companies have remained steady, edging up from 13.5x in late 2023 to 14.0x by mid-November 2024. While megadeals (those exceeding $5 billion) remain subdued due to regulatory pressures, smaller transactions have sustained market activity. Only one megadeal was closed in the past year, reflecting continued caution surrounding large-scale consolidations.
The easing uncertainty from the recent presidential election and an anticipated pro-business stance from the incoming administration have further bolstered optimism for dealmaking in 2025.
Strategic Adjustments in an Evolving Market
Private equity sponsors, holding assets acquired during higher valuation periods pre-2022, are adopting innovative strategies to demonstrate returns amidst economic constraints. Sponsors increasingly rely on private credit-like investments, including junior debt and preferred equity structures, offering capital flexibility while postponing divestitures that could underperform against targeted returns.
Regulatory uncertainties have also shifted focus away from physician practice management models toward tech-enabled solutions and ecosystem services, which are more insulated from direct policy impacts. Larger health systems are prioritizing ancillary services in existing markets over broader geographic expansions, emphasizing core operations and restoring pre-COVID operating margins.
Payers, on the other hand, continue to advance the “payvider” model, blending payer and provider capabilities, and are evaluating geographic expansions aligned with strategic objectives.
Conclusion
Despite the challenges, the health services sector is well-positioned to sustain robust deal activity into 2025. Strategic adaptations, a steady flow of capital, and improving economic conditions are likely to provide the momentum needed to navigate the complexities of this evolving market.
