NEW YORK—Following the record-breaking deal volume seen in 2021, M&A activity and investor interest in the health care services space has continued at a consistent pace through this year’s second quarter, albeit with some drop-off in transactions in the eyecare sector. With the fallout from the COVID-19 pandemic finally setting in, “the health care landscape has changed dramatically,” according to a recent analysis and report by Provident Healthcare Partners, an investment banking and advisory firm with offices in Boston and New York. 

“The disruption of the pandemic affected various levels of the supply chain for provider–based services,” the report noted. “These financial impacts are beginning to normalize while larger macro-economic conditions are beginning to worsen. Fears of rising interest rates, high levels of inflation, and declining overall economic health have led to an initial decline in consolidation in the overall market.” 

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However, when threats of a recession loom, investors “tend to flock towards the more defensive sectors, such as health care, the advisory firm noted. Dollars invested in the health care services industry have remained elevated and “the total number of private equity-backed deals has stayed level over the course of 2022,” according to Provident’s analysis. 

In addition, despite rising interest rates, valuations have remained consistent as the amount of “private-equity dry powder and need to deploy capital has outweighed the constraints placed on the debt capital markets,” Provident said. Private equity investors and strategic acquirers continue to compete to pursue add-on and platform deals to capture increased market share in the highly fragmented sector. 

Provident noted that its long-term outlook, despite near term challenges, is for substantial M&A activity in the health care sector this year. 

In the ophthalmology sector, Provident said this area “continues to be one of the most active specialties within physician services as macro-economic concerns have, so far, done very little to slow the pace of deal-making within the sector.” The report noted several “strategic add-on transactions” in the quarter, as well as the entry of a new private equity firm investing in the space by way of a deal with Vision Innovation Partners (a platform formerly backed by Centre Partners that Gryphon Investors of San Francisco partnered with in May 2022).

With more than 60 of the investor-backed platforms at least four years into their investment in the eyecare sector, Provident said it expects secondary buyouts, similar to the Vision Innovation Partners’ transaction, to play a large role in consolidating a very fragmented space.