This article is a part of your HHCN+ Membership
Private equity investment remains down in health care services. But the firms active in home-based care will likely have a major impact on the industry in the near future.
The decisions those firms make – while entering or exiting – will have a lasting impact.
In the second quarter, there were 164 PE deals across health care services in the U.S., which is the lowest mark since the second quarter of 2020, according to PitchBook’s health care services report, released this week.
“It was a bigger drop than expected in terms of deal activity,” Rebecca Springer, lead health care analyst at PitchBook, told me. “I thought that we had probably hit close to the bottom in Q1, but then we dropped over 20%.”
Private equity dealmaking has been affected by higher inflation and the subsequent higher interest rates. While inflation is easing, interest rates have not yet followed.
Because of that, the home care, home health and hospice M&A environment has been affected in multiple ways. Some of the dominoes have already fallen, while others could fall any time now.
Firstly, different types of transactions are getting done. Private equity firms are opting to go ahead with “platform deals” to get into home-based care.
At the same time, there are multiple, massive PE investments that have nearly run their course. When they officially do – and PE firms exit their current positions – the home health market could look a lot different.
In this week’s members-only, exclusive HHCN+ Update, I break down the macro PE trends – and explain how they could shake up the broader home-based care market for years to come.
PE dominoes waiting to fall
There are multiple large PE investments that have nearly run their course.
– Elara Caring is backed by Blue Wolf Capital Partners and Kelso & Company, the latter of which joined in 2018.
– Advent International acquired AccentCare in May of 2019.
– Looking further down the road, The Vistria Group and Centerbridge Partners backed the large home- and community-based services provider Help at Home in October of 2020.
– Wellspring Capital Management acquired Interim HealthCare’s parent company – Caring Brands International – in October of 2021.
All of these companies are top home-based care providers in the country.
It’s likely Blue Wolf Capital Partners and Kelso & Company are looking to exit their investment in Elara Caring sooner rather than later.
“The bank loan market is slowly improving, but it’s still a shadow of what it previously was,” Springer said. “There needs to be better access to finance some of those bigger deals. Also, the health of those older platforms is going to be pretty varied. Some are in a good position to exit; some are really not, given the current interest rate environment.”
While they have to eventually exit their investments, those PE firms also have to do so at an advantageous time, Springer said.
“I would expect that those that are not in such a good position are going to be holding on for longer,” she said. “Then, once platforms start trading, sponsors are going to be looking at what else is in the market and trying to time exits. They’re already working with multiples that are a couple turns lower than what they would have gotten in previous years.”
If they hold on too long, though, they run the risk of hurting both their internal rate of return and their fundraising on future deals.
An extension is usually available at the end of an investment, but lenders generally don’t like to see that extension realized.
“In the past couple of years, continuation funds have primarily been used for really good assets, strong assets that they want to hold onto and continue growing,” Springer said. “But in times past, … they were used to hold onto assets that have really underperformed. Generally, lenders don’t like that, and aren’t going to be supportive. But technically, it’s something you can do.”
In the end, this puts PE firms in a precarious position. AccentCare and Elara Caring are two large, solid home-based care companies.
The largest independent home health companies have been dropping like flies over the last couple of years. Humana Inc. (NYSE: HUM) acquired Kindred at Home. UnitedHealth Group’s (NYSE: UNH) Optum acquired LHC Group and is now in the process of acquiring Amedisys Inc. (Nasdaq: AMED).
Enhabit Inc. (NYSE: EHAB) announced last week that it was exploring the launch of a strategic alternatives process, which could ultimately end up in a sale.
If Enhabit is on the market, there could be one fewer buyer around to bid on the likes of Elara Caring or AccentCare. If it’s not another private equity group coming into the mix to buy those assets, it could be a managed care company.
Managed care companies – like Humana and UnitedHealth Group – have become a new group of buyers for home health assets in the last half decade.
“I think, for most private equity firms, they’re an exit opportunity,” Springer said. “Vertical payer-provider integration is not just Optum, it’s everyone. It’s just the direction that the industry is going. So, private equity has to focus on building assets that are attractive to those buyers.”
More managed care involvement in home health care specifically could cause trouble. If payers have significant in-house capabilities, they may be less likely to bend the knee and increase rates for small- to mid-sized providers.
At the same time, some home health insiders have suggested that managed care companies becoming aligned with industry advocacy efforts could be of benefit in the future.
Smaller ‘platform deals’
Despite a dip in activity, PE firms are continuing to invest in home-based care, albeit in a slightly different way.
A couple have already launched their own “platform companies,” which tend to be cheaper and less risky investments.
“For as long as platform trades are quiet, this is one of the primary ways that firms are going to be deploying capital in this market,” Springer said.
PE firms continuing to take advantage of this opportunity would prove that it’s the macro headwinds – and not necessarily the micro ones within home health or home care – that are affecting deal flow.
The first and second quarters have also been relatively quiet in the home care, home health and hospice markets from an M&A perspective.
“There are advantages of small platform creation,” Springer said. “It can be a proprietary deal sourcing process, so you can get a better entry multiple. The group is not already leveraged, so you’re not dealing with that issue in the high rate environment. You can start out with low leverage and position it to be able to grow pretty significantly. And, it’s just less capital to deploy in a slightly riskier environment.”
As for Avid Health at Home, it’s starting local in Chicago. It launched in tandem with Havencrest’s acquisition of For Papa’s Sake Home Care, but plans to scale quickly – in the Midwest, in the Mid-Atlantic and in the Mountain West geographies.
Avid Health at Home CEO Jen Lentz told me that Havencrest did look at more “sizable” deals at first, but ultimately felt like going that route would be more complicated.
“What we found was that it would be harder to go in and really change [things], when it comes to being tech-enabled, when it comes to best practices and policies,” she said. “We weren’t really too excited about some of the things we had looked at. So we opted to pivot and go for the platform, looking for smaller, quality agencies – that really have a unique perspective on the communities that they serve – to bring them up into the larger entity.”