Surge in private equity investments in healthcare and portfolio management by fund managers

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Investments from a variety of fund sources, from sovereign wealth funds to growth stocks and hedge funds, have poured into the healthcare sector, driven by high yields, demographic tailwinds and recession resilience.

This is noticeable due to the increase in investments of approximately $151 billion by private equity firms in the global healthcare sector in 2021, as the Bain & Company report indicates. The value of the healthcare deal more than doubled to $151 billion in 2021 from $66 billion in 2020. The report also states that the CAGR for healthcare from 2010 to 2021 was 11.1% versus 7.6% for all other industries. As a result, returns from the healthcare sector remained relatively good, with valuations reaching record highs. Thus, the median IRR during the said period for private equity transactions in the healthcare sector had outperformed at 27.5% compared to 21.1% in all other industries. Hence, revenue growth and multiple expansion through advanced care models and robust technologies have led to returns on investment in the healthcare industry.

Portfolio Strategy for Private Equity Firms for Healthcare Investments

Fund managers can approach the healthcare segment like other sectors. Additionally, the fund manager may not be a healthcare expert to understand the intricacies; nevertheless, they can understand the industry and develop strategies accordingly with the knowledge of investments and finance. For example, healthcare strategies for private equity firms can control buyout investments, investments in minority shares, investments in established and growth-oriented companies, majority ownership in healthcare companies. health of the lower middle market, etc.

The healthcare market presented the first investment opportunities for venture capital. However, most are now at the mature stage for private equity investment. Thus, potential targets for private equity firms may be mid-sized health technology companies that have significant double-digit growth potential. Health technology focuses on technology-based health products and services. It is a broad field enabling and facilitating the functions of healthcare processes. However, investors believe that healthcare technology assets are not worth their valuations and are often unable to write high multiples. Additionally, the past decade has seen vast expansions and therefore achieving rapid growth may be a little more difficult as valuations continue to rise in the future. Therefore, private equity firms must pursue smaller goals than their typical healthcare investments. Besides optimizing mid-tier entities, private equity firms can also focus on identifying businesses with function-wide platform providers. These companies can solidify their position in the healthcare value chain by providing data analytics services that would be hard to replace.

Success in deal evaluation for private equity firms lies in the collaboration of healthcare and technology teams, as access to experts in both fields will help assess the growth prospects of targets with its core business. Additionally, potential candidates for private equity firms may be entities addressing unmet market needs and therefore have the ability to generate revenue, increasing the efficiency of existing systems, thereby reducing costs. Investors can identify markets with high paper consumption, low technology penetration and regulatory trends encouraging technology solutions so that it has room for growth. The potential target must have the potential to meet customer needs compared to its competitor.

PE technology teams may have technology assessments of targets to ensure the target company’s offerings can meet customer needs. PE investments can only be scalable when the company has a roadmap for technology and product improvements as well as R&D and offers proprietary data to customers for benchmarking and analysis performance, keeping data privacy regulations in mind. Private equity funds fear the risk of disruption to the healthtech sector from industry players with pre-existing relationships, disruptive start-ups and large non-healthcare companies. However, careful due diligence focused on isolated companies can mitigate the risks. The due diligence process involves competitive dynamics, customer needs, regulatory pressures, geographic differences, etc. Also, getting complete and accurate information can be difficult, but establishing coordination between technical and healthcare teams within private equity firms can help overcome the complexity.

Private equity investments pave the way for future healthcare transformation

Health care valuations are expected to rise, as evidenced by last year’s transactions. Additionally, revenue growth and multiple expansion become key sources of deal value. So a portfolio manager who may not be a medical professional, but who has investment knowledge, can build a strategy like any other industry.

Booming prospects in the healthcare industry looking to strengthen their business models may be the driving force for private equity firms seeking favorable returns. Thus, private equity firms may seek to invest in relatively mature healthcare companies with a growth capital strategy. Accordingly, the portfolio manager may seek to focus on these companies as technology-intensive companies appear to be accelerating in the healthcare sector. However, a thorough due diligence approach is required to select potential targets who can be trendsetters in the healthcare value chain by meeting growing customer needs and playing a pivotal role in the digital transformation of the healthcare industry. health.


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