Artificial intelligence and policy uncertainty are top of mind for healthcare dealmakers, according to attendees at law firm McDermott Will & Schulte's recent annual New York private-equity healthcare conference.
"The policy ground beneath us may be changing in a pretty profound way, and it's a variable every investor and operator in this room really needs to plan around or at least take into consideration," McDermott Chairman Ira Coleman said at the conference.
He added that demanding market conditions, the changing regulatory landscape and powerful new technology are all converging.
"That combination makes this moment so full of risk and opportunity," he said.
Coleman talked about Americans' concerns about the high cost of healthcare and their desire for the federal government to do more to rein it in. "And with the midterm elections just...weeks away and premiums and prescription drug prices weighing on the voters, that sentiment isn't going away anytime soon," he said.
Although bankers, consultants and dealmakers said that a rebound in healthcare dealmaking is well under way, the recovery is uneven and driven by the highest-quality assets.
"What we're seeing is still this market of haves and have-nots," said Alexander Buzik, a partner at healthcare-focused firm WindRose Health Investors, adding that sector specialization is a critical differentiator for firms.
"As the industry becomes more complex, the ability to underwrite risk -- particularly regulatory risk and AI risk -- is going to be more important, and the deeper you are in the sector, it becomes easier to do that," he said.
While rising markets once supported strong valuations across all sorts of assets, today quality matters much more, bankers said.
"People are really focused on A, A-plus assets and A-plus sectors," said Mark Francis, managing director and global co-head of healthcare at investment bank Houlihan Lokey, adding that such assets often trade at a premium.
Slower performers and companies in less-favored sectors no longer have a sure path to a premium exit. Although they aren't necessarily distressed, such companies may require creative liquidity solutions, such as structured equity, minority equity or a continuation vehicle, Francis added.
U.S. healthcare deal volume and exits dropped more than 20% this year through Sept. 30, compared with last year, although total deal value only fell by around 12% over the same period, PitchBook data show.
Buyers and sellers' failure to agree on pricing remains the biggest transaction hurdle, according to a poll of conference attendees.
Many healthcare investors are navigating the regulatory uncertainty and policy shifts by steering clear of businesses exposed to government reimbursement and pricing changes, conference speakers and attendees said. Instead, they are investing in businesses deemed more insulated from such shifts, including back-end healthcare services, drug supply-chain businesses and high-margin, specialized services where human expertise can't be automated or replaced by software.
How private-equity firms are addressing and incorporating artificial intelligence also dominated conference discussions. Drawing on conversations with dealmakers, Fred Levenson, a partner who co-heads McDermott's private-equity practice, warned that firms must be nimble in adjusting to AI or risk ending up stuck with companies that are hard to exit from.
Speakers said that dealmakers must contend not only with policy uncertainty at the federal level, but with a patchwork of increasingly interventionist state-level regulations.
The early fear that AI would wipe out entire businesses has shifted toward a more nuanced repricing of risk, as well as factors that could benefit companies, such as having unique data that competitors can't replicate, conference panelists said.
That repricing, they said, partly explains why many healthcare software deals have stalled or saw sharper price disagreements.
"Valuation gaps are obviously very present right now" in healthcare software, said Connie Heil, principal at Brighton Park Capital, adding that prospective buyers are trying to assess companies' resilience to AI and growth prospects.
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