The souring economy put a dent in the white-hot leveraged buyout market for the med-tech industry, a panel of fund managers said yesterday at the AdvaMed 2011 conference in Washington.
The European banks crisis, an uncertain regulatory environment in the U.S. and a looming new tax on medical devices all have mixed into a toxic stew that’s choking the LBO market, which had surged back since the economic slump in 2009.
“If you look back over the last year, the credit markets had come back with a vengeance,” noted Tim Dugan, a partner at Water Street Investments. “It was to the point where we were wondering if people had taken short term memory loss pills, because the leverage levels and the structures of some of these transactions were getting crazy again.”
Private equity deals generated a clutch of mergers and acquisitions this year, thanks to a favorable debt market and large capital reserves. But after Apax Partners LLP’s $6.3 billion bid for Kinetic Concepts Inc. (NYSE:KCI), which would be the largest LBO since Lehman Brothers folded in 2008, that trend has slowed. The panel of fund managers cited the volatility on Wall Street, fueled by the European debt crisis and turmoil in Washington as contributing to the increased cost of the institutional leveraged loans used to finance LBOs.
“That’s the ‘L’ in ‘LBO,’ and I think you’re seeing the cracks on the leverage side,” said Brian Miller, partner and co-founder of Linden Capital Partners, noting factors including speculation about a default by a European nation and the implosion at Swiss investment firm UBS.
“You’ve got lenders in Europe if a country defaults, and when UBS and things like that that happen in the news, I think will have an impact in the next six to twelve months,” Miller said.
The LBO boom of the past two years was driven by a concatenation of factors, he added.
“You got government pumping capital into the economy, which lowered interest rates. The banks followed – you could get lending and you had funds that had raised money back in the ’07, ’08 period,” he said. “In 2010, leveraged buyouts were up about 74 percent on dollar value from their lows in 2009 and multiples also surged back up from seven or eight to the 10 range, and so volume was back and the pricing was back.”
But when the economy flagged in August, the cost began to rise steadily, putting a clamp on what some thought would be a run of more KCI-scale deals.
Linden also blamed the uncertainty surrounding the medical device industry, specifically the looming 2.3 percent medical device tax contained in the landmark healthcare reform law, which he predicted will “quell investment in businesses that are at the margin.”
“We saw the same thing when Obamacare was being battled out,” he said. “During that period, investment in health care broadly dropped by about three-quarters – deals didn’t get done because of uncertainty.”
That said, deals will still be done, same as it ever was, the panelists agreed.
“For good deals, debt funding is available and has been for the last 10 years,” noted Lester Knight, founding partner of RoundTable Healthcare Partners.