There are lots of ways to pick up a stake in the business, but health IT is healthcare investors’ favorite place to sink their money, according to a new survey by KPMG and Leavitt Partners. In fact, as you see below, the investors are willing to pay a premium for positions in such companies.
In September and October, KPMG and Leavitt surveyed 175 respondents about their healthcare investment plans. The two found that 34% of respondents were most interested in investing health IT, followed by care management (31%), home health (23%), retail-centric medical groups (22%) and primary care practices (21%).
Before you get the warm fuzzies, it’s worth noting that 64% of respondents said they saw health IT as an overvalued sector. That being said, 51% of respondents said that they expect to see valuations to remain the same next year, and 40% think valuations will actually go up next year. That should be particularly the case for tools helping consumers get the best care, researchers found.
The researchers predict that health IT companies will sell at a whopping 12.5 times EBITDA plus or minus a 1.5 margin of error. Other big winners for next year include retail-centered medical groups, which are predicted to sell at 11.5 times EBITDA plus or minus 0.7 and care management, tools are projected to sell at 10.8 plus or minus 1.8.
What’s behind this enthusiasm? According to Carole Streicher, KMPG Deal Advisory leader for healthcare and life sciences, providers seem to feel they have something to prove. “There is a bit of defensive postures motivating investments as healthcare organizations contend with competition and reimbursement models tied to quality and efficiency,” she said in a prepared statement.
In choosing specific deals, buyers are looking for firms that can create savings and economies of scale, plus improve cash flow or accretive earnings per share, Streicher said.
I will be most interested to see how these predictions play out, as they don’t square precisely with what I’m seeing in my day-to-day work. For example, if care management deals are popping up everywhere it’s news to me. In fact, many of the vendors I know of in the sector are having trouble finding customers much less investors.
I’d also like to get more data on which subsectors of health IT are hot enough to generate those kinds of multiples when selling out to investors. I strongly suspect that the big deals in health IT won’t be the acquisition of vendors in hot but still immature sectors like blockchain and health AI, but rather in less immediately-sexy categories like health data analytics.
Of course, though, what makes predictions fun is that you can be wrong in surprising ways. Let’s see whether IT investment provides some of the surprises in the coming year.