Banker Insights: Healthcare IT

Healthcare IT

Healthcare IT transactions

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  • The Healthcare industry is shifting to a value-based care model, which aims to deliver more effective care at a lower cost. We expect that providers will continue to pursue acquisitions of healthcare IT (HCIT) targets to decrease costs while maintaining a high standard of care. 
  • A shortage of labor and rapidly rising wages remain as the main pain points for providers. Private equity has identified this dynamic, and invested in provider IT solutions that optimize operations and improve margins. 
  • Revenue cycle management (RCM) and ancillary companies that improve collection rates and lower the costs of complex reimbursement collections, remain highly desirable acquisition candidates by both strategic and financial buyers. 
  • Outside of provider-focused HCIT, bio-pharma IT solutions that aim to improve workflow productivity, project management and reduction in clinical trial times, continue to remain a bright spot for deal activity. 

For more information or questions, please contact our Healthcare Services team:

Paul Kacik, Managing Director: pkacik@hexagoncapitalalliance.com

Brad Erhart, Director: berhart@hexagoncapitalalliance.com

Daren Oddenino, Director: doddenino@hexagoncapitalalliance.com

Banker Insights: Physician Services

PHYSICIAN services

physician services transactions

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  • Investor interest in physician practice management remains elevated and 2023 represents an excellent time for physician organizations to consider adding a strategic partner.
  • While the Covid-19 pandemic is over and physician organizations are returning or exceeding pre-covid volumes, operating challenges created by the pandemic, such as staffing, and enhanced patient acuity remain. These persistent operating conditions, coupled with sustained investor interest, are providing physician organizations with the opportunity to strengthen their organization by adding a strategic partner at attractive valuations.
  • These partnerships provide an opportunity to affiliate with a larger entity or remain independent while improving its financial strength, enhancing revenue, and adding greater efficiencies. It can also help accelerate an organization’s ability to transition to greater value-based revenue from fee-for-service.
  • Furthermore, these transactions provide an opportunity for physician owners to monetize a portion of the equity they have built over the years of serving as a physician and will typically be treated as capital gains vs. personal income.
  • Physician organizations that are interested in strengthening their position in today’s dynamic healthcare environment should consider all the advantages a strategic partner can bring.

For more information or questions, please contact the Healthcare Services team:

Paul Kacik, Managing Director: pkacik@hexagoncapitalalliance.com

Brad Erhart, Director: berhart@hexagoncapitalalliance.com

Daren Oddenino, Director: [email protected]

Banker Insights: Behavioral Health

Behavioral Health

behavioral health transactions

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  • Continuing the strong trends from last year, 2023 is shaping up to be another solid year for M&A in the behavioral healthcare sector.
  • Both residential and non-residential behavioral health services continue to garner a great deal of interest from strategic and private equity buyers, leading to competitive processes and attractive valuations.
  • We expect these transaction dynamics to continue, as financial buyers look to deploy capital for platform acquisitions as well as supplementing organic growth through add-on acquisitions. Similarly, large strategic providers are fueling earnings growth through the acquisition of complementary services, extending the continuum of care as well as geographic expansion.
  • Clinicians and practice owners who are interested in taking their practice to the next level through a liquidity event should consider taking advantage of the attractive transaction environment we currently find ourselves in.

For more information or questions, please contact the Healthcare Services team:

Paul Kacik, Managing Director: pkacik@hexagoncapitalalliance.com

Brad Erhart, Director: berhart@hexagoncapitalalliance.com

Market Monitor: Transportation & Logistics

Market Monitor: Transportation & Logistics

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Market Monitor: Transportation & Logistics

Making the right decisions for your business starts with having the most accurate and current information available. Our Transportation & Logistics Market Monitor keeps you up to date on the events, trends, and market forces that shape and guide the industry.

  • Port activity showed resilience throughout the year but experienced a significant drop in the fourth quarter of 2022 and the first quarter of 2023, especially on the West Coast. 
  • Diesel costs have retreated from pandemic highs but are still elevated from pre-pandemic levels. 
  • Long Haul trucking has been trending downward, due to the shift towards regionalized imports, which is driving the need for more cost-effective and sustainable supply chain solutions.
  • As global supply chains experience realignment due to geopolitical risk, we expect consolidation of the sector to accelerate to capture growth in new geographies and cost savings in new technologies.

For more information or questions, please contact our contributors:

Rich Anderson, Managing Director: randerson@hexagoncapitalalliance.com

Brandon Clewett, Managing Director: bclewett@hexagoncapitalalliance.com

Market Monitor: Packaging Materials

Market Monitor: Packaging Materials

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Market Monitor: Packaging

Making the right decisions for your business starts with having the most accurate and current information available. Our Packaging Materials  Market Monitor keeps you up to date on the events, trends, and market forces that shape and guide the industry.

A little bit of everything all at once – can be used to describe industries across the U.S. economy. Some market sectors are clearly faring better than others as economies adjust to a post-pandemic era, higher interest rate environment, rotating consumer spend, and acute geopolitical tensions.

Not even a traditionally resilient packaging sector can withstand the pressure of constantly evolving demand/supply and price/cost dynamics. Across packaging substrates, valuation multiples have generally declined 1x – 2x ‘turns’ of EBITDA from the peaks reached in 2021.

For more information or questions, please contact our contributors:

Andrew Suen, Managing Director: asuen@hexagoncapitalalliance.com

 

Banker Insights: Discretionary Consumer Sector


The Pending Recovery of the Discretionary Consumer sector

 ‘It’s tough to make predictions, especially about the future.’

