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Shortly after COVID-19 entered our collective lexicon, investments began pouring into the health care industry.
The warts on the U.S. health care system that COVID-19 exposed were enough for lenders, backers and buyers to continue to throw money at the companies – or even ideas – that could cover up or eradicate those warts.
Home-based care’s sellers and startups were beneficiaries of this trend.
But now, in early 2023, things have changed.
“While we’ve turned the calendar year over to 2023, I think that all of the concerns that investors had during 2022 are still very top of mind,” Elizabeth Vosnos, managing director of health care debt capital markets at Fifth Third Bank, said last week at the McGuire Woods Healthcare Private Equity and Finance Conference.
Whether it be home health care, personal home care or tech enablement for either, investors are taking a much longer look at targets than they may have in 2020 or 2021.
All the while, sellers are still hungry for the valuations their peers received in the years when macro, economic headwinds were less prevalent.
“Before, we would sort of kick the tires and maybe circle the car a few times,” Vosnos continued. “Now, we’re dismantling it and taking a toothbrush to it. I do think that there’s very much a renewed focus on credit quality, as well as … the risk-reward proposition.”
Likewise, in 2023 and beyond, home-based care companies will continue to garner interest from investors.
The difference will be what those investors want to know, want to see and want to pay prior to any cash handoff. And that difference will likely be stark.
That change in thinking, in the words of health care investment experts, is the topic of this week’s exclusive, members-only HHCN+ Update.
What they’ll pay
Even at the beginning of 2022, home health and hospice sellers were among those to notice that the days of commanding mid- to high-teen multiples of EBITDA were waning.
Even the larger home health companies, always a surefire part of the buyer field, began to take more disciplined approaches.
“I don’t want to say that acquisitions are off the table,” Enhabit Inc. (NYSE: EHAB) CFO Crissy Carlisle said on the company’s fourth-quarter earnings call. “I just want to say that we’re going to be very disciplined.”
Meanwhile, home-based care startups have been deploying raised capital carefully over the last year, knowing larger funding rounds may be hard to come by in the near term.
It’s not just about unlocking capital, either.
After the aforementioned rush invest into health care – and home-based care – came in 2020 and 2021, investors have turned over enough stones to realize they may not like what’s underneath them.
“I still think there are great assets that are commanding a premium value,” Adam Willis, the co-head of health care sponsor coverage at Apogem Capital, also said at the McGuire Woods event. “But what was 17 times EBITDA is now 15 times, or 14 times. What was 14 times is now 11 times.”
What’s underneath those stones are aspects of the business that home-based care leaders have been well aware of for years.
The first is staffing issues, and the detrimental effect it has on growth. The second is all sorts of things tied to the fact that many mature businesses in home health and home care are still run as mom-and-pop shops, to a certain extent.
What they need to know
Also at the McGuire Woods conference was a home health- and hospice-specific panel. A varying range of experts participated on the panel, but the one most familiar with the industry was Dexter Braff, the president and founder of the M&A firm The Braff Group.
At certain times, he had to explain things to the audience, which was filled of intrigued – but perhaps not well seasoned – members.
“You might be surprised, you might not be surprised, that the overwhelming majority of providers out there on a cash basis of accounting, they’re operating on QuickBooks,” Braff said.
At this point, the audience let out a few audible gasps and snickers.
“And I’m talking about providers at $75 million in revenue that are on QuickBooks,” Braff continued. “They’re entrepreneurs.”
Providers have oftentimes not done the due diligence required to get to a sale, or at least to a sale at the price they desire. Archaic processes are causing deals to fall through, or at least causing deals to plummet in value.
Those processes include compliance measures, billing systems, accounting efforts and other operational tactics of home health providers.
“The primary reasons I see deals collapse is from the legal side,” Andreas Apostolatos, managing director of healthcare services investment banking at Bank of America, said during the event. “It’s going to die in the chart audit. Or it’s going to die in the practices of compliance programs, whether they actually have a culture of compliance, or whether they’re doing the shady stuff under the table. You just ultimately end up finding it. They haven’t monitored it.”
Sometimes that “shady stuff” is also unintentional, Braff explained. These providers – while conducting good, money-making businesses – don’t have the bandwidth or wherewithal to keep track of it all.
In this economic environment, however, that is contributing to the decrease in M&A over the last two years in home-based care.
Where there’s opportunity
Where some investors see disaster, others see opportunity.
Given the future value proposition of home-based care, some health care investment experts are bullish on the idea of professionalizing the industry.
“There’s a lot of opportunity for the professionalization, if you will, of even large providers,” Braff said.
That’s part of the reason why investment in care enablement technology has ticked up in recent years.
Home health providers are further considering payer diversification, data collection and technological solutions to their problems. All of those take initiatives take time and money.
“We’re bullish long term,” Donnacha O’Sullivan, principal at TT Capital Partners, said at the event. “[It’s] lower-cost care and patients prefer this setting. I think we’re looking for opportunities, where the market views it differently. When folks were a little less bullish, we were getting more bullish.”
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