It was a wild year for healthcare investors, with the central drama being—no surprise to anyone—the continued assault of Covid-19. The pandemic has shaken virtually every industry, none more than healthcare. Yet $151 billion of private equity capital surged into healthcare globally in 2021, more than double the prior year, and the number of deals soared 36% to 515.

Did the industry post these records despite Covid-19 or because of it? It’s a bit of both.

During 2020, the coronavirus injected a huge level of uncertainty and disruption into healthcare markets. Plenty of buyouts still closed, though, and many wondered if the torrid pace could continue. It certainly did in 2021. Now Covid-19 is starting to shift from pandemic to endemic, meaning the system will eventually reach a stable state. Vaccines and antivirals could progressively dampen the anxiety and economic disruption caused by new variants. But no one knows what the stable rates of infection will be, and endemic Covid-19 could still take a significant toll on health and mobility.

Regardless of where the endemic settles, consider how Covid-19 has already changed industry trends in ways that open broad opportunities for investors.

Covid-19 greatly accelerated the adoption of virtual interactions between patients and healthcare staff. Companies rushed to digitalize many other manual processes as well, from drug clinical trials to medical records to revenue cycle management. Fallout from the disease exposed the creakiness of older IT systems, causing many providers and payers to realize they needed top-notch vendors to help upgrade their systems. And the widespread shutdowns exposed vulnerabilities in the medical supply chain, so that the previously below-the-radar distribution of medical products suddenly drew outsize attention. Case in point: the $34 billion deal for Medline, a company that turned out to be vital for delivering medical products in certain countries.

Still, the pandemic is just part of a complex story woven from multiple threads. It’s worth remembering that healthcare deal internal rates of return have outperformed the broader private equity market by a median 6 percentage points over the past decade. High returns, along with the industry’s recession resilience and demographic tailwinds, such as aging populations and the rise of chronic diseases in many countries, are enticing new sources of capital and intensifying competition for deals. Sovereign wealth funds, infrastructure funds, hedge funds, and nonhealthcare buyout funds all are scouting private deals in healthcare.

How these investors deploy their capital also is taking shape in new forms. We’ve seen the rise of consortiums, including some that include partnerships with corporate buyers, the burgeoning of life sciences fund vehicles, and more growth-equity deals. Investors are seeking creative ways to secure returns in a more competitive landscape.

In our report last year, we anticipated a strong 2021 for healthcare private equity as a backlog of large deals cleared. We identified three big areas for capital to be deployed, which each played out in spades.

• Infrastructure investments in healthcare IT to fix interoperability and data flow limitations, capped by the $17 billion Athenahealth deal.
• Value-based care to unite care provision and financing under one roof, helping companies to deliver better health outcomes while containing costs.
• Technologies that accelerate drug development from preclinical discovery to postapproval market entry.

In our 11th annual report, you’ll find detailed analysis of other major trends sweeping through healthcare investing, including these:

• The consumerization of care. People want a better experience and a more active role in managing their own health with innovative products, including mobile apps and smart devices.
• Digital solutions that improve operational efficiency. Solutions that digitalize the supply chain or leverage data to improve revenue cycle management attracted big investments.
• A willingness to take on development risk. More investors confident in their scientific expertise placed bets on cutting-edge biopharma and life sciences technologies.
• Large European biopharma and life sciences transactions. Europe saw more biopharma deal value than any other region.
• An even higher baseline for deals in Asia-Pacific. Investor confidence stems partly from positive consumer behavior shifts and the government regulation and incentives that fuel the growth of local medtech and biopharma firms.

Looking ahead, the transition to endemic Covid-19 will no doubt create new pockets of opportunity for private equity investors. Other avenues to value should also thrive, including new integrated care models, digital tools that use data and artificial intelligence to streamline operations, technology to build resiliency into supply chains, and cutting-edge drug therapies.

Assuming healthcare returns continue to outpace those in other industries, new capital will continue to migrate to the space and will likely drive multiples even higher. How will private equity sponsors create value in this environment?

Everyone chasing similar themes raises the bar for careful asset selection and ingenious angles to get deals done. Diligence, in turn, will have to push on several fronts. Investors should estimate the Covid-19 effect on each target company and ensure that the value creation plan can flex quickly as circumstances change. They should continue to concentrate on revenue growth as a key ingredient of value, while weighing the open question of whether operating margin improvements will play a larger role in the next vintage of investments. Preparation combined with resilience will allow the best healthcare investors to thrive in volatile times.