Navigating Healthcare PE in a Shifting Market: Insights from Matt Wolf of Elliott Davis 5-14-25

Summary

Navigating Healthcare Private Equity in a Shifting Market: Insights from Matt Wolf

Podcast: Becker Private Equity & Business Podcast
Host: Scott Becker
Guest: Matt Wolf, Director at Elliott Davis
Release Date: May 14, 2025

In this insightful episode of the Becker Private Equity & Business Podcast, host Scott Becker engages in a comprehensive discussion with Matt Wolf, a seasoned analyst and thought leader in the healthcare private equity sector. They delve into the current trends, challenges, and future opportunities within the private equity landscape, particularly focusing on healthcare. Below is a detailed summary capturing the essence of their conversation.

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1. Current Trends in Private Equity Deal Flow

Matt Wolf opens the discussion by addressing the year-to-date private equity (PE) deal flow, highlighting a noticeable decline in overall deal activity across sectors, including healthcare.

• Decline in Deal Volume:
  "Year to date we're down, depending on how you want to measure it, 25 to 35% over the past few years."
  (00:39)

• Factors Contributing to the Decline:
  Wolf attributes the reduced deal flow to several factors:

  • Longer Due Diligence Cycles: Increased scrutiny and comprehensive evaluations are prolonging the deal-making process.
  • Macroeconomic and Policy Uncertainty: Ongoing economic uncertainties and fluctuating policies are dampening enthusiasm for new investments.
  • Desire to Deploy Capital: Despite the downturn, sponsors remain eager to deploy capital and exit older investments, though challenges persist.

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2. IPO Market as a Bright Spot

Despite the downturn in PE deal flow, Matt points out a positive trend in the Initial Public Offering (IPO) market.

• Increase in IPO Announcements:
  "The number of announcements are actually up year to date over the past couple years."
  (03:05)

• Significance of Strong Capital Markets:
  The rise in IPO announcements signals robust capital markets, providing an alternative exit strategy for PE-backed companies. This trend is crucial as it offers liquidity options beyond traditional buyouts.

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3. Challenges with Vintage Deals and Policy Uncertainty

Scott Becker raises concerns about older vintage deals, especially in healthcare services, which may face challenges due to evolving market conditions.

• Extended Hold Periods Impacting Investment Thesis:
  "Again, in this higher interest rate, positive real interest rate environment, that's just not financially sustainable."
  (07:00)

• Changing Core Theses:
  Companies held longer than anticipated may find that the foundational assumptions of their original investments no longer hold true, necessitating adjustments or exits at unfavorable terms.

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4. Impact of Higher Interest Rates on Professional Services Deals

The conversation delves into how rising interest rates have affected PE-backed professional services firms.

• Sustainability of Distributions:
  "If you're a business owner and if you get a check for your ownership interest in that business, then really economically your distributions from that business should also come down a commensurate amount."
  (07:52)

• Financial Engineering Limitations:
  Many deals structured during periods of low-interest rates relied on financial engineering to provide immediate returns to owners. The current higher rate environment challenges this model, leading to potential financial strain.

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5. Navigating the Changing Market Regime

Matt Wolf emphasizes the transitional phase the market is undergoing and the opportunities it presents.

• Regime Change Acknowledgment:
  "As we're working through this regime change that I feel like we've been talking about for at least a year, maybe almost two years, it will take time to work out."
  (09:56)

• Opportunities Amid Challenges:
  Despite current challenges, Wolf remains optimistic about future opportunities for savvy investors and operators who can navigate the evolving landscape.

• Return to Normalcy:
  The shift towards a more normalized interest rate environment is seen as a path toward sustainable growth and investment stability, reminiscent of periods before the pandemic and global financial crisis.

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6. Future Outlook and Opportunities

Looking ahead, both Scott and Matt discuss the potential for recovery and growth in the PE and healthcare sectors.

• Sustained Deal Volume Drivers:
  Factors such as aging PE-backed portfolios needing exits and substantial dry powder in middle-market buyout funds are expected to sustain deal-making activity.

• Emphasis on Sustainable Cash Flows:
  The market is moving away from prioritizing growth at all costs towards valuing companies with stable and sustainable financial foundations.

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7. About Elliott Davis

Towards the end of the episode, Matt Wolf provides insights into his role at Elliott Davis.

• Firm Overview:
  "Elliott Davis is another large public accounting, consulting, audit, tax advisory firm. And I think we're very well situated in sort of core middle market to lower middle market."
  (11:06)

• Alignment with Private Equity Needs:
  The firm's nimble operating model and focus on the middle market position it as a strategic advisor to growing PE-backed businesses, aligning with their growth projections and operational needs.

