Private Equity Shows Continued Record Interest in Health & Wellness

There’s been a slowdown in deal activity post-pandemic, but PE investors remain generally bullish on the fast-growing health and wellness sector, including traditional fitness, franchisee groups, and new longevity and recovery offerings

Despite the slowdown in relative deal activity since 2021 as the world grappled with inflation, higher interest rates and worries of recession, private equity investors remain as excited as ever to invest in health and wellness services, as they now also sit on a record level of “dry powder” (committed capital held for future investments) that they need to deploy.

The industry’s strong tailwinds for success continue, which include growing consumer awareness and adoption across all demographics, the resilient and non-discretionary nature of spend, strong brand loyalty, high fragmentation, innovation of technologies and services and the general appeal of the industry’s overarching mission to improve people’s quality of life.

That said, the mix and depth of PE interest for any given investment will vary greatly depending on business model and profile.

For example, whether a business is a franchisor versus a company-owned model, or a platform of units under an owned brand vs. a franchisee, will play a factor in the type and depth of interested investors. Other considerations include customer value proposition and low/mid/high price positioning, big box vs. boutique footprint size, whether a company is focused on fitness, recovery/longevity or aesthetic/beauty, its repeat vs. one-time customer mix, consistent vs. up-and-down revenue growth history and margin profile.

The Rise of PE-Backed Franchisees

While private equity groups have gradually broadened their scopes of interest in order to deploy capital in available opportunities in the space, they continue to monitor the relative tradeoffs.

For example, in the years leading up to COVID, more and more PE groups gained comfort with and invested in franchisee platforms across both high-value, low-price (HVLP) gym brands and studio fitness brands in opposition to prevailing PE sentiment to invest only in franchisor or company-owned brands.

Early franchisee investors saw massive value in backing a system’s top operator and then leveraging the franchisee system’s wealth of unit ramp and performance consistency along with the franchisor’s proven marketing and support processes to significantly de-risk new unit underwriting.

To further enhance growth, PE-backed franchisee platforms also pursue highly efficient acquisition and consolidation of other franchisees, all operating exactly the same brand and systems, and then deploying best practices to drive post-acquisition improvements.

While PE-backed franchisees typically help a franchisor’s system grow faster and with more consistency, relative tradeoffs still exist that can create relationship friction. For example, tension could arise from a franchisee’s limited operational control over timing to open or close units, pricing strategy, branding and marketing spend, key vendor selection, remodel and buildout costs, ability to acquire units, permitted leverage, non-compete scope and ability to sell or transfer ownership.

Even in light of these relative tradeoffs, franchisee investing will continue as an area of interest in today’s market.

We anticipate deal activity to be led by growing, fragmented franchise systems while the more mature and consolidated franchisee networks see an evolving universe of buyers emerge beyond traditional PE funds to also include longer-hold family offices and asset manager, as well as multi-brand strategic operators attracted by the proven, tenured systems and high cash flow yields these platforms reliably generate through maturity.

Franchisor & Company-Owned Landscape

Beyond franchisees, investor interest remains robust for franchisors and company-owned models. Premium value drivers for these models include strong returns performance and consistency across units, demonstrated portability across markets, validated remaining headroom opportunity, high customer satisfaction and retention and quality management and processes. Relative tradeoffs shaping investor preferences toward franchisors and company-owned models can include preference for asset-light (franchisor) vs. capex-heavier (owned) growth and partner-dependent (franchisor) vs. independent (owned) operational agility, control and consistency.

Either of these models, when executed well, can deliver a compelling double-digit exit multiple off of a forward-looking EBITDA.

Considering big box vs. studio footprint, investors again have varying preferences: some like the durable, predictable membership access models, wide amenities and large absolute earnings power that a big box offers while others may be put off by the larger build-out, fixed costs and more complicated staffing models.

Similarly, some investors prefer the smaller, conveniently located, higher return-on-invested-capital (ROIC) studio footprints with highly engaged consumers while others struggle to get comfortable with higher relative churn rates, higher membership costs, perceived fad risk, and larger unit expansion volume required for growth.

All Eyes on the Wellness Boom

Lastly, we are seeing a proliferation of service offerings building out a broader wellness services ecosystem.

Services focused on recovery, longevity and overall well-being are arising, and whether it is hot and cold contrast therapies, IV hydration drips , assisted stretch , consumer-directed healthcare and weight-loss management services , relaxation and meditation, or others – today’s consumer is demonstrating a willingness to spend on new modalities to optimize how they feel and perform in their daily lives. As winning brands scale in this growing wellness services segment, we expect no shortage of investor demand.

Overall, deal momentum in health and wellness services is gaining in 2024, and we expect a number of marquee transaction announcements this year that will only accelerate the excitement and interest of investors in the sector.

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