In this episode of the Healthcare M&A Podcast, HORNE Capital Senior Manager Jarrod Barraza is joined by Matt Johnson of SeaCap Advisors for a frank conversation about current headwinds and what may lie ahead. From slowed exits and margin pressures to AI’s growing presence in due diligence, the discussion captures a sector at a turning point.
The Post-Peak Reality: From Q4 2021 to Today
The fourth quarter of 2021 was a high-water mark in healthcare M&A activity. Since then, things haven’t exactly worsened—they’ve simply shifted. Platform companies, especially in physician practice management (PPM), are experiencing a variety of challenges. Some are selling up, others are realizing they may have overpaid or failed to integrate, and a few are pausing acquisitions to focus on optimizing their current assets.
The Integration Imperative
The era of growth via multiple expansion may be fading. A recent Bain study attributes 98% of healthcare PE fund performance to revenue growth and multiple expansion, with only a marginal role played by margin improvements. Going forward, margin expansion will need to be a key lever. That’s easier said than done: labor costs continue to rise, while reimbursement pressures mount from both government and commercial payers.
Exit Challenges and Value Creation
Exits remain one of the largest bottlenecks in today’s market. Interest rates are limiting larger buyouts, and many buyers are increasingly selective—especially when a seller hasn’t done the integration work needed to deliver margin gains. In response, more firms are pursuing horizontal integration and looking inward to improve efficiency and performance.
Dry Powder Meets Risk Aversion
Despite ample dry powder in the market, both buyers and sellers remain cautious. Younger physicians face overwhelming debt loads and are risk-averse. On the other side, buyers are more disciplined after early overpayments. The market is searching for a middle ground that enables deals to move forward without overstretching either party.
The Non-Compete Conundrum
Ongoing legal uncertainty around non-compete agreements adds complexity to the M&A environment. These clauses, historically considered essential to retaining key revenue producers, are now under increasing legal and regulatory scrutiny. Their perceived value may not match real-world enforceability, particularly in states with more aggressive enforcement or shifting legal landscapes.
Employee Ownership and Retention Tools
Some large buyers are turning to broader employee ownership as a retention strategy. While this can create alignment, it’s not always a recruiting silver bullet. ESOP-like structures may still face the same staffing and cost pressures that challenge the rest of the sector.
Outlook for 2025: Activity with a Delay
Many had predicted a record year in 2024, but deal flow slowed for a variety of reasons: rate uncertainty, regulatory changes, and investor fatigue. Heading into 2025, expectations remain cautiously optimistic—but many expect a slower first quarter, with activity picking up in the second half of the year as rate clarity improves.
Deals that have been stuck in holding patterns for a year or more may finally push through as stakeholders tire of delays. Pipelines are full, and many are just waiting for market signals.
AI’s Emerging Role in M&A
AI is becoming more visible in healthcare dealmaking, especially in due diligence. Document summarization tools, searchable data rooms, and advanced QA automation are streamlining review processes. AI may even flag contractual provisions that previously escaped human eyes.
On the investment side, platform-agnostic AI tools and workflow overlays continue to attract capital. However, investors are becoming more selective, wary of point solutions that may not scale or integrate effectively.
Conclusion
Healthcare M&A is entering a new phase. Margins matter more. Integration is no longer optional. And tools like AI are reshaping workflows. For 2025, expect:
- Continued dry powder deployment, but with more discipline
- Longer and more stringent physician agreements
- Delayed activity in Q1, with potential acceleration mid-year
- More due diligence automation and AI adoption
- Ongoing uncertainty around rate cuts and legal developments
Navigating this new landscape requires clarity, creativity, and a willingness to adjust strategies as both macro and micro dynamics evolve.
