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The challenging environment may benefit prudent sponsors and strategic investors.
Healthcare service deal flow is expected to remain resilient, though not immune to macroeconomic pressures. General economic uncertainty, elevated interest rates, and tightening credit conditions may temper the pace of activity in 2025, making a record year unlikely. Even so, private equity firms, buoyed by dry powder and long-term sector confidence, are likely to remain active players, sustaining a steady volume of transactions.
Healthcare services deal volume is off to another slow start despite hope for a rebound in the sector. According to data from S&P Capital IQ, 149 deals have been announced through May 2025, which is similar to last year at this time, and well below the 200+ announced deals over the same period in prior years.
Regulatory and general economic uncertainty are casting a cloud over dealmakers. Over the summer, Congress will work through what promises to be a complex and difficult budget negotiation, which may see changes to Medicare, Medicaid, and other government healthcare programs. The future of these programs will have implications for healthcare service executives, investors, and dealmakers alike.
While tariffs do not generally have a direct effect on healthcare to the degree they do other sectors, second- and third-order effects, including the uncertainty around their implementation, are impacting the appetites of decision-makers and investors in the space as they consider making acquisitions.
The resilient May jobs report has reinforced the Federal Reserve’s focus on the full employment half of its dual mandate, making near-term rate cuts unlikely.
Regardless, the Fed’s ability to influence the cost of debt used to finance buyout deals is limited. Monetary policy, the Fed’s primary policy tool, affects shorter term treasuries. In fact, since the Fed began cutting rates in September, the yields on 10- and 20-year treasuries increased 40 and 52 basis points, respectively. These yields more directly influence the rates at which middle-market companies can borrow money to finance acquisitions.
Despite macroeconomic headwinds, we expect healthcare services dealmaking to continue. According to PitchBook data, hold periods for healthcare portfolio companies are approaching historic highs, signaling a growing need for exits. Meanwhile, Bloomberg reports that private equity funds are sitting on $250 billion in committed capital, known as dry powder, that must be deployed. Sponsors are eager to invest in new opportunities while also facing pressure to return capital to their limited partners by exiting older investments.
This push-and-pull dynamic, coupled with healthcare’s relative insulation from economic cycles, is expected to sustain deal activity, even if the volume doesn’t match the highs of recent years.
We expect that future dealmaking will continue with greater scrutiny than in prior cycles. With the cost of capital elevated, the margin for error is shrinking. Buyers are likely to spend more time and resources evaluating deals, considering a wider range of opportunities, and taking a more selective approach before committing to a transaction.
Whether you’re evaluating a new platform, preparing an exit, or assessing the impact of new policies on your investment strategy, our team can help. At Elliott Davis, we offer market insights, valuation support, and due diligence services tailored to your goals. Reach out to learn how we can support your next move.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.
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