The Federal Reserve cut interest rates by 0.5% on Wednesday, which will likely have an impact on hospice M&A.
Interest rates have widespread implications for the hospice mergers and acquisitions market, particularly when it comes to private equity investments. PE firms, and some publicly traded companies, tend to finance their acquisitions by taking on debt. The rate reduction — from close to 5.5% to between 5% and 4.75% — means that the flow of dollars may pick up as borrowing gets less expensive.
The slash in interest rates could result in a resurgence of M&A in the hospice space through the end of the year and into 2025, according to Cory Mertz, managing partner at M&A advisory firm Mertz Taggart.
“I think we’ve hit bottom in terms of transaction activity. I would imagine over the next two to four quarters, we’ll see a substantial pickup in transaction activity,” Mertz said in a Home Health Care News webinar. “It’s not extreme, but I think the consensus is that activity is picking up. There’s pretty strong anticipation that the Fed will start cutting rates. That will continue to excite some folks.”
Rate hikes are the Fed’s primary weapon against inflation, which climbed at a record pace during 2022 and last year. Now, inflation is slowing down, dropping from 9.1% in 2022 to 2.5% currently, according to the Fed.
The drop reflects a shift in the Federal Reserve’s priorities as it moves to protect the job market over fighting inflation. The reduction marks the first rate cut since 2020. The Fed is expected to further reduce rates by another half a percentage point before the end of the year, with a likely 1% cut in 2025.
“We’re not saying ‘Mission Accomplished’ or anything like that,” Fed chairman Jerome Powell said in a press conference. “I have to say, though, we’re encouraged by the progress we have made.”
The relatively high rates during the past two years are among the factors contributing to an M&A slump in the hospice market, in which deal volume has slipped significantly from the record numbers of transactions in 2020 and 2021.
The first quarter of 2024 saw four hospice transactions take place, data shared with Hospice News by the M&A advisory firm The Braff Group show. This year’s activity to date dips below the 23 hospice deals that occurred in 2023, which was a significant decrease from prior year’s total of 40 transactions, The Braff Group indicated.
“There was a lot of pent up demand and a lot of capital to be deployed [in 2020 and 2021], and, an incredible number of transactions that were executed in that period,” Les Levinson, partner and co-chair in the Transactional Health Law Group at Robinson & Cole, said in the Home Health Care News webinar. “I think what we’ve seen is that the interest rate environment has probably been the predominant driver of clamping down deal activity in terms of volume.”
The rate reductions could boost not only deal volume, but valuations of companies that come up for sale, according to Kevin Palamara, managing director and Jake Vesely, vice president, of Provident Healthcare Partners.
“Generally, interest rate cuts tend to boost M&A activity and valuations. Lower interest rates make borrowing more attractive, and most of these transactions are financed with some level of debt. This is especially true for large-cap [private equity] recaps, which typically rely heavily on leverage,” Palamara and Vesely told Hospice News in a joint email. “Several platforms are at the tail end of their investment cycles and may have delayed going to market due to high interest rates and subsequent concerns about valuation impacts. With rates coming down, we anticipate these processes will resume, an increase in PE interest and, in turn, heightened activity and valuations across hospice organizations of all sizes.”
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