Consistent with Dan’s boomlet theory, recent market volatility probably won’t create a wave of new healthcare activity, but it should change the dynamics a bit. Healthcare has generated a steady stream of activity for several years, and the drivers in the healthcare business continue. And, with the amount of equity placed in the sector by venture and growth private equity investors during the past five years, there will continue to be a stream of maturing investments that will need to be monetized.
While the dollars available for private equity to continue to pump into the sector are substantial, the change in the leverage picture should temper pricing. As a result, without the ability to use as much leverage, PE firms won’t be able to pay as much and maintain the same returns. Returns already appear to have moved pretty low given some of the double-digit multiples paid in recent deals. Another casualty near-term may be the leverage-driven recaps that PE firms have been using to create dividends, maximize returns and extend exits.
This should be good news for strategic buyers in the healthcare sector, many of which are well capitalized with cash on their balance sheets. With the added benefit in many cases of the ability to realize savings and synergies, the advantage seems to have swung back to the strategic buyer. Hot auctions with prices being pushed higher by private equity firms may have temporarily disappeared. Another interesting implication here for sellers is that the opportunity for a private equity firm to be able to auction a portfolio company to other private equity firms may have diminished.
A change in the auction market could also actually be good news for SPACs. There is still substantial capital in those entities looking for deals (over $3 billion registered or raised in SPACs to date in 2007, some specifically targeted at healthcare), and the auction format has typically put SPACs at a disadvantage given the timeframe and mechanics of completing a SPAC acquisition. They may now have the opportunity to negotiate transactions with companies that previously disappeared into private equity-driven auctions.
Andy Cowherd is a Managing Director and head of the Healthcare Group at Peter J. Solomon & Co., a New York-based investment bank. Prior to joining PJSC in 2005, he spent eight years as a general partner of Atlantic Medical Capital, a private equity fund focused on healthcare investments.