After a run-up in hospital shares in the wake of the Affordable Care Act, traditional private equity now prefers to inject capital in more promising areas such as behavioral health, healthcare technology and contract research organizations that fuel drug development.
But some PE firms may be re-evaluating their theses.
Though Apollo Global Management represents the only new capital to come into the sector recently, Matt Nord, a partner at the New York PE firm and a member of the board of directors at RegionalCare Capella Healthcare (RCCH) —the result of a merger Apollo helped engineer in March—said he suspects "other sponsors are starting to update their analysis."
True, sponsors have had problems unloading their hospital holdings. Only Blackstone-backed Vanguard Health Systems has recently found a buyer, Tenet Healthcare, in a $4.3 billion deal in June 2013.
The fact is hospitals represent the highest cost site of care at a time when the market is pushing for lower costs, according to Kara Murphy, a partner in Bain & Co.'s Boston office. There's also continued uncertainty around reimbursements amid the shift to value-based care from the traditional, fee-for-service model, and concerns over how the presidential election could impact the ACA.
"If you're a growth-oriented private equity investor, it's a heavy lift and contrarian play to go invest in hospitals," Murphy said.
Still, industry pundits suspect there remains pockets of opportunities for certain segments of the investment community, and especially as the equity markets prove challenging for some public hospital companies. It also helps if there is some smart money to follow, and among PE firms in the healthcare space, Apollo may fit the bill.
Apollo-backed RegionalCare Hospital Partners in March combined with Medical Properties Trust (MPW) - Get Medical Properties Trust, Inc. Report Capella Healthcare to create a $1.7 billion-in-revenue hospital system giant, only months after the REIT bought the healthcare services company from Chicago financial sponsor GTCR. The combined entity now goes by RegionalCare Capella Healthcare (RCCH) and is based in Brentwood, Tenn.
Medical Properties said in March that net proceeds from the transaction would be approximately $550 million, having spent $900 million in cash to acquire Capella from GTCR less than a year earlier. Meanwhile, the transaction came just four months after Apollo purchased RegionalCare from Warburg Pincus for an undisclosed sum. Both RegionalCare and Capella were older investments for Warburg and GTCR, suggesting each sponsor was unlikely to inject additional capital in the two hospital operators.
Curiously, these and other PE firms saw their opportunities in the sector when hospital stocks traded down in the mid-2000s. Financial sponsors took a bunch of for-profit operators of health care facilities private. Once Obamacare took effect in March 2010, it fueled a huge run for the hospitals, and up through 2015 that bode pretty well for the sector's backers.
"We saw a bunch of smart private equity money come in and buy up hospital assets," said Gregory Hagood, a senior managing director and president of Solic Capital. "We saw good returns for the public investors and private equity guys."
Perhaps the most notable of deals was the leveraged buyout of HCA Holdings (HCA) - Get HCA Healthcare Inc Report . The hospital company in July 2006 agreed to a $33 billion LBO by a consortium that included Bain Capital, KKR and Merrill Lynch Global Private Equity, the private equity arm of Merrill Lynch. At the time, the deal represented the largest LBO transaction in history. The for-profit hospital operator's financial backers in 2011 raised $3.79 billion in HCA's third IPO, and have continued to reap impressive rewards as they sell off their stakes in the years since.
History may repeat itself, Hagood asserted, as a sector-wide pullback in the public markets may attract PE investors who see a distressed, value proposition emerging. "We may see one or two deals come back around," he noted.
Recent stock performance suggests that a couple players may soon look like LBO prospects, Hagood said.
While he declined to comment on potential targets, publicly traded hospital companies that have suffered in recent months include Quorum Health (QHC) - Get Quorum Health Corp. Report , whose shares have lost more than 50% of their value since the rural health business completed its spin off from Community Health Systems (CYH) - Get Community Health Systems, Inc. Report in May, trading at about $6.43 on Monday.
The equity markets also haven't treated Community Health well since the breakup. Shares of the company have fallen about 41% to $11.23 a share since April 29, the last trading day before the completion of the spinoff was announced.
There's also LifePoint Health (LPNT) , the Brentwood, Tenn., operator and owner of hospitals and healthcare services in non-urban communities. LifePoint's stock has retreatred about 20% this year, trading at a recent $58.43.
"There's a lot of vulnerability," Bain's Murphy said. "That creates an opportunity for consolidation."