In the second quarter of 2024, the healthcare services sector faced a series of significant challenges, particularly in the context of private equity (PE) investments. Despite a 16.5% decline in overall deal activity compared to the previous quarter, with around 142 deals announced or closed, there are signs of a recovery underway. The market showed signs of acceleration towards the middle of the quarter, especially in the Applied Behavior Analysis (ABA) and mental health services segments, with renewed investor interest in high-quality assets.

Evolution of the Healthcare Services Market

The slowdown in deal activity in Q2 was mainly attributed to the physician practice management (PPM) segment, where market sentiment deteriorated significantly. However, starting in May, there was a shift in the PE healthcare market, with an increase in mergers and acquisitions (M&A) activity, albeit with a more cautious approach. Seller price expectations began to moderate, creating new acquisition opportunities.

In the ABA context, several significant transactions were announced, such as Shore Capital Partners' sale of Behavioral Innovations by Shore Capital Partners to Tenex Capital Management and Frazier Healthcare Partners' sale of Caravel Autism Health by Frazier Healthcare Partners to GTCR. These transactions indicate renewed interest in ABA services, which continue to benefit from structural growth trends driven by the increasing prevalence of autism and evolving clinical models.

Average Valuation Multiples

In the healthcare services sector, average valuation multiples have shown variability depending on the segment. Enterprise Value/EBITDA (EV/EBITDA) multiples have been a crucial tool for investors in evaluating investment opportunities and determining entry and exit strategies. Below is an overview of the average EV/EBITDA multiples for key healthcare services segments in the second quarter of 2024:

• Healthcare IT Services: 18x – This segment has maintained high multiples due to the growing demand for advanced technological solutions and the ongoing digitalization of the healthcare sector.
• Pharmaceutical Services: 15x—The pharmaceutical sector remains attractive to investors due to its resilience and steady growth, which is fueled by the demand for drugs and support services.
• Home Care and Behavioral Health Services: 13x—These services have benefited from the increasing focus on personalized care and long-term care management.
• Physician Practice Management (PPM): 10x – PPM multiples have been moderate, reflecting a decline in market sentiment and pressure on margins due to operational challenges and evolving market dynamics.
• Applied Behavior Analysis (ABA): 15x – ABA services have recorded sustainable multiples, thanks to growing awareness and the need for treatments for autism and other behavioral disorders.

These data highlight how healthcare IT and pharmaceutical sectors remain valued at higher multiples, reflecting robust growth expectations and stability. In contrast, sectors such as PPM show lower valuations, signaling greater caution from investors and a more challenging market.

Mental Health Segment

The mental health segment has seen increased investor interest, with several platforms ready to enter the market or already in preparation. Recent transactions include Avesi Partners' acquisition of First Steps Recovery and the sale of Turning Point Centers by InTandem Capital Partners to Acadia. With the market reopening and favorable winds in terms of reimbursement and demand winds, this is a good time for investors to reconsider opportunities in mental health.

Valuation Dynamics and Investment Strategies

Valuations in the mental health sector have shown some stabilization after a period of high volatility. Well-managed platforms continue to be appreciated, although investors have become more cautious about future return expectations. Transactions in the mental health sector tend to focus on partial hospitalization (PHP) and intensive outpatient programs (IOP), which offer a mix of revenue stability and opportunities for organic growth.

Overall, the healthcare services sector is going through a period of transformation, with increased attention to asset quality and operational sustainability. Investors are adopting a more targeted approach, focusing on segments such as healthcare IT services, pharmaceutical services, and other non-PPM services. This trend is driven by a combination of factors, including the reduced cost of capital and expectations of moderate but stable growth.

Final Considerations

The outlook for the healthcare services sector in the coming months of 2024 is moderately positive. Expectations of a gradual acceleration in deal activity, driven by a moderate reduction in valuations and greater availability of capital, are moderate. However, the market remains highly selective, focusing on high-quality assets and segments with solid growth foundations.

In conclusion, the healthcare services sector shows signs of recovery and adaptation in a still uncertain market context. Investors who can identify the right opportunities and manage associated risks may benefit from current dynamics, positioning themselves for sustainable growth in the long term.