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Conclusion

This episode offers a deep dive into the current state and future prospects of private equity within the healthcare sector. Matt Wolf provides a balanced view, acknowledging the challenges posed by reduced deal flow and shifting economic conditions while highlighting the resilience and adaptability of the market. For investors and stakeholders in the PE and healthcare industries, the insights shared underscore the importance of strategic positioning and adaptability in navigating a transitioning market landscape.

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Note: The advertisement segment promoting Walden University at the end of the podcast has been excluded from this summary as per the request to omit non-content sections.

Transcript

[Scott Becker]

This is Scott Becker with the Becker Private Equity and Business podcast. We're thrilled this week to pass 7 million downloads and be ranked one of the top podcasts, I think number one or two in the Apple business news category. So God bless all of you that listen to the Becker Private Equity and Business podcast. We're thrilled today to be joined by Matt Wolf. Matt is a brilliant analyst, thought leader in this health care private equity space. Brilliant, brilliant person, one of our most listened to guests. Matt, take a moment to introduce yourself and maybe we could talk about what trends you're watching in private equity currently.

[Matt Wolf]

Yeah, thanks Scott. So, Matt Wolf, I'm a director at Elliot Davis. I spent my career in healthcare valuation and private equity working on private equity backed health care companies really through the life cycle. And over the past decade or so I've really focused on the analyst side of that as well and studying the market, putting together our, and talking about it to really anybody who will listen to me. So I'm always, always excited to be on the show and talk about that. And I guess with the wrap up of April, we were just looking through some of the year to date numbers in terms of overall deal flow, not just healthcare, but private equity deal flow in general. And despite the excitement leading into the year, you know, year to date we're down, depending on how you want to measure it, 25 to 35% over the past few years. Just an overall private equity backed deal volume, you know, it's, we're now also kind of in the middle of conference season. So I've been talking to a lot of sponsors just about what they're seeing and what they're trying to do. And everybody wants to get deals done, they want to deploy capital, they want to exit long in the tooth companies. But the timing may not be right still. And looking for the right deals, the due diligence cycles are longer, the macroeconomic uncertainty, the policy uncertainty continues to dampen some deal activity, not all. One interesting data point though is in terms of IPO announcements, just the number of announcements are actually up year to date over the past couple years, which is, which is a good sign I think, you know, at least in terms of the number of announcements, not necessarily the total, you know, market cap trying to go public, but at least the number of companies going public is, you know, there's announced IPOs is higher than it's been the past couple years, year to date, which I think is strong. Right. We want strong capital markets. It's an important part of the overall economy. Even in the Real economy. Right. Access to capital. And so there's some bright spots there too. It's just, you know, this policy uncertainty will create challenges for management teams, for sponsors, investors, and, you know, we're all kind of navigating it together.

[Scott Becker]

No, and your point is so well taken in the IPO market because that's important, quite frankly, because it leads to a spot where that's another exit opportunity for companies in different ways. Granted, often larger companies, some of those are not huge IPOs either. And it provides another off ramp to at least part of an investment in a partly liquidity event and at least the potential for one going forward. And I think that is fascinating to watch too. And so that's good news. And as the stock market rebounds, hopefully as debt cost sort of start to normalize and see a little more certainty, as trade deals start to get announced, that the markets do become a little bit easier to navigate between buy and sell. I mean, the word I've heard so often recently is pause that people were gearing up for deals and then there was a pause in the markets. And so we'll see if that's a pause or if that becomes, you know, elongated.

[Matt Wolf]

Absolutely. And you know, the, the factors that I continue to watch are in terms of this, this pause, it's really twofold. One is just the vintage of investments that are out there. Right. So, for example, healthcare service companies, so providers, physician groups, things like that, that are private equity backed, we now have, we're approaching 60% of the PE backed ones have been held for five or more years by their primary sponsor. Right. Those need to get turned over. That will push deal activity. And then we also look at dry powder and middle market buyout funds. And this is again more healthcare specific, but it's around $250 billion of dry powder for funds that say they invest in healthcare. And there's, you know, overlap because some funds will invest across multiple sectors. But that's an incredible amount of dry powder, a very, you know, aging portfolio that needs to turn over. And though that will continue to push to get deals done. And I think, you know, we're still working through this cycle of, you know, moving from an era where investors were rewarding growth at all costs into now this new environment where investors want sustainable cash flows, they want margin, they want financial sustainability. And for companies that have that financial sustainability story, they will have access to capital markets, they will have interest in deals, and we will see see those deals happen. And you know, looking through the IPOs that have been announced, you know, we See that, that's a consistent theme in the stories. Whereas even, you know, two years ago, you're still getting a lot of, well, we need to go public so that we can get capital to, you know, scale up and be profitable. That's, that's not the story anymore. So, yes, definitely a pause. And the sort of duration of that pause is going to look different for different segments of the real economy, different industries, different sizes of companies. But there are some underlying macroeconomic, some underlying capital market factors that will continue to drive deal volume. Right. It's not going to be, you know, like the, the absolute craziness of 2021, but it's not going to go to zero either.

