But since most of these firms are less established, they're going through earlier financing rounds with venture capital funds, rather than private equity. That might explain why VC transactions have been flat while the private equity trend is “pretty sharply” down, he said.
Still, some companies, particularly healthcare providers, are seeking nontraditional deals rather than a buyout. William Hanlon, principal at healthcare investment bank Hammond Hanlon Camp, said providers are looking for looser affiliations, where the parties gain economies of scale but retain their independence—rather than a traditional merger.
“There are more transactions that don't involve a change of control,” he said. “There are more strategic deals occurring than financial ones.”
Another factor slowing deal volume has been the uncertainty around what reimbursement rates and utilization will look like under healthcare reform. The news about the healthcare law's implementation—delayed provisions, fumbled enrollment efforts—has also given investors pause. “We've got a little bit of a stop, look and listen posture,” Cowherd said.
Chris Rile, who specializes in private equity transactions at law firm Ropes & Gray, said that part of the decline in deal volume may be related to timing. Dealmakers rushed to close deals in the fourth quarter of 2012 ahead of an expected tax hike, which never materialized. That led to fewer deals to be closed at the start of 2013.
While deals have picked up again in the third quarter, the appetite for deals has been uneven. Rile said there is more hesitation from PE firms that invest in companies such as post-acute care providers that are highly sensitive to government reimbursement, but less hesitation in deals involving companies that improve the efficiency of care.
Jeff Woods, a Boston-based partner at the Parthenon Group, said his advisory firm has seen the numbers suggesting a slowdown in PE deals but hasn't experienced any slowdown itself. “We're on pace to have a record year,” he said.
Parthenon focuses on areas that have defied the trend: healthcare services such as urgent care, dental care and optometry, and outsourced services such as revenue-cycle management. It also has seen an uptick in deals in areas including behavioral health. These are sectors that were once largely self-pay but have benefited from expanded insurance coverage.
Cowherd said he expects an M&A rebound in 2014 as the uncertainty around healthcare reform lessens. He added that as providers consolidate, private equity firms will start rolling up the companies that serve them—such as staffing and revenue-cycle management firms—because they too will need added capabilities and scale.
Woods said investors are waiting to turn the calendar to Jan. 1, when some of the questions about the impact of Obamacare begin to be answered. He predicted that much of the angst around the law ultimately will prove unwarranted. “I think what you're going to see is a good outlook for 2014.”
Follow Beth Kutscher on Twitter: @MHbkutscher
