THL’s Shahab Vagefi: ‘We see deal activity picking up in H2 going into 2024’

'You need high-quality A-plus assets with good growth, strong customer retention, a differentiated offering and profitability with good free cashflow conversion.'

In PE Hub and PE Hub Europe’s ongoing series of interviews with private equity thought leaders about the state of dealmaking, PE Hub spoke with Shahab Vagefi, MD in the healthcare division at Thomas H Lee Partners.

Boston-based private equity firm THL invests in mid-market growth companies in financial technology and services, healthcare, and technology and business solutions. The firm’s portfolio company Intelligent Medical Objects acquired Melax Tech earlier this year.

Shahab Vagefi, THL

What are you expecting in terms of dealflow in H2?

We expect things to pick up in the second half of 2023. The first half of 2023 and second half of 2022 were certainly slower than 2020 and 2021 and the first half of 2022. From a macroeconomic perspective, rate hikes are mitigating the US, US inflation has cooled, the credit and IPO markets are reopening. We see deal activity picking up in H2 going into 2024.

What are the key challenges for dealmakers?

There may still be a bit of recession risk heading into the second half as well as going into 2024. There are indications that things are opening up, but if you look at some of the geopolitical and macro factors, for instance, the Chinese economy, the prolonged war in Ukraine, the US starting to hear about potential concerns again in the banking sector. That is still a visible risk that folks will have to deal with going into 2024. I wouldn’t say it’s a risk-free environment today.

The other challenge is deploying capital in high quality assets. What we’ve seen over the past year was almost the market turning into a bit of a barbell, with B and C quality assets either pulling processes or just not coming to market and the A-plus assets still commanding premium valuations. There is a lot of capital still on the sidelines that is looking to be deployed and chasing those high-quality assets. We saw a bifurcated market develop over the past 12 months. That creates challenges to deploy capital as things remain competitive.

What are the opportunities for investing in healthcare?

HCIT (healthcare information technology) remains an important focus area and pharma services. From an HCIT perspective, we see a long-term, durable trend towards the enablement of better care at a lower cost and with a better experience for patients and the providers. A lot of that is going to be driven by digital health and health tech solutions.

What about exit opportunities?

The high tide kind of went out in the second half of 2022. Looking ahead to the end of 2023 and beginning of 2024, you need high-quality A-plus assets with good growth, strong customer retention, a differentiated offering and profitability with good free cashflow conversion. You’re still going to see opportunities like that come to market and see a lot of interest.

What about Europe?

US is by far the largest market for private equity. Specifically, with HCIT, we see most of the opportunities within the US, but we do see some opportunities in the EU.

What about take-privates and corporate carveouts?

We have spent a good amount of time on both given where public markets have trended over the past several months, though they’ve recovered more recently. There was certainly an impact to a lot of public companies and valuations over the past 12 plus months, and there are potential interesting take-private opportunities there. We’ve had discussions with several public companies, as well as [about] strategic carveouts of non-core assets.

What about valuations?

The quality premium assets have continued to sustain high valuations, like 2022 and 2021. You’ve seen a bit more of valuation reset in the public markets. From a private market perspective, there’s probably been more pulled processes or processes put on hold, as opposed to sponsors forcing an exit. They would prefer to just hold and see if valuations recover going into 2024.

Editor’s note: For more perspectives on dealflow for the remainder of 2023, see our interviews with EQT’s Eric Liu, Blackstone’s Martin BrandSperry Mitchell’s Beatrice Mitchell; Churchill’s Anne Philpott.