Armchair Finance

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Valuations Coming Down?

The era of easy money ended like the snap of a bear trap last summer and into fall when the magnitude of the credit crisis became clear. That means that across industries, the record ascent in business valuation that accompanied the easy borrowing at generous terms has ended as well, and healthcare is no exception. So it was a good time to attend a recent meeting of the Nashville Healthcare Council, where a group of panelists from banks, venture capital firms, and private equity firms debated strategic issues related to healthcare acquisitions in the coming years.

Valuations, as we have seen in the housing market, don't come down as quickly as the spigot of easy money was turned off. Perhaps that's why, with the possible exception of some nonprofit hospital chains, we've seen a dearth of deals for healthcare in general, and hospitals in particular, of late. Valuations are too high, while financing is too expensive.

But valuations will come down, too, for a variety of reasons:

  • Just as in the real estate sector, the healthcare acquisition market in recent years has been driven by excess liquidity.
  • That excess liquidity has since largely dried up.
  • In the past three to four years, many new players who didn't have any particular expertise in healthcare gravitated toward the healthcare market, another factor in escalating valuations to, in many cases, double digit multiples of EBITDA (or EBIDA, in the case of acquisitions of nonprofits).

Meanwhile, these panelists expect a return to the use of private equity to fund deals. Why? Several reasons. Chief among them:

  1. With generalist firms that don't have a healthcare track record now exiting the market, the sector becomes more attractive to firms with healthcare expertise.
  2. Historically, healthcare has been under represented in private equity. Very few private equity funds have an exposure to healthcare. As they get bigger there will be more pressure to get involved.
  3. Private equity firms that have healthcare expertise have raised record amounts of money and are looking for a good place to deploy it. As valuations drop, they'll get more involved.

So what does it all mean? Well, if you're a potential buyer, it's getting to the point where valuations are becoming compelling. And after years of keeping their powder dry while the seller's market exploded, it's a buyer's market again, and there's plenty of distressed debt to be had. When will the buying binge begin? With the rest of the economy drifting toward recession, if we're not already in one, what sector of the economy is safer than healthcare? I can't think of one.

Philip Betbeze

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