Navigating Opportunities and Challenges in Today’s Healthcare M&A Market

Jon Hammack (00:02): Welcome to Solomon Connects. I’m Jon Hammack. I’m Jon Pritti, I’m a partner in the healthcare group focused on medical devices and outsource services.

Jon Pritti (00:09): And I’m a partner in the healthcare group focused on healthcare technology.

Jon Hammack (00:12): We’re here today to talk about the state of the healthcare market and what’s been driving activity, and what we see coming for the end of this year in 2026.

Jon Pritti (00:20): Jon, it’s been an interesting year thus far. We’re roughly halfway through the year. I would say M&A activity across the board has been relatively muted, but healthcare has shown some bright spots. There’s been certain subsectors that have proven incredibly resilient. What are some of the drivers that you think are dictating that activity?

Jon Hammack (00:37): Healthcare is a broad and diverse market, as you know; there’s subsectors and not every subsector has performed the same as others in this market, but I think, as a whole, I’d say healthcare has had a decent year. We started the year with an expectation that deal activity would be significantly accelerated from last year, and we hit some speed bumps as we moved into the early part of the year with tariffs, regulatory and reimbursement changes, and it created a market where a little bit of the haves and have-nots, sectors that were impacted by these changes at the beginning of the year, have been slower in sectors that haven’t been as impacted, have done better. Healthcare, as I said, is a large and complicated sector. It’s 20% of GDP, and I think one of the benefits of being in healthcare is when you have periods of time where certain subsectors are slower, other subsectors pick up the pace and can perform, and I think that’s what we’ve seen this year.

(01:37) There’s a lot of things that have impacted the market this year to the downside and the things that I just mentioned, but there’s a lot of capital on the sidelines and people are looking to put money to work. Private equity certainly in the mid-cap has been slower to rebound over the last few years; but sectors like the one you’re in, healthcare technology, there’s a need for innovation in making healthcare more efficient. And I think sectors that are exposed to those, and markets, have done well. And despite an environment where I would say it’s a little bit still of risk-off, assets that are high quality — A assets we call them _– there’s a scarcity value and those assets have, while there’s been fewer of them, have come to market and have done extremely well. And I think as we get into ’26, we’re going to see even more activity.

Jon Pritti (02:31): Could not agree more. And I think you hit on a key thematic around the haves and have-nots. I think we’re seeing an over-rotation and, right now, overvaluation on growth — I think people are absolutely placing a premium on growth. It mitigates a lot of the risks out there, if business is going to double or triple during a hold period. So, we’re seeing multiples really hold in those segments across all the subsectors of healthcare. I think the drop off to the B and B+ assets is significant and there’s absolutely still some valuation gaps that need to be solved.

Jon Hammack (03:01): And there’s been some assets that they haven’t brought out, but I would say are good B-B+ assets partly driven by the valuation gap; a gap in buyer and seller expectations that was driven by what’s happened over the last three to five years, where assets were acquired at elevated prices. And buyers today don’t see value in paying those same prices. Private equity has just decided to hold back; to grow into the value, if you will, by waiting another year or two before bringing those back to market.

Jon Pritti (03:31): It’s going to be tougher to count on multiple expansion to drive returns.

Jon Hammack (03:34): Absolutely. And, actually, I’d say I think you almost have to account — if you’re not an A asset — on multiple compression. As a whole, I’d say one of the things that we’re seeing in healthcare, and I think it’s going to continue to be a driver, and we’ve spoken about this, it’s a convergence of the market. It’s no longer a market where you’re selling just a product or just a service or just a technology. You’re starting to see convergence of all three of those to drive more efficient care, to drive cheaper care, to fight access to people in areas that aren’t as populated. And I think that convergence is going to drive a lot of activity.

Jon Pritti (04:09): Could not agree more.

Jon Hammack (04:10): So, Jon, we touched on private equity, and I think we’ve seen continued slowdown in activity in private equity this year, and particularly in the mid-cap sides; different factors are impacting the market as we discussed. What do you think more broadly has happened in healthcare?

