At the JPM Healthcare Conference, it rained, people were anxious, and attendance still took a hit — but not as much as last year. Sounds promising, right? Not so fast. If JPM2024 had a t-shirt to sum up market sentiment, it would read: “Hope, but not confidence.” Hope due to dry powder for deals and a general feeling that things will be better but without the data or specifics to prove it. Here’s a few reasons why…
Deal volume: Stalled economics
Investors (and founders) hope deals will start flowing this year, but they’re not confident. “Survive until 2025” was one mantra shared by some, for multiple reasons.
In the Before Times — pre-COVID and 18 months post — Fund X might raise a billion to deploy over 6-10 companies with a hold period of 3-5 years for growth and exit. Since then, the economy deep faked a recession for two years and the Fed raised interest rates 11 times in that same period.
Interest rate exposure is the big unspoken. How much of that “free money” is now choking companies? And you thought the housing market was bad.
With the money flow still largely frozen on the PE side, no one is making money. Many have not done deals in 18 months. Those who are exiting must reset expectations and take their 2.5X returns. Our partners in A rounds and lower middle market, however, have been much more active in the last year.
But for almost everyone else, it’s been a pretty ugly market: Doing bad deals, inside and unlabeled rounds to keep businesses alive, has got to get better. I’m hopeful, but not confident.
Deal quality: Is A- the new A++?
Since the market is reshaping, we might as well redefine deals. As I’ve said, you haven’t needed to be that smart to make money in healthcare. For the past decade, the economy was like the self-driving cars I saw all over San Francisco. Now, it’s more like the Boeing Max that lost a side panel mid-flight: nobody died, but someone did lose their shirt (literally).
That makes for interesting times. Over the next three months, the next layer of the market — the A- deals — needs to unlock. There just aren’t as many A++s to be had and that will have to be good enough for the machinery to start moving before mid-year.
Maybe good-enough deals will help the market love what it tends to ignore: the perpetually unsolved problems of “the now.” Healthcare has a lot of them and despite all the announcements at JPM, most left me feeling Meh.
Deal macros: The U.S. versus itself
Deals may be stalled but big-ticket macros will bear down fast on the 2024 U.S. economy: Interest rates. Congress’s ability to govern the country (and itself). And oh yeah, the election.
Just as things have started to look good, there’s the January debt deal, an inflation uptick that will delay interest-rate cuts to at least Q3 (where they were already headed), and whether Donald Trump will hold court from 1600 Pennsylvania Avenue, or another location.
We need the signal under the noise to get back to market fundamentals and the certainty that investors want. Given that the Eurasia Group just identified “The U.S. Vs. Itself” as the top global risk of 2024, I have hope but not confidence.
Fingers crossed
A company’s Reason to Believe is compelling proof that it can deliver on its promises. The U.S. economy and the healthcare industry could use some of that.
Banks look like they’re more willing to lend, but pent-up demand doesn’t drive good decisions. And we still might be in for a tough time — a bloodbath if you hung out with JPM’s more dramatic hall-dwellers.
I’m hopeful, even if I’m not confident.
