Are you expanding your investment portfolio to include the healthcare sector? Or perhaps you’re already active in this space and looking to sharpen your strategy. Healthcare is a capital-intensive industry with a growing demand for funding. From new technologies and facilities to mergers and acquisitions, the opportunities for growth – and investment – are strong, but it can be complex. With regulatory and reimbursement model shifts, you need a carefully considered investment plan that covers you for every eventuality – and stretches long-term.
At Fusion CPA, we work closely with both private equity investors and expanding healthcare operators. Lately, we’ve seen deal activity accelerate: by mid-2024, the total value of healthcare buyouts in North America had already surpassed the entire deal value recorded in 2023. In simple terms? Investor momentum is back – and moving fast.
Looking to access this space and grow your capital effectively? That starts with understanding how to use debt strategically. In this blog, we break down key debt instruments used in healthcare deals, best practices for structuring leverage, tax considerations, and the risks you’ll need to manage along the way.
Types of Debt Instruments in Healthcare Investments
As an investor, it’s not just about accessing capital. You also need to structure investments in a way that preserves equity, manages risk, and maximizes internal rate of return (IRR), or profit. Your debt structure affects investment cash flow, flexibility, and your overall outcome at exit. Here’s a breakdown of the different debt options and where they typically fit in when it comes to a sensible investment strategy:
Traditional Bank Loans
These are often the first step in funding a healthcare transaction.
- Term loans. These are lump-sum loans repaid over time with fixed installments. They’re commonly used to finance acquisitions or large capital investments like facility builds. Term loans provide predictable repayment terms and lower interest costs, but typically offer less flexibility in the event of market conditions changing.
- Revolving credit. Think of this as a credit card for your portfolio company. Capital can be drawn and repaid as needed. Sounds risky, but building a revolver into the capital structure gives the portfolio business flexibility to manage short-term cash flow fluctuations. This can be especially helpful in healthcare, where reimbursement delays are common. It just builds in that buffer to protect operations for more stable returns long-term. As with any investment, you need to approach it with a clear, well-considered strategy to manage risk effectively.
- Asset-Based Lending (ABL): This is a type of loan that is backed by your investment company’s assets. This would typically be receivables, inventory, or equipment. In healthcare, it’s often used to unlock liquidity from predictable billing streams. For your investment strategy, ABL can be a useful way to free up capital without diluting equity or relying on higher-cost financing. It’s especially effective in deals where the target has strong accounts receivable but limited cash flow or when you want to preserve equity for strategic use elsewhere.
Private Debt Financing
When traditional bank loans aren’t flexible enough; or when you want to fund more of the deal with debt; private debt options come into play.
- Mezzanine financing is a secondary debt repayment option. This means it is settled after senior – or primary – debt. Because it carries more risk for the lender, mezzanine debt typically comes with higher interest rates. Lenders often include conversion rights, giving them the option to convert the loan into equity if the portfolio company misses repayment terms or fails to meet key performance benchmarks.
Making use of mezzanine debt will allow you to finance a larger portion of the deal with borrowed money and things should remain stable as long as the loan is repaid without triggering conversion.
- Unitranche loans combine senior and subordinated debt into a single facility with a blended interest rate. As an investor, you might opt for this structure when you’re managing multiple loans with varying repayment terms and want to simplify the capital stack. Instead of negotiating with several lenders and juggling separate agreements, unitranche provides one loan, one lender, and one set of terms, speeding up execution and reducing legal complexity.
While Unitranche financing often carries a higher interest rate than traditional senior debt, the streamlined process can outweigh the cost in competitive or time-sensitive deals. That said, for highly structured transactions that require layered control or tailored financing, traditional multi-lender setups may offer greater flexibility.
Public Debt Offerings
Looking to get in on larger or later-stage healthcare investments that require substantial capital without further equity dilution? Public debt options may be the way to go.
- High-yield bonds also known as “junk bonds” are unsecured debt instruments sold to public markets. You can use them to raise significant capital for your portfolio company without giving up ownership equity. This makes them especially useful for funding aggressive expansion, recapitalizations, or big acquisitions. Because they carry higher risk, they also come with higher interest rates—but when your portfolio company is mature, cash-flow positive, and positioned for growth or exit, that cost can be justified. Used strategically, high-yield bonds allow you to preserve equity while scaling financing in a non-dilutive way.
- Senior secured notes are public bonds backed by specific assets. They offer lenders greater protection, thereby giving you leverage to negotiate better terms. Investors typically use them to secure better interest rates and preserve the company’s cash flow – making them especially valuable in capital-intensive deals.
