McDermott Will & Emery released the firm’s latest healthcare private equity market report this week, providing a readout on the final sector-specific deal trends from 2023.
The firm’s data support the idea of a general trend toward more active deal structuring as buyers contend with choppy market conditions and work to bridge gaps in valuation expectations.
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Rollover equity structures jumped in popularity and are now used in more than 65 percent of all deals, up from just 38 percent in 2020. Larger deals are more likely to include a rollover component — only half of deals with headline values under $50 million had rollover.
Though rollover incidence is growing, size has remained relatively steady. The average value of rollover as a percent of purchase price is now 28 percent, compared to 25 percent in the prior year.
Deals with deferred purchase prices or earnouts have also become more common. Around 23 percent of last year’s deals used earnouts, up from 17 percent in 2022 and just 12 percent through the market’s peak in 2021.
Earnout usage is up even within sub-verticals that have a stronger preference for upfront cash, like physician practice management. One-quarter of all PPM deals had earnouts last year, which is more than 2.5 times the number in 2021.
Despite the market turbulence, seller notes have fallen further out of favor. The percentage of transactions with seller notes is now just 5 percent, less than half that of 2020, following steady year-over-year declines.
Representation and warranty insurance adoption has ticked slightly higher, with 78 percent of deals greater than $50 million having RWI in 2023 vs. a 73 percent average from 2020 to 2022. Usage in deals less than $50 million continues to be relatively rare.