It takes three to make a trend, but two fertility clinic sales process reported by 9fin recently indicate a wave of more such services hitting the buyout market over the next 12-18 months.

While the broader M&A market remains in the doldrums, it is the fertility sector that is offering a ray of hope for private credit lenders to deploy capital and private equity firms to find exits to fund the necessary payouts to LPs.

A number of sponsors behind the nation’s largest fertility roll ups are preparing to unload their reproductive services, which sources say should mean more fruitful opportunities in the sector to come over the next year or so. Clinic networks including Ivy Fertility and Kindbody have already hit the block, as 9fin recently reported, foreshadowing what’s expected to come — an oasis in today’s dry M&A market.

All told, bankers estimate the fertility services industry is an $8bn potential marketplace. Harris Williams predicts that IVF procedures in particular are projected to grow by 10% through 2025.

Today, almost all fertility platforms of scale are owned by PE, with the exception of the founder-owned Kindbody, which has several PE and venture investors. In addition to the InTandem Capital-backed Ivy Fertility, Webster Equity Partners, Lee Equity, and Amulet Capital have formed their own roll ups since 2017.

Fertility’s due date

PE interest in outpatient care is nothing new, but there are a few unique reasons for the rise of fertility businesses in PE portfolios, according to Rick Zall, partner at King & Spalding’s healthcare and regulatory practice.

Generally, this niche market has been underinvested historically and hasn’t received the same attention as other areas of healthcare like hospice and home healthcare. That is beginning to change.

With more people delaying having children and infertility rates increasing, the sector is drawing more attention, Zall said. A 2024 National Health Statistics report shows that more than 13% of US women ages 15 to 49 had impaired fecundity between 2015 and 2019.

Leading up to the pandemic, an increasing demand for fertility services caught the eye of PE, compelling firms to start purchasing individual clinics. Over the last seven or so years, firms invested in the sector have accumulated and consolidated the PPMs into what are now the largest reproductive healthcare roll ups in the US, including US Fertility, the Prelude Network, and Pinnacle Fertility.

Richard Groberg, a managing director at MidCap Advisors with extensive experience in fertility services deals, told 9fin that demand for fertility services saw a significant surge coming out of Covid. A slew of fertility-related M&A deals and lending activity took place starting around late 2021 and continuing through to 2023.

“People weren't traveling as much. They weren't going to concerts. They weren't going to events,” Groberg said. “That surge increased prospective growth rates and made the industry more attractive, resulting in a frenzy of buying through the end of 2023.”

Employers offering fertility benefits have made these services more affordable for patients and subsequently created value for fertility practices, too, Zall added.

“There is big demand and not a lot of supply — it's fragmented. That's one of the reasons you're seeing a lot of these come to the marketplace,” he said.

The other reason is that PE has had longer holding periods for their investments, Zall said. Many of them now need a liquidity event to reap their returns, thus the predicted onslaught of fertility assets coming up for auction over the next year.

Valuation mismatch

Yet what threatens to stymie the M&A boom in fertility services is a years-long common story across the buyout market: a mismatch in valuations.

A 9fin source said that through 2023, every major fertility roll up trade has sought valuations between 16x-21x adjusted EBITDA. Lately, fertility platforms may be seeking valuations on the higher end of that scale.

“Anyone trying to trade today is looking for 18x to 20x EBITDA, but it’s unlikely anyone is achieving that,” the source said, pointing to a drop in valuations since 2022. “Other than Boston IVF, nothing of significant value traded in 2024,” said the 9fin source.

Indeed, what is a rising concern across the market is that growth in the sector has not hit expectations. The 9fin source said that the expected revenue growth for US fertility practices is due to drop because of a slowdown in growth.

A drop in demand compared to 2021 is partially to blame. Practices have been less effective than expected at growing revenues and profits after closing. And with high-for-longer interest rates, debt is more expensive now than when sponsors first started buying up fertility clinics.

Long term hopes

Even though multiples have come down recently, Groberg said the industry’s long-term growth dynamics still make it an attractive prospect for incoming buyers — and therefore the lenders that provide the leverage needed to fund those deals.

There is still a significant part of the US population that lacks access to facilities that provide IVF services, as well as would-be patients who can’t afford them, Groberg added. AI and technology enhancements coming to the industry will make those services cheaper for patients and allow fertility clinics to scale up.

What’s more, fertility is relatively safe from current market uncertainty, making these businesses more competitive opportunities for lenders. Groberg said typical deals in the industry are carrying debt financing multiples of 4x-6x adjusted EBITDA in leverage, not including a working line of credit.

Groberg said there’s no way to guess whether incumbent lenders will struggle to stay in on new fertility deals, as buyers typically have their own preferred lenders and operators will want to secure the lowest interest rates and debt service possible — as with any private equity transaction.