The healthcare senior lending market remains very active, according to experts who spoke on a panel at the 16th Annual Healthcare and Life Sciences Private Equity and Finance Conference in Chicago on February 20 and 21. The experts provided a nuanced look at the market, pointing to exciting opportunities, while also making note of challenges.
Experts included Gregory Browne, Managing Director of Ally Corporate Finance, Jae Lee, Director of Bank of America, Adam Willis, Managing Director, Head of Healthcare of Madison Capital Funding, and Michael Young, Managing Director of CIT Group. Raj Natarajan, a McGuireWoods LLP partner moderated the panel.
Here are five key points from the panel discussion.
1. There continues to be an abundance of capital in the healthcare market in early 2019. The increase in capital deployment and growing competition among debt providers lead to a downward shift in deal size in 2018. Although deal terms were as aggressive as the market has seen, the number of deals remained high with a greater focus on hold size. More institutions are building stronger, deeper relationships with fewer sponsors, with some turning to non-sponsor and corporate opportunities. Due to the abundance of capital in the healthcare space, a bull market is predicted for the next few years.
2. Investors have continued to focus on highly fragmented areas within the healthcare market that provide opportunities for roll-ups. Physician practice management companies remain attractive and have continued to experience consistent growth in 2018, accounting for roughly one-quarter of the healthcare private equity deals according to the panelists. Investments in healthcare IT, veterinary, behavioral health, home health, hospice, autism, and health and life sciences companies have increased and are expected to grow in 2019. A panelist also noted that traditional, brick-and-mortar healthcare spaces (including senior housing and long-term care) can continue to provide attractive opportunities, due to demographic trends.
3. Capital is neither permanent nor monolithic. Each transaction is unique and it is important not only to consider the amount of capital, but the type of capital. Stability, certainty and flexibility are important qualities to consider when choosing a strategic partner.
4. Pressure on pricing and capital has driven the market. EBITDA is now seen as a proxy for purchase price and what the business can theoretically generate, rather than merely a proxy for cash flow. However, this pricing structure does not always materialize. There was some concern about trending increase in defaults given increased pressure on leverage, broad definitions of EBITDA and more diverse capital structures.
5. Due to the competitive nature of the healthcare market, diversity within portfolios are decreasing and greater hold sizes are becoming more attractive to investors. Lenders have had to become more aggressive in their underwriting, and sponsors continue to want the simplest financing solution that often results in single-lender or unitranche transactions.