Why 2023 Is Shaping Up to Be Private Equity’s Big Year in Senior Living

Last week, we learned that the first quarter of 2023 was the slowest for new senior living M&A since the same period in 2021. Interest rates causing headaches in capital markets were a big reason why.

For companies that previously planned to rely on sourcing debt for new deals, the cost of capital and general uncertainty are still a big and ever-present barrier to closing transactions. Making matters harder, asset pricing is not where some sellers want it to be, prompting them to hold on for potentially better deals ahead.

But for well-capitalized investors with access to equity, the outlook in 2023 looks far rosier. Although the deal market has slowed, there are still some sellers determined to offload assets this year, and certain transactions remain viable.


Private equity firms like Coastwood — which, together with Lee Equity Partners led a deal to join ISL and Discovery at the hip — are looking to take advantage of the opportunity at hand. Jonathan Schatz, who is president of Coastwood, said the current period is “an incredibly attractive time to grow.”

“We will be selectively aggressive about the opportunities that we go after,” he told me this week.

In this week’s exclusive, members-only SHN+ Update, I analyze the current transaction market and offer key takeaways, including:

  • Why a tougher capital market is favoring private equity firms and cash buyers of senior living communities in 2023
  • How the coming year and beyond will not be without risk for PE firms and other similar buyers

‘A lot of growth opportunities’

At this point in 2023, there is little doubt that senior living and health care capital and M&A markets are in an upheaval.

The number of publicly announced mergers and acquisitions registered at a mere 98 in 1Q of this year, representing a 13% decline from the 112 deals announced in the fourth quarter of last year and a 32% decline from the 144 deals announced in the same quarter of 2022, according to recent Irving Levin data. That amounted to the slowest first-quarter for deal-making since early 2021.

Difficulty and uncertainty are causing the market to continue its tilt toward buyers, such as “the big institutional sponsors where they only underwrite to 60% leverage,” White Oak Managing Principal Jason Dopoulos told SHN earlier this month.

Earlier this month, NIC Chief Economist Beth Mace told SHN reporter Austin Montgomery that the buyer pool for M&A in senior housing has “shrunk significantly” thanks to headwinds in interest rates and volatility in banking.

Two camps are emerging in potential sellers: Those that have deals that need to get done now, and those that can hold on longer for more favorable bid-ask spreads.

“There’s difficult decisions for portfolio managers probably right now on what to retain, looking at their entire portfolio of properties,” Mace said.

As hard as those “difficult decisions” are for sellers, for buyers they represent opportunities to pick up properties at a discount. The challenge is getting deals done.

Schatz said there’s “no question” that the deals getting done in 2023 are done with higher equity ratios, and that’s being reflected in the purchase price multiples. Generally in private equity, enterprise value-to-revenue multiples that historically have been closer to 2.4 times are now around 1.7 times.

He pointed to trends in other sectors as indicative of what the senior living industry is undergoing. For example, in the software industry, “you were seeing historically 50% percent or greater leverage on deals.”

“That’s changed this Q1 to between 70% and 92% equity,” Schatz said. “The question is, how does all of that apply to senior housing? My view is we are going to see some similar trends.”

Schatz described Coastwood’s growth and investment strategy in senior living as “selectively aggressive.” In his view, a shrinking pool of buyers has given companies like Coastwood a lot of potential targets for investment without having to “boil the ocean.”

“We see a lot of growth opportunities on our plate,” he added.

So far, those growth opportunities have included a recapitalization that brought Integral Senior Living and Discovery Senior Living into the same family. And based on Schatz’s comments, the remainder of the year will indeed give Coastwood plenty of ways to invest and plant their flag.

Last week, my colleague Tim Mullaney surmised that the Lee-Coastwood-Discovery team is well-positioned to take on select assets from a large senior living platform like Brookdale Senior Living’s (NYSE: BKD). I agree with his take, and believe we have only seen the beginning of what these companies will do in senior living.

“We have … probably the most solid operating business [in senior living], that has a great track record of success and profitability,” Schatz said. “That puts us in a really good position relative to some of our peers.”

A big year for private equity will not come as a surprise to many people — about 40% of respondents to the Senior Housing News 2023 Outlook Survey said PE firms will be the most active senior living buyers in 2023. But if market conditions continue to tilt toward PE investment, look for the proportion of PE deals to swell, and further fuel the “gold rush” in senior care that ​​General Atlantic Managing Director and Global Head of Health Care Robbert Vorhoff described to Axios last year.

Some risk ahead

While the coming year will no doubt carry many opportunities for companies like Coastwood, it is not without risk, either.

Private equity-owned nursing homes were specifically called out by U.S. President Joe Biden, who said in his State of the Union speech last year the ownership structure leads to worse quality and higher costs for residents. The Centers for Medicare & Medicaid Services (CMS) have also proposed rules this year requiring more ownership disclosures and floating definitions of private equity and real estate investment trusts.

Skilled nursing facilities carry one crucial difference from senior living in that they are mostly funded by Medicaid and Medicare payments. Private equity firms also only own about 5% of U.S. nursing homes, according to an October 2020 JAMA Network Open study. Even so, it doesn’t seem out of the question to me that PE firms investing in companies offering assisted living or memory care could face similar scrutiny in the future.

Another potential challenge is related to community performance and misaligned goals. In the months before the pandemic ramped up in the U.S., there was some apprehension that private equity investment in senior housing could lead to unrealistic expectations on operators, particularly if the company is unfamiliar with senior housing.

While I think the last few years have helped to quell those fears as senior living companies have successfully worked alongside private equity partners, I do see misalignment between community performance and investor expectations as another potential pitfall ahead.

To Schatz, those risks necessitate a careful eye for new opportunities. Looking ahead, he said the company is looking to remain “asset light.” He agreed that performance was a challenge — but he was also careful to note that in the case of Lee-Coastwood-Discovery, community performance is expected to be a tailwind.

“The industry is facing increased RevPOR, higher absorption relative to new inventory on the market and upticks in occupancy,” he said. “So, our biggest focus — also one of our biggest challenges — is that we have to continue to deliver operationally, and whatever we do, we have to make sure that we continue to deliver high-quality management services for the capital providers that we work for.”

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