After Long-Term Care Drove Health M&A Growth in 2019, Investors See Deals as Key 2020 Survival Strategy

Despite the seemingly constant headwinds swirling around the post-acute and long-term care space, the sector again helped to drive overall health care deal volume in 2019 — and with more uncertainty ahead for the year, investors could turn to even more acquisitions as a way to weather the storm.

Long-term care transactions came in third place in terms of combined health deal value in 2019, with a total of $16.6 billion in completed sales according to data from the Norwalk, Conn.-based Irving Levin Associates. That’s a 22% gain from the prior year, despite the fact the deal count only grew 2% to 437.

The $16.6 billion price tag on long-term care deals in 2019 was good enough to beat out the home health and hospice category — which saw 89 deals for $1.5 billion, or a value drop of 55% from 2018 — as well as the hospital and behavioral care sectors. Only “other services” and managed care companies saw more M&A dollar volume last year, according to Irving Levin Associates.

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Global consulting and accounting firm PwC used that data to project its deal outlook for 2020, a year that promises macro-level upheaval in the health care space — from a potential Supreme Court review of the Affordable Care Act to a November election that could bring a new president and shake up the composition of Congress.

But while those factors could serve as an excuse for capital to sit out the coming year, PwC concluded that the market will continue to be ripe for deal activity.

“2020’s uncertainties — ACA’s future, macroeconomics, the election — don’t suggest less future deal interest,” PwC U.S. health services deals leader Nick Donkar said in the report. “Rather, given available capital, companies are likely to see deals as a resilience strategy.”

In particular, PwC focused on the potential for private equity to continue its health investment push into 2020.

“On the sector trend front, capital availability persists and will continue driving deals activity,” the company observed. “Private equity firms, for example, are likely to continue seeking value-driven models, especially in growing sub-specialties. Private equity firms also remain potential deals partners for payers and providers.”

That interest could take the form of consolidations.

“Horizontal integration within sub-sectors is also likely to continue due to its potential to strengthen competitive positioning, mitigate volume pressure, and enhance population health efforts,” PwC noted.

PwC isn’t alone in predicting private equity domination in 2020. Non-public investors currently have about $1.5 trillion in available cash just sitting in their coffers, according to a January report from alternative-asset data firm Preqin. That figure represents a record high — or double the amount of available private-equity money seen just five years ago.

“It seems like on a weekly basis in 2019, we continue to see new funds being dedicated to seniors housing and senior living — with a portion of that flowing into skilled nursing,” Brandon Bohland, managing partner at Senwell Senior Investment Advisors, told SNN earlier this month.

Increased private-equity attention could lead to strong per-bed prices for skilled nursing facilities in some markets in 2020, fellow Senwell managing partner Ben Bohland predicted.

“When a stabilized opportunity comes on the market, you have quite a few bidders,” he said.

But continued private-equity appetite for skilled nursing facilities and other health care properties comes with a catch: growing scrutiny from officials in Washington. A small group of federal lawmakers — including Sen. Elizabeth Warren of Massachusetts, currently running for the 2020 Democratic presidential nomination — last fall called on several private equity heavyweights to disclose more information about their nursing home investments.

“We are particularly concerned about your firm’s investment in large for-profit nursing home chains, which research has shown often provide worse care than not-for-profit facilities,” the lawmakers, all Democrats, wrote in their letter, which was sent to companies including The Carlyle Group and Formation Capital. “In light of these concerns, we request information about your firm, the portfolio companies in which it has invested, and the performance of those investments.”

The concerned politicians aren’t alone in their scrutiny on private nursing home investors: Tom DeRosa, CEO of major real estate investment trust (REIT) Welltower Inc. (NYSE: WELL), has frequently accused Carlyle of allowing the HCR ManorCare nursing home chain to suffer amid a lack of capital investment under its ownership; Welltower and hospital chain ProMedica teamed up to purchase ManorCare in a blockbuster 2018 deal.

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