The Takeaway: A Q&A With Luiz Greca on Trends in Healthcare IT
How has the HCIT sector performed over the past year, and how do you anticipate the HCIT sector to perform in 2023?
The HCIT sector has shown resiliency over the past few years compared to other healthcare sectors. Nevertheless, M&A deal activity has slowed materially after 2020–2021 record highs, a period in which many HCIT assets of scale transacted. The lack of activity in equity capital markets has been even more pronounced, with no IPO deal pricing in the last 12 months. As a result, there is a growing backlog of companies gearing up to enter the market.
For the first quarter of 2023, the focus was largely on preparation with a healthy level of pitch activity. We are already seeing increased deal flow in Q2 and expect a meaningful uptick in the second half. LBO financing has been mostly available (though more expensive), particularly for deals under $1 billion, with direct lenders stepping up to cover the void created by banks.
There is significant interest from both private equity and strategics to invest in the HCIT sector as it is less affected by labor inflation and less exposed to reimbursement dynamics and stroke-of-pen risk. Thus, it provides an opportunity for investors to be exposed to healthcare, a traditionally defensive sector during recessionary periods, without many of its associated risks.
What are the biggest challenges and opportunities facing the HCIT sector in 2023?
The unprecedented availability of capital to early-stage HCIT companies during the zero percent interest-rate regimen created overcrowded markets in deemed “hot sectors” with often very little differentiation amongst players. In normal times, many of these companies would not get funded at the valuations or scale they were (or would not get funded at all). As a result, we are seeing many companies hitting a plateau in revenue and struggling to generate profit or scale effectively—something that is exacerbated by the current inflationary environment and general market slowdown. This dynamic is both a challenge and an opportunity and will lead to a high amount of natural selection in the market, with many not surviving or consolidating.
The disciplined management teams of well-capitalized companies with attractive unit economics and differentiated business models will be the ones coming out on top. We already see companies that have shown discipline with their growth strategies and have prioritized profitability being rewarded by the market. Companies that focused on “growth at all costs” are now unable to grow into their most recent valuations. Many of these companies will face difficult decisions, and we expect there will be a substantial amount of consolidation coming out of this, resulting in a high amount of deal activity. All in all, the natural selection taking place will ultimately benefit the sector, and there will be many opportunities for both strategic and financial buyers.
What do you expect to happen to valuations in 2023, and which subsectors within HCIT do you anticipate having the most deal activity?
We are closer to reaching market equilibrium in the private markets. Where the public companies are trading (or a last five- to 10-year average) is a good metric to gauge valuations for how private companies in HCIT will perform. The biggest valuation adjustment is occurring in high-growth, cash-burning companies. The more profitable companies will see less compression. Market leaders with staying power and a combination of strong organic growth and profitability (or “rule of 50+”) have scarcity value and will therefore continue to command premium multiples.
Subsectors that will see the highest amount of private equity deal activity in 2023 include:
- Specialty-focused electronic medical records
- Revenue cycle management
- Behavioral, senior, and post-acute care technology
- Data analytics and interoperability
- Patient and member engagement
- Value-based care enablement
- Pockets of virtual care and remote patient monitoring
What are the main trends taking place in the industry?
The HCIT industry is currently experiencing several trends that are driving innovation and investments across the sector, which include (i) labor inflation and shortage driving automation and outsourcing, (ii) the need to contain unsustainably high healthcare costs, (iii) the continuous shift of care from expensive bricks and mortar to the home, (iv) the rising demand for quality preventative healthcare, and (v) the increased awareness and focus on behavioral health.
Additionally, one of the most recent and notable trends that I would like to highlight is the AI revolution. It is impacting (and will continue to impact) nearly every aspect of healthcare, from administrative functions such as revenue cycle management to clinical decision-making and value-based care enablement.
Generative AI, which has been popularized by the ChatGPT application, is poised to be the most disruptive form of AI for healthcare. While it is still early, it is fair to assume that through generative AI, we will finally be able to unlock meaningful value from vast amounts of otherwise disparate, complicated, and unstructured healthcare data. Near-term benefits will include higher-quality, summarized data in EMRs, streamlined prior authorization processes, the ability to answer patients’ complex medical questions in real time, and better and faster diagnosis and screening.
Luiz Greca
Managing Director