Jon Pritti (04:29): Look, I think overall it’s 20% of the US GDP, as you alluded to earlier. There’s definitely still a lot of interest in the sector. I think the overall mentality is much more towards risk-off. People are spending time evaluating deals, but I think they’re having trouble getting over the goal line. They’re much more conscious of their going in multiples and making sure that they do not overpay for assets. I think you’re seeing certain subsectors see premiums subscribed to them, because as you’ve seen, for instance, the provider landscape, which has a bunch of challenges around reimbursement cost pressures on the employee side, you’re seeing a pivot towards sectors that like healthcare technology, like pharma services that are relatively immune to those factors. So, you’re seeing the names that are helping drive efficiency. Whether it’s quicker access to the market from a pharmaceutical perspective around drug development, whether it’s increased efficiency on the provider side from a technology perspective, you’re seeing assets like those attract a significant amount of interest and you’re seeing multiples hold in those subsectors.

Jon Hammack (05:32): Yeah, I think one of the other things we’re seeing in the private equity market is, as these hold periods have elongated, LPs want a return to capital. We’ve seen this in other market dislocations; when one product tends to slow, you see the advent of other products, and the secondaries market is one that continues to be very busy; continuation vehicles continue to be very busy. We’ve seen, you know, more and more private equity processes result in minority sales or structured equity-like type of transactions as a way to raise some capital to return to LPs. We’ve seen people being creative to try to find ways to return capital to LPs, in an environment where you need to do it if you want to go out and raise new funds.

Jon Pritti (06:17): Absolutely. And I think that kind of tug of war between the elongated hold periods and the pressure to return capital is going to eventually solve the valuation gap we’re seeing for some of the B and B+ assets out there. I think hopefully that log jam opens up early next year. Maybe we get a rate cut from the Fed and that helps drive some increased activity.

Jon Hammack (06:36): A lot of people talk about the lack of rate cuts as being part of the reason that activity has been slower, and that may play a part of it, but I think to your point, it’s this valuation gap that I think has really deterred people from coming out. We’re starting to see green shoots of activity now. I think post Labor Day we’re going to see more activity, and I think it’s going to accelerate into ’26.

Jon Pritti (07:03): I think another dynamic we should see from the private equity community is there’s a lot of assets that came to market, and the A assets have traded and traded at premium values. There’s been a lot of assets that haven’t traded, and I think some of those you’ll see folks circling back as we get closer to end of year and there’s full visibility into the 2025 numbers and people start to lean in a little. I expect probably an atypical level of one-off activity during the balance of the year.

Jon Hammack (07:28): I completely agree. As I mentioned earlier, healthcare is a broad sector with many subsectors that have different factors that drive more and less activity. At Solomon, we’re building a group to provide kind of holistic coverage across the healthcare ecosystem. You recently joined us to lead and expand our efforts in healthcare technology, share what’s happening in your space.

Jon Pritti (07:45): Healthcare technology remains a bright spot within the broader healthcare ecosystem. There’s absolutely a significant interest from the investor community in this space. There’s been a ton of activity, both on the provider side, specifically within revenue cycle management. There’s been a lot of activity on the pharma tech side and the pharma commercialization side. I think they all speak to a couple of thematics. Number one, a lot of these assets in these companies help providers, they help pharma companies increase their revenue and drive increased revenue capture, so to speak. And in the tough environment where we have right now from a regulatory and from a reimbursement perspective, their services are at a premium. And we’re early in the adoption curve, so, I think people are very interested in the white space that these companies have in front of them. I think on the pharma side, a lot of these assets help speed the drug development cycle, right? Get drugs to market quicker. As we’ve moved more and more towards specialized medicine, they’re helping in terms of targeted therapeutics. So, we just continue to see a lot of activity. It’s interesting to watch the evolution of how some of these private equity funds have thought about the space. If you go back 10 years ago, you had your specialist and you had your generalist funds, and that was who was investing in HCIT. And then you had this whole bucket of funds that would not touch healthcare technology and were very focused on the provider landscape. As those assets have started to have some challenges, you’ve seen them now pivot. They understand the pain points, they understand the market dynamics. So, they’re saying, let’s not waste all this shared knowledge that we’ve gained over the last decade and make investments into healthcare technology.