– Yogi Berra

During my career, I’ve experienced five material downturns in the economy and capital markets. In the early stages of each cycle, valuations of publicly owned Discretionary Consumer (“DC”) ** companies led other sectors down as economic headwinds intensified. Once the Fed and Congress initiated stimulus by increasing market liquidity, lowering interest rates, cutting personal and corporate tax rates (or all the foregoing), the DC Index valuation was the first to climb, and more often than not, was the fastest to recover to pre-downturn levels. At the depths of the downturn, the number of negative data points affecting DC businesses far outweighed any positive metrics. Yet the DC sector has come back, frequently roaring back, cycle after cycle.

Being an eternal optimist and counting on history to repeat itself, I know the DC sector will recover. While it is difficult to predict “when” the recovery in the DC sector will commence, I’m going to take a shot at it…

A Look Back

First, a review of the Great Recession and the state of U.S. Households and Corporate entities leading to that very dark era in history. According to the US Census Bureau, in 2008, just as the recession commenced, household leverage exceeded 13% of disposable income. Non-Financial corporate entities were significantly levered with interest expense accounting for 4% of revenues, per the Bureau of Economic Analysis. 

Today, both Households and Corporate entities have significantly stronger balance sheets, with Household leverage under 10% of disposable income and Non-Financial Corporates’ interest expense accounting for approximately 2% of revenues. All in all, U.S. Households and Corporate entities are better positioned to weather the weak economy. Household and Corporate spending should minimize the depths and durations that the S&P 500 and the DC indices may languish.

Now, for some charts to illustrate how the DC Index performed before, during and after the Great Recession.

DC Sector Historical

The peak DC Index valuation occurred on July 6, 2007. The DC Index declined by ~60% to its lowest level on March 9, 2009. There was a total of 612 days, or 20.4 months, from the peak to the trough.

In 2008 and 2009, the Fed and Congress took unprecedented steps to resuscitate capital markets and to stimulate the economy. In 2009, the DC Index soared and led to reaching the previous (July ’07) high valuation peak on May 27, 2011, a total of 809 days, or 27 months later.

A Look Ahead

In an effort to forecast the future of the DC Index, I’ll rely on metrics tied to the cycle of the Great Recession. By overlaying the preceding data from 2007 to 2011 to present-day metrics, I’ll provide estimated target dates for the trough and the recovery to the former peak.

Prediction DC Sector

The most recent high of the DC Index occurred on November 19, 2021.   By overlaying the 20-month historical peak to through, I estimate the DC Index will hit a low in Q3 ’23.   Yes, seven to eight months from now, the DC Index will bottom out, then begin its upward momentum.

Now, no recessions are comprised of the same set of variables.  One of today’s biggest issues in the DC sector is massive supply chain disruptions.  The timeline for resumption of well-oiled supply chains is anyone’s guess.  Inflation is another major factor impairing the economy, and the Fed has clearly communicated its intent to battle it with recurring interest rate hikes.  I can see how the DC Index low could be pushed out into Q4 ‘23 but I doubt it will occur later than this.

Finally, geo-political risk is the ultimate wildcard.  If the U.S. is drawn into a kinetic war with Russia or China, all bets are off.  Absent this worst-case scenario, once the vortex is reached, I estimate the DC Index will reach its former November 2021 peak in 27 months, or Q4 ’25.

The storm clouds will break, and sunny days (along with higher DC valuations) will shine upon us. Of this prediction, I believe Yogi would concur.

** The DC Sector is comprised of the following sub-sectors: Automobiles & Components, Consumer Durables & Apparel, Consumer Services and Retailing

Looking Ahead – Key M&A Themes in 2023


Looking Ahead - Key M&A Themes in 2023

Strategic acquirers and financial sponsors alike were busy putting capital to work which culminated in a dizzying 24 months of record-setting M&A activity.  However, a valuation correction, which arguably began in the second half of 2022, is expected to carry over in 2023 as monetary tightening and interest rate hikes continue.  As the fight for price stability wages forward, many industry experts predict 2023 transaction activity will be ‘muted’ relative to the past two years, but not ‘decimated’ as witnessed during the Great Recession.

Private Equity acquirers are calibrating market valuations and investment theses under a fresh economic cycle.  Rising borrowing costs, pressure on key equity return metrics, and macro-economic uncertainty is creating a melting pot of ‘noise’ when it comes to business valuations.  Smaller target acquisitions will become more prominent – “add-ons” are generally quicker to digest and integrate and can sometimes be acquired at more favorable valuations while also meeting growth criterion.  Private debt funds, or non-bank lenders, will be a primary source of financing as the asset class continues its meteoric rise and abundant deployable capital (‘dry powder’).  Heightened scrutiny in due diligence – all acquirer-affiliated constituents (investors, quality-of-earnings, insurance, operations, environmental, human resources, legal, etc.) are on high alert taking special care when identifying and allocating the risks between counterparties.

Strategic acquirers to continue dominating the proportion of middle-market M&A activity in 2023.  Corporate acquirers have significant deployable cash on-hand and existing credit facilities after more than a decade of shoring-up balance sheets.  The last two years of cash preservation and debt repayment tactics have further expanded capital allocations to M&A strategies.                Strategic fit, growth characteristics, and cash flow resilience will determine a premium vs. discounted valuation for middle-market businesses.

We anticipate strategic buyers to prevail in most large middle-market company transaction processes, while financial sponsors focus on smaller middle-market businesses that complement their existing portfolio investments.   Premium valuations will be awarded to those companies that are outperforming their peer groups.

Hexagon Capital Alliance has a 23-year history of assisting business owners in planning and executing on their personal and corporate liquidity objectives.  All deals start with a conversation.  We are here to listen then present alternatives to help business owners make informed decisions.