[Scott Becker]

No, but one of the points you made is such an important point. Some of these older vintage deals might be provider services deals, and that's of concern and here's why. The world around aggregating provider services over that six to eight year period has changed dramatically. So even as the capital markets open up and change, some of those businesses, depending on specialty, are in a much more challenging spot in terms of sustainable cash flow and growth than they were at some point. So you look at things like certain types of platforms built around obstetrics, for example, ob gyni or provider services or practice management, that at one point there was a relatively rosy forecast. For now, between reimbursement challenges, shortage of doctors, still inflationary cost, the cash, one of those businesses is much tougher than it was expected to be three to five years later. And whenever things get held for a much longer vintage than anticipated, the core thesis around the original investment often can change. And so that's a whole nother set of circumstances that causes some concern depending on how those companies performed compared to core thesis. Because over a longer period of time, those core thesis either play out or factors change. And we're seeing a lot of that, I think.

[Matt Wolf]

Absolutely. And it's such a good point that you bring up, Scott. Whether it's, you know, professional services in general, whether it's physician practices or other, you know, accounting firms, whatever, where you had these PE deals back when money was less expensive, that were essentially financially engineered to provide the owner operators of those businesses to, you know, really make the same or more monthly annual income that they were making, plus get paid out for their capital as part of the acquisition. And now in this higher interest rate, positive real interest rate environment, that's just not financially sustainable. Right. If you're a business owner and if you get a check for your ownership interest in that business, then really economically Your distributions from that business should also come down a commensurate amount. But that wasn't what happened with many deals in any sort of professional services setting prior to 2022. Right. And so that sort of shakeout. And you said it well. Right. The investment thesis has changed and there's a lot of investors that are kind of frankly holding the bag. And not all of them certainly, but there are some that are in some real tough positions that are going to have to exit at unfavorable multiples, unfavorable cash on cash returns. And that's going to have to work itself through the system. Particularly, particularly in any sort of sort of owner operator, professional services model.

[Scott Becker]

No 100%. I think that's a fascinating additional take that whenever vintage and hold periods get longer and longer, there becomes less certainty around those thesis. Just like if you buy a house in a neighborhood, you know, in three to five years, that neighborhood's probably still going to be good. Much harder to project what's going to happen in 15, 20 years than. And similarly with a lot of these companies bought a long time ago. What a fascinating time in the markets. Matt, anything else you wanted to share with us today before we wrap up?

[Matt Wolf]

Yeah, I would just say, you know, as we're working through this regime change that I feel like we've been talking about for at least a year, maybe almost two years, it will take time to work out. There are challenges, but you know, those challenges create opportunities. Right. So there are definitely opportunities for investors, for operators. Might require some short term pain of exiting certain companies or businesses or segments of the market. But as, as the regime evolves into this new sort of positive real interest rate environment that looks very much like other cycles did. Again, we've talked about this before, but the, the 15 or so years between the global financial crisis and the pandemic, we're where interest rates are very low. That was the aberration. Now we're working back towards normalcy and as we work through this transition, there will be a lot of really great opportunities for savvy investors and savvy operators.

[Scott Becker]

Well, we sure hope so. Take one moment and tell us a little bit about Elliot Davis. You moved to Elliot Davis recently, this spring. Talk a little bit about Elliot Davis for a second.

[Matt Wolf]

Yeah, happy to. So Elliot Davis is another large public accounting, consulting, audit, tax adv firm. And I think we're very well situated in sort of core middle market to lower middle market. A very nimble operating model that allows us to be a very astute kind of core advisor to growing private equity backed businesses.

[Scott Becker]

Right.

[Matt Wolf]

Really be sort of very aligned in terms of nimble operating models, growth projections, outlooks and to, you know, it's just we're very well positioned to be that, that advisor. That's how the firm is built. And yeah, it's been, it's been a great, great transition. It's a great firm.

[Scott Becker]

Thank you very much, Matt. Always great to visit with you again. Matt Wolfe, Elliot Davis, thank you so much for joining us on the Becker Private Equity and Business podcast. Thank you.

[Matt Wolf]

Thank you.

[C]

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