Jon Hammack (09:13): How is AI playing into your space, if at all?

Jon Pritti (09:15): AI is still in the early innings. It’s on every investor’s mind, in every process. It’s a key area of diligence. I think we are starting to see some consensus emerge that AI, at least within healthcare, will be played on the healthcare technology side and the tech-enabled side, as opposed to selling a pure AI solution into the provider and pharma landscape, i.e., you need access to the data to make the AI really work well. You also need, and I think what New Mountain did with their combination of access healthcare, smarter DX and an AI business is really telling where they kept the people component involved. So, I think there is a view that while AI will be incredibly beneficial around process recognition and help drive workflows and better outcomes, you still need a people component to that aspect. So, I think because of that, we’re seeing multiples really expand on the tech-enabled side, as opposed to the pure software side. Within healthcare technology, we’ve seen a number of processes in the tech-enabled side of healthcare technology that two, three years ago multiples would’ve been in the 15, 16 times range. They’ve now ticked up closer to 20.

Jon Hammack (10:22): I actually saw your new business card. It looks like you renamed yourself Jon Pritti, AI. What’s the reason for that?

Jon Pritti (10:29): Process recognition? And look, you know, as we kind of wrap up the conversation here, what are your views on the balance of this year? What do you expect to see play out? How optimistic are you for 2026?

Jon Hammack (10:43): If you would’ve asked me this a year ago, I would’ve told you that I was very optimistic about 2025. I would’ve gotten that wrong. I think what we’re seeing now is different than a year ago. We’re already starting to see green shoots of activity primarily with the higher-rated companies, the A+ companies that we talked previously about, and I think that that’s going to roll into ’26. So, I think a few things are going to happen as we approach the end of the summer and the end of this year. I think, one, we’re going to see more processes come out and test the market, not just for A+ assets but for the B assets. And I don’t use B assets as a dirty word — I mean, these are good companies. And I think that there is a real willingness and a need for particularly private equity to put capital to work. And as you mentioned earlier, I do think that this valuation gap between buyer and seller is narrowing, and I think having a few good prints with those B assets is going to give the market confidence, it’s going to kind of help unlock the log jam. I think as we move into ‘26, a few things are going to happen. One, I do think we’re going to start seeing some rate cuts, which I think on the margin is going to be helpful and maybe that’s helpful in narrowing this valuation gap. And the backlog right now of assets that have been waiting to come, really for the last two or three years, is significant. And if you pair that with the LP demand that they return capital, we’re optimally positioned to see this log jam free and to see a lot of activity as we get into next year.

Jon Pritti (12:14): I agree. The one dynamic we are seeing a little though, it does feel like some processes are starting to become a little more elongated. You know, you’re seeing bankers run processes that are enabling longer diligence times, which I think is needed, right, in this environment? Especially for the B and the B+ assets, where people have to get comfortable with the various risk factors. Yeah, I think we’re seeing more and more prep work and interaction happen in advance of processes. Because it feels like private equity is definitely shifting towards a more thesis-driven approach. So, I think we’re going to see more of that, end of 2025, and 2026 as well.

Jon Hammack (12:46): I think that’s right. I mean, people don’t want to have busted processes. So, that upfront education and kind of pre-marketing, I think it’s used for many reasons, but part of it is to assess buyer interest and to see, and if they should actually push out with a broader process. As I think about the back half of this year, if you have an A asset, an A+ asset, I couldn’t think of a better time to be in the market. There’s such a scarcity value of high-quality assets. We’ve seen it sporadically, but when we’ve seen these assets come out, the level of interest they’re getting to the market is significant. And despite what I said earlier around multiples, you know, kind of normalizing, we’re still seeing those assets get premium multiples.

(13:29) So, I think that wraps today’s discussion. Jon, thanks for joining me.

Jon Pritti (13:33): Thanks for having me, Jon. Really insightful discussion around the state of the healthcare M&A markets. Really excited for what lies ahead in 2025 and 2026.

(13:41) As am I.