The Takeaway: A Q&A With Neha Shah and Brent Shepherd on Healthcare Capital Markets
What are your views on the current state of the financing markets?
Brent: The markets are very strong right now, particularly the private credit market, where we are seeing more and more demand, given the amount of dry powder in that market. Funds have raised so much money, even since the start of the year, and they are actively trying to find ways to put it to work. Importantly, what we saw at the start of the year was the syndicated market coming back. Both the high yield and the leveraged loan markets have also increased their activity, and as a result, we are seeing more holistic competition among the different markets. However, with the syndicated markets coming back, the private credit markets have to find new ways to differentiate themselves.
What are you seeing in healthcare specifically?
Neha: Brent and I lead healthcare within capital markets, and a number of our clients have come to us asking, “How and where do I go to get the most flexible capital today?” The question has come up for a variety of reasons, whether it’s to refinance debt, return some capital to LPs, pay off seller paper/earnouts, delever high-cash, interest-bearing debt for more PIK/flexible capital, or simply fund an acquisition or provide more runway for future growth. We’ve seen a lot of these situations arise throughout the industry, but it’s been most prevalent in multi-site healthcare. Many of these multi-site healthcare assets grew quickly from a robust acquisition environment, and integration has been more difficult or taken longer than expected. This has been compounded by a tight labor market, which, when coupled with higher leverage and higher interest costs, causes unforeseen challenges in managing respective debt loads. Much of what we are currently working on is giving companies some breathing room by introducing a junior capital component, whether that’s a Holdco PIK note or preferred equity, to give them time to find their way back to cash flow and credit metrics that are manageable and ensure the company has an affordable debt stack. There are a lot of great companies out there, and our ability to articulate a story, given our understanding of the industry, is what has led and continues to drive our success.
Can you expand on how Houlihan Lokey is assisting clients amid those challenges?
Brent: We sit in an interesting position between the supply and demand of the market, and our clients recognize the need for the type of solutions we provide. Given how active we are, with anywhere between 40 and 50 deals in the market at any given time, we know there is a huge supply of capital from investors looking to put money to work.
Given that we know what investors want and need on the sponsor side, and we know the appetite on the investor side, we’re in a good position to marry those two things efficiently. The mix of structured solutions that people are looking for is best achieved from our position.
Neha: Brent makes an important point here. One of the big things we pursue and achieve is efficiency. That’s one of the valuable strengths of our platform. Given everything Brent touched on, we know who’s doing what and can run a much tighter process. Running this efficient and effective process is why sponsors continue to hire us. They see the benefit in running a process; we can drive the best terms, each of our deals is bespoke, and we provide tailored solutions based on a company or sponsor’s needs. We can also garner the relevant industry team’s expertise where needed, such that we go out into the market with one voice and can help lenders understand the intricacies of these niche verticals within healthcare.
Brent: That industry expertise improves efficiency for both the sponsor and the company. The company doesn’t spend a lot of time trying to educate investors, and investors don’t waste their time trying to put assets to work.
Why the expansion into healthcare capital markets coverage specifically?
Brent: It is partly due to the volume we saw last year, but also seeing what was coming this year, trying to get ahead of that, and being able to react to the deal flow that was coming in. We knew we would see some portfolio stress, especially in the healthcare services market, and we wanted to ensure we were prepared.
Neha: Agreed. I think healthcare is its own beast. You need to know healthcare in order to do healthcare. You need to know about reimbursement risks, how the staffing should work, how purchasing should work, etc. All that in-depth expertise is what we can provide clients facing, for example, broken balance sheets, interest rates, high costs, labor rates going up, and so on.
Are there substantial headwinds regarding access to financing, or is it on a company-by-company basis?
Neha: For strong credits, people are running to do those deals, and you will get the best price—as we have seen on recent deals we’ve executed. When there is complexity in the transaction, which could be company- or industry-specific, we have consistently shown how we can be most helpful in getting those transactions done and tailoring these solutions for each company, time and time again.
Brent: A lot of the private credit or structured credit product groups have seen this coming as well, which is why there is more depth in the junior capital market than ever. That segment has become much more developed, and people are looking for that additional yield. Junior capital is more competitive than it has ever been.
Any final thoughts?
Neha: I would say, always call us! We tell our clients that even if they want to bounce something off us, we see so much, and we have so much deal flow that we have a good pulse on the market and a good sense of what is possible in this market. And frankly, we have executed deals that other people or firms could not. We’ve got better terms from sponsors, relationships, and lenders just by coming in, creating a process, and driving down terms.
Brent: Absolutely. We have visibility into the market, industry expertise, and a high comfort level with complexity. Such that we can get deals done that even the syndicated market, which historically has been the most efficient market, could not get done. We have advised on just about every different capital structure across every healthcare subsector in the past couple of years, so we are really excited to assist our clients in healthcare.
