By Bobby Guy

Welcome to the inaugural post on the Waller Lansden Healthcare blog.  For our opening discussion, we thought we'd take on the issue of excess liquidity, and we invite responses regarding the availability of credit to the healthcare sector. 

It is no secret that the U.S. economy, like the global economy, is experiencing a liquidity bubble.  Simply put, there is an excess of money chasing yield in the market.  And like any bubble, the investments into which the money is being put do not necessarily reflect a rational perception of the underlying value, and more importantly, the ultimate risk.

Easy money wasn't around just a few short years ago.  If you'll remember back to 2001 and the aftermath of the dotcom implosion, many healthcare companies couldn't buy money.  Period.  The availability of credit simply dried up.  This was true of numerous sectors in the economy, and especially true in healthcare.  Several attempted public offerings in the healthcare sector went flat.  Many hospitals, looking for credit to refurbish old facilities or build new ones, simply couldn't find it.  The next year, National Century Financial Enterprises, the lender of last resort to many healthcare providers, went under—taking 275 healthcare companies with it. 

Now, it seems money is available everywhere.  Many specialty lenders focusing on the healthcare sector have been birthed in the last few years, and hedge funds and private equity funds focusing on the healthcare sector have exploded.  Even with interest rates rising, money continues to be available at historical levels.  It was recently reported that there is enough money in hedge funds to take the entire NASDAQ market private—twice.  Credit derivatives contracts (agreements that divide up risk, either by using pools or through swaps) are worth more than nine times global gross domestic product.   A month ago, I talked to a fund with almost $100 million to invest in the next three months, and if it did not meet its three month deadline, all money would have to be returned to investors to chase yield elsewhere.
 
What does all this money mean for the healthcare sector? 

• In the senior living industry, investors are scrambling to find enough new projects to take in all the money they have to invest.  Like the ads for lendingtree.com, the abundance of lenders and investors has made it a borrower's market.  So much money is resulting in returns that are low based on historical levels and compared to the risk being undertaken.  But the money continues to flow into senior living. 
• In other healthcare sectors, non-reimbursed providers and servicers are just plain hot.  For example, money is flowing very quickly into durable medical equipment, and outsourcing companies.  Life sciences, and biotech (which according to The Economist has never turned a profit as an industry), are also gathering significant capital.   Again, the amount of money competing for every investment is resulting in lower returns for higher risk.  Still, the level of investment continues unabated. 
• And what of the hospital industry? Anecdotally at least, it appears more money is making its way to the local hospital, giving hospitals the opportunity to make reinvestments in their facilities, and to plan for the future.  How this breaks down on a hospital-by-hospital basis, and how much of the new capital is making its way to the rural, non-profit hospital market, remains to be seen.  More money is certainly available, and lenders are willing to accept more long-term risk, but it is unclear how much penetration excess liquidity is having in the rural sector. 

For the moment then, easy money is "hip" and cool.   No one knows how long the current wave will last, but it is fresh wind in the sails of the healthcare market compared to the doldrums of 2001-03.   Remember that inevitably, as with all financial cycles (and bubbles), this one too must turn (burst) . . . but maybe not yet.   We'll leave that topic for another day. 

Query to readers:
How are you seeing the abundance of money affecting the healthcare sector? Is it reaching your company/facility?  [Responders can choose whether to be anonymous or to give contact information]