Aging Population Will Continue to Drive Healthcare M&A in 2019

By Ryan Binkley

Based on demographic trends, the aging U.S. population will continue to drive M&A activity forward in the healthcare industry.

That is the view of Ryan Binkley, the President and CEO of leading middle market M&A advisory firm Generational Equity. The number of healthcare transactions have been growing the last several years, a trend Binkley doesn’t see diminishing this year.

Healthcare is a $3.3 trillion market, making it a huge and growing industry for professional buyers and investors, especially as consolidation of the sector continues to be the overriding trend.

“The healthcare industry has been a strong driver of M&A activity in the U.S. and globally for several years now,” said Binkley. 

“It is among the top performing sectors in terms of deal count, deal value and private equity investment, and 2018 was a record-setting year for the industry in terms of deal volume. While it could be hard to top, signs suggest that 2019 could match and even exceed this exceptional activity, particularly in our ballpark: the middle market.”

Reviewing Healthcare M&A in 2018

Healthcare M&A was in a healthy state as 2018 drew to a close, with PwC reporting that over 250 healthcare-related transactions closed in every quarter in 2018 (Q1 284, Q2 293, Q3 261), with a run of 200+ deals stretching back to Q4 2014.

This sustained strength in deal volume has made healthcare one of the best performing sectors for M&A activity last year. Positive momentum continued into Q3 2018, with deal volume increasing over 6% compared with 2017.

“The level of merger and acquisition activity in and relating to healthcare has been one of the many factors sustaining the current seller’s market,” says Binkley.

A driving force of this substantial M&A activity in 2018 was private equity investment. A report by Preqin revealed that, as of November 2018, 585 healthcare-focused deals involving private equity firms had been concluded throughout the year, worth $56 billion. This is on course to exceed 2017’s figures of 619 deals and $57 billion value.

Furthermore, this focus of private equity investment on the healthcare industry shows no signs of curtailing, with PwC projecting an increase to 747 deals in 2019, due in part to over $600 billion in cash reserves reportedly ready for investment into the industry.

“Transactions involving private equity firms have been a growing trend across all industries in recent years, with significant amounts of capital waiting to be invested,” says Binkley. 

“The healthcare industry is a particularly attractive prospect for these organizations, offering strong operating margins, sustained performance levels through year end, and opportunities presented by our country’s aging population.”

Age and Other Factors Driving Healthcare M&A

The aging of the U.S. population is a major factor driving M&A activity in the healthcare industry. 

The number of Americans aged 65 and older grew from 35 million in 2000 to 49.2 million in 2016, according to the U.S. Census Bureau, and this number continues to increase as baby boomers age and life expectancies increase with innovations in medicine, technology and healthcare support. 

According to the AARP, 10,000 baby boomers are turning 65 every single day, and this is expected to continue into the 2030s. This means that nearly seven baby boomers are turning 65 every minute.

This aging population will expand the revenue of the healthcare sector overall due to increased spending on medications, health services and later life care. This will continue to make the niche an attractive proposition for professional buyers and private equity investment and, at the same time, increasing the competition in the market to find the highest-quality targets.

Furthermore, the greater demands this aging population present and the rising expectations of customer and patient experience will likely result in increased consolidation among healthcare companies. 

This M&A activity will allow larger organizations to gain access to developing technology, expertise and techniques in this rapidly evolving industry. This will allow healthcare companies to remain ahead of the curve, further scale and improve their offering to consumers.

“Significant consolidation is expected among healthcare businesses in coming years, driven by the need to keep up with our maturing population and the development of equipment, medicine and facilities,” says Binkley. 

“However, current concentration in the sector is low, with no single enterprise accounting for over 5% of industry-related revenue. This low market concentration leaves ample room for consolidation to increase in the coming years.”

The consequences of the aging population mean it’s no surprise to Binkley that long-term care is one of the most dynamic growth segments in the healthcare sector.

“Our sources suggest that long-term care was estimated to account for over 40% of the deal volume in the healthcare industry for 2018,” says Binkley. “Meanwhile, physician medical groups are anticipated to attract the highest total value, accounting for over 50% of this year’s forecast.”

“The demands of the aging population will also drive an increase in home healthcare and pharmaceutical solutions. A transaction Generational Equity supported last year, the acquisition of East Tennessee Personal Care Service by Amedisys, is indicative of this wider trend – Amedysis was seeking to expand the home health capabilities to respond to the needs of their customers.”

The aging population is not the only factor that is expected to drive healthcare M&A into another successful year in 2019. PE Hub has highlighted that organizations in the behavioral health space have also been a big focus and activity should remain steady this year.

Behavioral health companies, covering a spectrum including behavioral addictions, substance abuse and eating disorders, are attracting attention due to the software and technology they possess relating to these specific conditions.

“Very recently our firm helped close the acquisition of ABA of North Texas – an organization that offers high-quality behavioral services for children and adolescents with autism spectrum disorder and other disabilities – by The Family Treatment Network, a platform company of Pharos Capital,” Binkley shares.

“ABA’s focus on the impact this disorder has on children and teens was highly valued by Pharos, and will help strengthen their own treatments and capabilities. This is just one example of deals involving behavioral health companies that have grown as larger organization’s look to incorporate businesses with specialist knowledge and equipment for these conditions that impact increasing numbers nationwide.”

What to Expect from Healthcare M&A in 2019

Overall, M&A activity in the healthcare industry is expected to remain strong in 2019, building on the positive trends set in 2018 and years prior. The implications of the country’s aging population will be a key factor in motivating further consolidation and mergers among healthcare companies (and across industries) and will encourage private equity investment to fund the demands of an older population and capitalize on expected revenue growth.

Indeed, Deloitte’s survey into M&A Trends 2019 found that 61% of respondents expect the number of deals closed in the Healthcare and Life Science industries to increase this year, with just 2% predicting a decrease. 

As the influx of baby boomers will continue to necessitate staffing, equipment and research for medicine, assisted living and more, expect long-term care services to also remain a growing segment of M&A activity in the healthcare sector.

Ryan Binkley is the President & CEO of Generational Equity, one of the leading middle market M&A firms in North America. Based in Dallas, TX, Generational Equity has closed more deals in the middle market than any M&A advisory firm since its inception, helping scores of business owners secure their financial legacy and transferring over $4 billion in wealth to their clients.