It’s the third public healthcare company to say it’s taking a buyout and going private this summer. Medical scribe company Augmedix announced its acquisition by $6 billion startup Commure in July, and digital health-tracking platform Sharecare said in June PE firm Altaris would buy it.
Experts say the recent string of take-privates is good news for startups. M&A activity has been ticking up since the beginning of the year, but hasn’t rebounded from 2023 lows as quickly as dealmakers hoped.
Now, healthcare startups dreaming of an IPO might be encouraged to stay private longer with renewed chances for big returns through M&A.
“Every time we see one of these bigger deals happen, it’s a really powerful validation, because firms know they’re going to be in it for a little bit longer term,” said David Marks, a private-equity-focused partner at Holland & Knight. “They’re only willing to do it if they really have a high degree of confidence in it.”
Private equity’s return to the scene
The debt market is finally correcting for the types of deals healthcare companies have been waiting for.
Interest rates are coming down for the large amounts of debt necessary for firms to conduct leveraged buyouts, or LBOs, said Thad Davis, a senior managing director at Leerink Partners.
“Cost of capital in the LBO market is declining right now, and equity values have ticked up but haven’t gotten super hot. There’s an opportunity to take these companies private,” Davis said.
Athelas
The Sharecare and Augmedix deals were much smaller than R1 RCM’s, at $518 million and $139 million, respectively. And Commure, Augmedix’s buyer, isn’t a private equity firm, although it’s been unusually acquisitive for a healthcare startup, making six deals since its launch out of stealth in 2020.
Still, debt rates are expected to keep falling, which should open up more windows for healthcare companies and private equity firms alike to make deals of all sizes.
PitchBook Data’s lead healthcare analyst Rebecca Springer thinks we’ll likely see more large deals like R1 RCM’s buyout this year.
“Folks have been sitting on the sidelines with dry powder, and are feeling more confident about the interest rate environment going forward,” she said.
Where we’ll see more deals
Private equity firms looking for more deals right now are interested in many of the same sectors that VCs are right now — especially AI.
In healthcare, startups have emerged with AI-driven profit structures that are more up private equity’s alley, with less cash burn and a theoretically quicker path to breakeven.
Revenue cycle management has long been a hot area for private equity firms. Medical scribe companies like Augmedix are also picking up steam as dozens of clinical documentation players compete for health system contracts.
Abridge
Springer said she’d put pharma services companies at the top of the list of potential acquisition targets right now for private equity, followed by healthtech players, and then behavioral health and home-based care providers.
Springer said she thinks private equity firms are “very unlikely to buy a care delivery company in this environment.”
And while bigger deals may be coming back, she said she also anticipates more discounted acquisitions of venture-backed digital health companies that notched too-high valuations during healthcare’s funding boom.
“I’m seeing a lot of companies that took a couple of rounds of venture funding and then couldn’t quite get to the next revenue milestone, sell to a private equity-backed platform or sell directly to private equity if they’re willing to meet in the middle on valuation,” she said. “I think you’ll see more of those VC-to-PE deals as the venture landscape shakes out and as PE looks more actively at areas like digital health.”
Skirting regulatory scrutiny
A stricter regulatory environment has prompted some dealmakers to sit on the sidelines rather than risk getting a deal blocked.
Private equity’s deepening presence in healthcare has been a central focus of that scrutiny, after nearly two decades of buying up hospitals and raising prices. Two congressional bills introduced this year looked to block private equity rollups in healthcare; a fresh wave of criticism followed PE-owned Steward Health’s bankruptcy in May and its hospital closures announced last month.
But Holland & Knight’s Marks said private equity leaders he’s spoken with recently aren’t necessarily deterred by regulatory scrutiny as they look for their next buys.
He said the acquisition of R1 RCM, which sells a tech platform rather than healthcare services, simply reflects the growing traction of AI-powered tech for healthcare administration rather than an effort by private equity firms to seek out FTC-friendly deals.
“When I’ve asked them point blank, they’re seeing the regulatory shifts and they know they need to account for it, but it’s not really fundamentally changing their investment pool,” Marks said. “I think it’s just a true, organic interest in the spaces.”
