How PE Firms Are Adjusting Hospice Exit Strategies in a Shifting Market

Private equity firms typically turn around and sell an asset within three to five years post-acquisition. However, some may slow that cycle down in today’s economic environment.

The presence of private equity firms in the hospice arena has expanded exponentially during the past several years. But this year, deal volume slowed across the board. While the slowdown applies to all buyers, the decline in private equity transactions is particularly noteworthy because they were among the most aggressive acquirers in the space between 2019 and 2022.

Exit volumes dropped precipitously in late 2022 and throughout 2023, according to Mark Kulik, senior managing director for the M&A advisory firm The Braff Group.

“When PE buys at a high valuation level — and now the marketplace has cooled down, and those valuations have dropped significantly — it’s hard to exit, because you still have to make a return on your investment from two and three and four years ago,” Kulik told Hospice News. “So that’s what’s happening today; PE is being a bit more patient. They’re being more selective in what they’re buying.”

Only three hospice M&A transactions occurred during the third quarter of 2023, down from eight in Q2. This is down from 11 in Q3 2022 and 18 in the same period in 2021.

These numbers are a far cry from the record-breaking PE volume of prior years. Of the estimated 60-plus hospice transactions that occurred during 2021, at least 39, or 65%, were private-equity based, a rise from 56% in 2020, according to The Braff Group.

To date in Q4, the only publicly reported PE hospice transaction was Gentiva’s purchase of the hospice, home health and palliative assets of the nonprofit health system ProMedica, branded as Heartland Hospice.

Though Gentiva did not disclose the financial terms of the transaction, Bloomberg reported that ProMedica’s Heartland Hospice is valued at $710 million. Heartland Hospice is headquartered in Toledo, Ohio, with locations in 26 states.

Gentiva is a portfolio company of the private equity firm Clayton, Dubilier & Rice (CDR), which acquired a 60% stake in business from Humana Inc. (NYSE: HUM) in August 2022.

However, while this transaction is among the most significant in 2023, it was not an exit deal.

One major contributing factor to the exit-deal slump is rising interest rates. In an effort to combat inflation, the U.S. Federal Reserve has raised interest rates aggressively during the past two years — 10 consecutive increases totaling more than five percentage points — a pace unseen since the 1980s.

Though rates seem to have stabilized for the time being, many investors are in a wait-and-see mode to gauge the impacts on hospice valuations, according to Stuart Irby, senior vice president, Healthcare Investment Banking, at Stephens.

“Interest rates have driven valuations down. PE firms use leverage to generate financial returns when they acquire companies, and where current interest rates are, it’s really hard to pay what people were paying 24 months ago,” Irby told Hospice News. “As a result, if you’re holding a portfolio company that’s doing well, you’re waiting to see some change in the marketplace that indicates that interest rates may come back down and allow peak valuations to come back up.”

The last five years saw record-breaking multiples in the industry, and private equity-backed platform deals were among the most common types of transactions. A pattern of large hospice deals occurring in 2021 and 2022 set a high bar for transaction valuations and volumes, which contributed to this year’s slump by comparison.

Dominating the market in 2023 are massive outlier deals, including some involving payers or other massive health care companies, according to data from Provident Healthcare Partners. This includes the $5.4 billion purchase of LHC Group by the UnitedHealth Group (NYSE: UNH) subsidiary Optum Health, and that same company’s recent acquisition of Amedisys (NASDAQ: AMED).

This year also saw an uptick in acquisitions and affiliations among nonprofit hospices.

Investors will have their eyes open for market fluctuations in 2024, when a number of hospice platforms are expected to reach maturity.

Valuations will continue to be a primary factor. In a lot of cases this year, buyers and sellers didn’t see eye to eye on hospice price tags, David Cox, member of the law firm Bass, Berry & Sims, indicated.

This was because many sellers expect similar amounts to those record-breaking valuations in 2021 and 2022. Now, buyers are often less inclined to deploy that much capital on a hospice.

“There’s still some valuation disconnect. The multiples that buyers are comfortable paying probably pulled back some, and I don’t know that there’s been a complete acceptance of that on the part of sellers,” Cox told Hospice News. “We’ve seen some [deals] in 2023 with buyers trying to stretch to meet the seller’s expectations, but they’re really looking for pristine assets. To the extent that they’re trying to stretch to meet those valuations and then not finding a pristine asset, we saw more transactions that didn’t make it to the finish line than in prior years.”