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PE braces healthcare services deals as add-ons fall

Despite a strong year in deal count that surpassed pre-pandemic levels, PE investors in healthcare services face challenges ahead.

Private equity made the third-highest number of deals in the healthcare services space in 2023, but economic pressures led to a decline in add-on transactions.

Firms announced or closed an estimated 788 deals last year, a year-over-year decline that still surpassed pre-pandemic levels, according to PitchBook’s Q4 2023 Healthcare Services Report.

Activity was propped up by transactions for medspas, followed by cardiovascular groups.

Typical deal size and structure have changed fundamentally under the pressure of high interest rates and a labor shortage spurred by the mass workforce exodus in the wake of the COVID-19 pandemic.

Even as workers began to reenter the field in the first part of 2023, financing remained a key issue for PE dealmakers. In fact, healthcare services companies accounted for over 20% of leveraged loan defaults, according to the report, despite comprising only 12.5% of borrowers.

In short, PE is facing a high cost of capital.

Add-on deal activity, which typically comprises the majority of PE-backed healthcare services deals, subsequently fell 37.7% year-over-year.

In other subsectors, the drop was even more dramatic. In the musculoskeletal, veterinary and vision categories, for example, add-on deal activity declined over 50% year-over-year.

Meanwhile, growth deals, in which PE firms make minority equity investments in target companies, hit an all-time high in healthcare services this year—a product of efforts to restructure debt.

Featured image by Peter Dazeley/Getty Images

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