Four Key Takeaways from McDermott Will & Emery’s HPE Miami 2023

Brian Hamilton, Managing Director at DuneGlass Capital and Omer Karaayvaz, Vice President at DuneGlass Capital, recently joined 1,600 other investors, executives, and founders at McDermott Will & Emery’s Healthcare Private Equity conference.

Topics ranged from private equity fund secondary developments to fundraising in a challenging environment to trends and developments in fund finance.

Here are the DuneGlass team’s top four takeaways from the conference.

Higher inflation means lower EBITDA multiples.

Inflation has created an environment that we haven’t seen in recent times. It’s led to higher interest rates, which has resulted in higher operating costs and interest expenses. Companies are now looking to utilize lower debt levels and higher equity investment. This has led to lower EBITDA multiples and lower valuations.

Increased insurance coverage results in increased revenues.

Building a great company that meets patients where they are while increasing insurance coverage will result in increased revenues. If you can marry these, along with bending the cost curve, your growing company will have increased margins. This will result in the high multiples we’ve seen over the last 12 months (16-20x).

Deal volume will increase over Q3 and Q4.

Although deal activity has slowed over the course of Q4 2022 and early 2023, the conference participants remain bullish and believe deal volume will increase over Q3 and Q4.

One reason for this bullishness is because the public markets have not fared well over the past year and have lost value. This has caused investors to be overweighted in the PE allocation, as these investments have some $7 trillion of unrealized value. Many private equity firms will be required to help their investors find liquidity by selling their portfolio companies this year.

Lastly, due to a cooling effect on valuations, the velocity of portfolio company add-ons is sure to increase for those companies with adequate cash/balance sheets.

We may see 75-100bp increase over the next year.

Although the interest rates have caused the cost of debt to increase, many lenders and investors believe that the increases will be smaller than this past year. Despite the increases forecasted, many lenders believe that the pricing (the spread they receive above SOFR) will not move much higher if at all. In fact, as SOFR could see a decline, many lenders believe that their spreads may compress as well as the lending environment will become more competitive.

Questions on how the healthcare private equity environment might affect your practice? Contact Brian Hamilton.

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