U.S. Federal Reserve Chair Jerome Powell has indicated that interest rates may rise faster than expected, which could have a significant impact on hospice M&A trends.
Rate hikes are the Fed’s primary weapon against inflation, which climbed at a record pace last year. The U.S. Department of Commerce in January clocked the run of inflation at 5.4%, which is more than double the Federal Reserve’s goal of 2%.
Powell made his remarks in a hearing before the U.S. Senate Committee on Banking, Housing and Urban Affairs.
“The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” he said during the hearing. “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”
The trend has widespread implications for the hospice mergers and acquisitions market, particularly when it comes to private equity investments.
PE firms tend to finance their acquisitions by taking on debt, meaning that the flow of dollars may slow as borrowing gets more expensive.
The impact was already apparent in 2022. No large private equity platform deals took place last year, compared to eight in 2021, according to the M&A advisory firm The Braff Group.
In the United States and Canada, home-based care and hospice deal volume dropped to 60 transactions among PE firms in 2022, down from 100 in 2021, according to a PitchBook report. The 2022 numbers align with those for 2020, when COVID substantially delayed many acquisitions.
Uncertainty around inflation and the cost of debt has led some stakeholders to expect that smaller deals will be more prevalent during 2023 than big platforms, according to Mark Kulik, Braff Group’s senior managing director for home health, hospice, pediatric and private duty.
“There is not going to be as much of a demand for follow-on or bolt-on acquisitions, because no platforms were made,” Kulik told Hospice News. “Theoretically, if no one buys any more platforms, then ultimately the demand for hospice will fall off by private equity, because there’s no platform to be used to add on more hospices down the road.”
The Fed has increased rates by 4.5% since March 2022, and some expect another 0.5% rise within the coming weeks as new economic data comes out, including employment numbers.
If implemented as expected, the potential hike would likely coincide with the central bank’s next meeting on March 21-22.
“Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time,” Powell told the Senate committee. “Our overarching focus is using our tools to bring inflation back down to our 2% goal and to keep longer-term inflation expectations well anchored. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run.”