Home-based care dealmakers have been busier of late, but that has not yet translated into more transactions.

There’s some feeling that sidelined private equity firms will eventually have to enter the game, but that may not be the case.

For one, interest rates have still not come down. But also, the “dry powder effect” – and available money being ready to be deployed by PE firms – can sometimes be overstated, Rebecca Springer, the lead Health care analyst at Pitchbook, told Home Health Care News.

“I think it’s really easy to overstate the pressure of the dry powder effect,” she said. “I hear the narrative a lot, that there’s a lot of dry powder, and therefore deals have to get done. There is always a lot of dry powder. And it’s not correlated, if you look historically at deal activity. In reality, managers have a lot of flexibility in how they deploy capital, they can deploy into existing portfolio companies, they can do smaller deals, they can wait. There is pressure, especially from the [limited partner] base, to deploy capital, but more to a much greater extent to return capital.”

Pitchbook released its Q1 health care services report last week.

The report showed extremely low deal activity, in home-based care and across the health care industry. The estimated health care services PE deal count for the first quarter was 158, putting 2024 on a slower pace than the past four years.

It is worth noting, however, that deal activity generally picks up in the back half of the year. Last quarter, there were 235 PE health care deals, for reference.

It’s also worth remembering that dry powder on its own does not push across deal activity, Springer said. She did say, however, that there are more signs of PE dealmaking activity picking up, but it’s tough to pinpoint when exactly that will lead to more deals.

“I think dealmakers are actively looking at potential opportunities,” Springer said. “There’s more conference attendance, more proactive thesis development happening. But we’re still expecting that deal processes are going to take a while, and that larger platforms are still going to want to sit back a little bit and see what the Fed does, as well as wait for some other platforms to trade and see where multiples come in. There’s no real big hurry to get deals done.”

Springer also acknowledged that dealmaking generally picks up later on in the year, a trend she expects to continue in 2024.

“I think processes will continue to slowly ramp up throughout the year, we’ll start to see announcements probably in late 2024 for some bigger processes – that would be my best guess,” she said. “I always want to hedge that a little bit. But it looks like that’s approximately the timeline for there to be lower interest rates as well.”

Home-based care dealmaking

Health care dealmaking has been about in line with home-based care dealmaking over recent quarters.

In the first quarter, there were fewer than 15 home care, home health and hospice deals, according to data from the M&A firm Mertz Taggart.

In addition to the macroeconomic headwinds, home-based care investors are also seeing regulatory uncertainty, specifically with home health payment rates and the now finalized 80-20 provision from the Medicaid Access Rule.

The next home health proposed payment rule is expected early this summer. The 80-20 provision, on the other hand, is finalized – but it won’t be implemented for another six years.

That’s why Springer doesn’t expect the 80-20 provision to impact dealmaking significantly in the near-term future.

“I think that it probably doesn’t have a huge effect,” she said. “I think if you were going to be investing in Medicaid home- and community-based services, you’re already the type of investor who’s willing to do some regulatory due diligence and be really thoughtful about what geographies you’re diving into.”

For home-based care investors still inclined to get into the business right now, Springer did also say she believes there’s some untapped potential in hospice.

“We believe there is still a good investment opportunity in hospice, which has fared better than home health in recent CMS fee schedules, and particularly in palliative care, which is increasingly seen as an important component of VBC,” the Pitchbook report read.

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