Best Practices for Using Leverage in Healthcare Investments
Leverage – using borrowed money to increase the size and potential return of an investment – is one of the most effective tools in your healthcare investment strategy. While debt refers to the capital borrowed (like a loan), leverage is how you use that debt to retain full equity control while committing less capital upfront – ultimately enhancing your overall return.
When used wisely, leverage allows you to control larger assets, scale faster, and improve IRR—without tying up excess capital. But the same tool that boosts returns can also magnify losses. If performance weakens or your exit timeline shifts, debt obligations still remain. That’s why it’s critical to structure leverage strategically. Here’s how to approach it:
1. Assess Leverage Capacity and Risk Tolerance
Before using debt, you need to understand how much your portfolio company can realistically support.
Evaluate Cash Flow and Asset Strength
Assess whether your target company generates consistent, predictable cash flow and has a strong asset base. In healthcare, this often means stable reimbursement streams and tangible assets like facilities or equipment. These factors determine how much debt the business can support without putting your investment at risk.
Model for Rate and Market Shifts
Interest rate volatility can quickly cut into returns. Run multiple financial scenarios to test how rate increases or how slower growth would impact debt service and returns. Consider fixed, floating, or hedged options based on your investment holding period and risk appetite.
2. Align Debt Structure with Investment Horizon
Your debt strategy should always consider your exit timeline.
Match Debt Terms to Your Exit Strategy
Avoid a mismatch between loan maturity and your target exit. If the debt agreement ends before you’re ready to sell or recapitalize, you may be forced into unfavorable refinancing. It may also push you into a rushed exit that leaves money on the table.
Leave Room for Growth
Don’t over-finance upfront. Maintain liquidity so your portfolio company can absorb delays, invest in improvements, or pursue add-ons as needed.
3. Diversify Capital Sources
A well-balanced capital stack gives you more flexibility, control, and negotiating power.
Blend Debt Instruments to Control Cost and Risk
Use a layered mix of senior debt, mezzanine financing, and revolving credit to balance interest expense and repayment terms. This way, you can optimize your funding for flexibility and efficiency.
Avoid Over-Reliance on a Single Lender
Working with multiple lenders so you have leverage in terms of negotiating better terms and policies.
4. Structure for Tax Efficiency
The way you structure debt doesn’t just impact your returns, it can also affect your taxes.
Take Advantage of Interest Deductions
Most interest on debt is tax-deductible, which reduces taxable income at the portfolio company level and improves post-tax cash flow. Just be mindful of IRS caps, like those under Section 163(j). This may limit how much interest can be deducted based on earnings.
Maintain the Debt’s Economic Substance
To ensure interest remains deductible, your loan terms must look like real debt and not be disguised equity. That means clear repayment schedules, enforceable obligations, and market-based interest rates.
Plan for a Tax-Efficient Exit
Explore defer strategies such as 1031 exchanges (for real estate-backed deals) to reduce capital gains tax exposure when you exit.
Managing Risk Across the Investment Lifecycle
Healthcare investments carry risks that stretch beyond leverage and financial structuring. Below are key areas you should monitor throughout the deal lifecycle:
1. Regulatory Disruption
Policy shifts can impact compliance and put revenue and return on investment at risk. It is important to stay abreast of state and federal regulations for the sector, as noncompliance can lead to penalties that eat into profits and affect your portfolio company’s ability to scale.
2. Reimbursement Risk
Delayed or reduced payments can disrupt cash flow. Keep a close handle on Medicare/Medicaid exposure and payer contract terms. Build flexibility into your financial models with your CPA to absorb fluctuations and protect working capital.
3. Staffing Shortages and Key-Person Dependency
Many healthcare businesses rely on highly specialized clinicians or key operational staff. As such, recruitment challenges can delay growth plans and erode EBITDA. You need to build workforce contingency planning into your diligence process.
4. Technology and Automation Risk
Outdated systems or poor tech can stall scalability and inflate costs. Evaluate whether your target company has invested in automation, billing systems, and Electronic Medical Records. Lagging digital infrastructure poses both operational and return-related risks.
5. Market Saturation and Competitive Pressure
Entering an overcrowded health segment can limit pricing power and reduce margins. Before you invest, you need to conduct thorough due diligence on competitors and set realistic projections to protect your investment performance and outcome.
At Fusion CPA, we help investors like you navigate the complexities of healthcare deals with confidence. From selecting the right debt instruments to managing operational and regulatory risks, our CPAs provide financial insight to drive long-term value. Contact us today!
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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.