Why private equity healthcare investment may rise in 2025

Modern Healthcare – Thursday, December 12, 2024
By Alex Kacik

Private equity investment in healthcare is expected to pick up in 2025 but still fall short of the highs of 2021, merger and acquisition advisers said.

Private equity-linked healthcare transaction volume is poised to rebound after a sluggish 2024 as interest rates cool, state-led oversight bills lose momentum and a new presidential administration begins. Corporate investors will likely prioritize deals that involve healthcare information technology and other administrative support services over physician practices, industry observers said.

Still, some retail clinics and other providers may draw interest from private equity. Walgreens, for instance, is considering a private equity acquirer, according to reporting from the Wall Street Journal. The company on Tuesday denied what it described as rumors and speculation.

“It is going to be a better year than 2024 both in terms of the number of deals and capital deployed,” said Darren Buskirk, a director at the consultancy Stax who focuses on private equity transactions. “There will be more activity around healthcare IT, revenue cycle management and electronic health record management, which they perceive as safer bets than physician practice management.”

Here’s what to look for in 2025 private equity healthcare activity.

Why could private equity activity increase?

Many firms were waiting for the outcomes of the presidential election and certain state bills designed to closely scrutinize healthcare transactions tied to private equity firms.

PitchBook analysts said in November that private equity-linked healthcare deal volume would drop 15% in 2024 compared with 2023, when there were 788 transactions. That number has declined since the 1,013 deals made in 2021, according to PitchBook data.

Looking ahead to 2025, the prospect of President-elect Donald Trump’s business-friendly policies has spurred talks among potential merger and acquisition partners in healthcare, advisers said. Private equity firms also welcomed the demise of a sweeping California bill that would have prevented corporate investors from controlling a physician group through management services organizations. It was one of at least half a dozen private equity-focused state bills that failed to pass in 2024.

“There will be some positive effects for private equity firms stemming from what happened in California,” said David Marks, a healthcare attorney at the law firm Holland & Knight who focuses on private equity transactions. “Even legislators who voted for [the bill] said they didn’t want the outcome to be a higher cost of capital. The fact that got people’s attention is a positive sign.”

In addition, corporate investors will pay less to borrow money as interest rates drop. Those lower costs could drive merger and acquisition activity across the industry, including among private equity investors, advisers said.

“Rates ratcheting down has the potential to get some folks off the sideline and increase merger and acquisition activity,” said Ken Marlow, a healthcare lawyer at the law firm K&L Gates who advises health systems and private equity companies.

What sectors interest private equity?

Healthcare IT, specialty pharmacy management, revenue cycle management, clinical workflow software and other administrative support services are expected to draw private equity investment.

These types of companies are less risky than provider organizations, which face stringent regulations and inconsistent reimbursement levels, advisers said.

Looking ahead to 2025, private equity will increase healthcare IT investment, said Ron Present, a partner at the consulting and accounting firm Armanino. Demand for healthcare IT companies has grown as health systems try to boost productivity and efficiency amid inflation and labor shortages, he said.

Why might private equity look at Walgreens?

Walgreens could be viewed as a risky bet for private equity firm Sycamore Partners, where it could buy the retail pharmacy chain for a relatively low price, cuts costs and divests parts of the business such as its primary care and multispecialty provider VillageMD, industry observers said.

This potential acquisition would likely be a one-off deal rather than the start of broader private equity investment in retail health, said Jeff Goldsmith, founder of the consultancy Health Futures. The momentum for retail health has slowed as companies like Walgreens, Walmart and CVS Health have lost money on their retail clinic operations.

“Private equity has a lot of dry powder, so why not put it to work and take a risk?” he said. If Congress cracks down on pharmacy benefit managers, pharmacies like Walgreens could become more profitable, Goldsmith said.

There is a mismatch between Walgreens’ mission to sell retail healthcare products to everyone and VillageMD’s, which is to provide value-based care to the underserved, said Rob Larson, a director at Stax.

“VillageMD would be more successful on its own, and I imagine any private equity firm acquiring Walgreens would look to divest the business,” he said. “Over the long term, Walgreens could replace VillageMD with a simple, traditional retail healthcare service like MinuteClinic’s.”

What other types of providers will investors consider?

Corporate investment in physician practices will be muted relative to other sectors as valuations have dropped and the federal government looks to crack down on private equity-backed physician group consolidation.

Still, investors will target some ambulatory care operators such as infusion centers, surgery centers and outpatient mental health providers, experts said.

Ambulatory infusion centers, for instance, may benefit from private equity-funded management companies, said Woody Baum, the CEO of the ambulatory infusion provider Local Infusion.

“The large majority of infusions still take place in the hospital, suggesting there is a large site of care opportunity to push into ambulatory infusion centers,” he said.

Two large sales of ambulatory infusion providers this year could spur other activity. Elevance Health in March purchased private equity-funded Paragon Healthcare for an undisclosed amount, and the private equity firm Boyne Capital sold Infusion Associates in July to Vivo Infusion.

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