Rising interest rates and unlikely to deter investors or strategic buyers from acquiring hospice companies.
The Federal Reserve raised interest rates by 0.75% earlier this month. The rates now range from 3.75% to 4%. The Fed will likely institute further rate hikes to combat record-high inflation.
Higher interest rates will push up borrowing costs, making hospices more expensive to purchase in the long-run. But this won’t curb investors’ appetites for hospice assets, according to Jake Vesely, senior associate at Provident Healthcare Partners.
“Strategic buyers in the post-acute space will continue to pursue expansion in the hospice market via M&A, so long that it remains accretive, as it’s one of the fastest ways to increase market share in existing locations or to expand into new markets,” Vesely told Hospice News in an email. “Given the attractive demographics of the hospice space, there continues to be an influx of new private equity firms looking to get into the space in addition to the existing firms that have been searching for an asset over the past few years.”
Despite a slowdown this year, deal volume in hospice M&A remains strong and continues to outpace other health care sectors. The prior two years saw hospice deal record highs in terms of volume and valuations, propelled by favorable demographics, rising demand for care in the home, and the promise of health care cost savings.
Hospice and other home-based care assets continue to draw a widening range of buyer types, according to a recent Provident report. Health care organizations in adjacent verticals to both home health and hospice “remain bullish” on expanding across these sectors, the report indicated.
During Q3, hospice M&A remained slow compared to 2021, according to a report from M&A advisory firm Mertz & Taggart. Overall, 11 hospice transactions were completed in the third quarter, down from 24 deals that closed during the same period last year, according to the report.
Though interest rates may be causing some “downward pressure” on valuations in the hospice space, they aren’t likely to cause “meaningful challenges” to M&A activity, Vesely stated.
“Interest levels and valuations remain elevated, given the vast number of private equity firms and strategic consolidators competing for assets in the space, despite the anticipated interest rate hikes,” he said.
The latest increase marks the sixth consecutive raise made by the Federal Reserve this year, and pushes rates to a “new highs” that haven’t been seen since 2008, according to a report from Trading Economics.
Interest hikes may have a broader impact on private equity investors expanding in the hospice space, according to Cory Mertz, managing partner of Mertz & Taggart. Private equity investors may see less potential for return on their hospice investments as borrowing gets more expensive, Mertz said.
This has the potential to change the hospice investor landscape, he added.
“We are seeing some of these financial investors pivoting away from the traditional private equity model altogether as other investment opportunities become more attractive in a rising-interest environment,” Mertz told Hospice News in an email.
While higher interest rates may bring some pain points for households and businesses, the hikes are a move to battle inflation pressures causing economic issues nationwide, according to Federal Reserve Chair Jerome Powell.
“These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” Powell said during an economic policy symposium.
Interest rises may not abate any time soon. Rates are expected to peak at 4.5% to 4.75% by early 2023, projected Chicago Federal Reserve President Charles Evans at the National Association for Business Economics Annual Meeting in Chicago.
“We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored,” Powell said. “We will keep at it until we are confident the job is done.”
Impacts of rising interest rates may billow more substantial plumes in larger hospice transactions than in smaller deals, according to Mertz.
Deals that fall somewhere in the middle may need to stretch in valuation to fill the gaps, he said.
“It will certainly have some impact, but more for the larger deals, say $100 million or more. The impact goes down as you move down market,” Mertz told Hospice News in an email. “Smaller agencies are still very attractive, as they still have the mandate to grow by acquisition. And as rates rise, we will be more impacted in the lower middle market. We will start to see valuation gaps arise as values soften over time.”