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Resilient private equity healthcare demand further elevated by COVID-19

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Resilient private equity healthcare demand further elevated by COVID-19

Private equity healthcare deals received a further boost in the wake of the coronavirus pandemic, building on the sector's popularity that has been growing consistently since the early 2000s.

There were 380 healthcare private equity deals completed in 2020, up just over one-fifth from 313 deals in 2019, despite a 14% decline in total global private equity activity, Bain & Co.'s 2021 Global Healthcare Private Equity and M&A report found. Although total disclosed deal value for healthcare private equity deals fell 17% to $66 billion, the report said the total "is robust considering the effects of COVID-19."

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Early healthcare investors in the 2000s "made very good investments, high-return investments," Franz-Robert Klingan, a partner at Bain and co-author of the report, said in an interview.

Interest in these assets continued to increase in the subsequent decade, and in any year, particularly for the past five years, there has been both "an increasing absolute amount, [and an increasing] relative share of private equity money going into healthcare," coupled with an increasing ability to unwrite underlying risks, Klingan added.

Healthcare investments were considered more recession-proof following the global financial crisis. Investors could "take out cost and drive change and, therefore, create the value creation opportunities that private equity is looking for," Klingan said.

There has been "some sort of perturbation, clearly," in the healthcare sector throughout the pandemic, but "if you ask me, was it all bad? No. The pandemic has highlighted specific opportunities for alternative sites of care for telemedicine, for modernization of the clinical trial system, and then for consolidation in the provider sector," Klingan said.

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Opportunities abound

As governments and healthcare systems grappled with urgent needs following the outbreak of coronavirus, it became apparent in which areas there was a need to scale up or improve efficiencies, and private equity buyers have increasingly sought out those opportunities.

Market participants identified investment opportunities attached to clinical trials, telehealth, certain areas of biotech such as mRNA vaccines, and diagnostic testing, triggered by accelerated needs to provide services, products and data.

Private equity buyers are also targeting areas in which efficiencies can be made. Healthcare services that can be provided away from a hospital setting, for example, were already on buyers' radars, but the subsector's tailwinds have been amplified by the pandemic, Klingan said.

"Private equity is in a unique position to help the entire system to be more efficient in investing behind those alternative sites of care," Klingan said. "It will clearly be subject to microbiology and regulation, so you need to observe, but you're out of the hospital and you have a fundamental cost advantage — and that's a big driver because, next to the demographics, it is an important push."

Although it is more of an industry shift than a COVID-19 shift, pharmaceutical services is a "really hot area" for investment too, Andrew Nicholson, managing director of Baird's Global Healthcare Investment Banking team, said. With big pharma looking to outsource more of its services, these businesses are able to build and scale, working with multiple pharma companies "rather than being trapped within one pharma company."

Investments in technology that can drive efficiencies for healthcare providers and production have also proven popular, as has anything to do with technologies that have "been so needed during the pandemic," said Freshfields Bruckhaus Deringer LLP Counsel Gina Bicknell, who is experienced in technology transactions and the pharmaceutical industry.

Technology investments providing for the healthcare sector have proved no different. "Any industry that's proven itself to be recession-proof, I think people are going to be jumping into those with both feet."

Pockets of opportunity for generalists

While healthcare sector specialists dominate investments, managers with a more generalist outlook, or with other sector specializations, may be able to find investment opportunities in some areas of the industry.

Sector specialists benefit when executing on deals, Klingan said. With deep sector models, they are more successful in origination and are in a better place to win an auction in a competitive environment. These firms are also able to underwrite more risk and have the necessary depth to think about a good value creation program, he added.

But with that caveat, there are some areas where managers without sector specialization could enter the market.

Nutraceuticals — consumer healthcare producing products such as multivitamins and dietary supplements — has been "really busy," Baird's Nicholson said, and it is an area where managers can get a potential foothold. There are opportunities in the distribution side of healthcare, too, as it cuts across different sectors.

Knowing how to undertake a deal and having geographical knowledge and insight into what is happening in a particular country, as well as having sector insight, is important, Nicholson explained. But there are "definitely … opportunities to get pretty knowledgeable quite quickly, especially around some parts of healthcare that maybe not as complex as others — so understanding the ins and outs of what's going to make a successful molecule might be beyond most of us, but understanding how you can provide a service in a fast-growing area to another set of [business-to-business] customers is maybe something which is more translatable," he added.

Healthcare sector to remain buoyant

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Macro factors driving interest in healthcare are all very well known — "an aging world population of people living longer and there being greater access to medicine et cetera," Freshfields Private Equity Partner David Brooks said. "But I think all of those factors with the tailwind of COVID-19, and perhaps uncertainty in other market sectors, to my mind, means that this is going to remain a very buoyant space."

"If the general market perception is that those private equity sponsors who have deep-seated healthcare teams have been successful in those investments, then I'm sure we'll see more of that in terms of other people upscaling of the same way," Brooks added.

Healthcare activity for Baird was up 60% globally in 2020 versus 2019, its sixth successive record year, Nicholson said.

"COVID-19 has had an impact on where investors are looking to deploy their capital," Nicholson said. As other sectors that largely shut down in the wake of the pandemic begin to see recovery, "the delta between healthcare and other sectors, you'd naturally expect to come off over the next few years."

But the healthcare sector, too, has a backlog of procedures that were postponed or canceled in the wake of the outbreak. "There's going to be a big tailwind to the companies over the next few years in many parts of healthcare because so much activity got stopped for a period," Nicholson said.

"I wouldn't bank on a record every year," Bain's Klingan said, but he sees a "continued strong development" of the healthcare sector in the coming years, "particularly after COVID, there's a lot to do in the healthcare sectors."

"Investors can be fantastic catalysts in driving progress and efficiencies in healthcare, and so every reason to believe that it will be a strong sector," Klingan added.