PRIVATE EQUITY INVESTMENTS IN HEALTHCARE HIT A THREE-YEAR HIGH LAST YEAR AT NEARLY $30 BILLION, DESPITE STEEP VALUATIONS AND FIERCE COMPETITION

Bain & Company's fourth annual report on healthcare private equity flags early-stage deals, carve-outs and category leadership as keys to unlock higher investment returns

New York – April 15, 2015 – Healthcare continued to be a growing area for private equity (PE) investors in 2014.  According to Bain's fourth annual Global Healthcare Private Equity Report, developed with collaboration with the Healthcare Private Equity Association, the value of new buyout investments in the healthcare sector globally hit a three-year high last year at $29.6 billion – nearly double 2013 levels – despite the number of deals declining by 10 percent. Conditions for exits were also strong last year, with the number of healthcare buyout-backed exits slightly increasing from 2013, the previous high point of the decade.  Yet, investors faced steep valuations and fierce competition thanks to strong financial markets, the deep pockets of strategic buyers and the large number of healthcare investors competing to put uncalled capital – or dry powder – to work. 

"There is great excitement and opportunity in the healthcare space, and that has grown over the last two decades," said Nirad Jain, a Bain partner and author of the report. "It used to be that prominent healthcare PE deals occurred only here and there, but momentum has steadily ticked up.  In 2014, they made up 11 percent of PE buyout deals overall. This progression is a result of disruptive changes in healthcare that are enabling access to more efficient and affordable care, while also creating opportunities for PE to aid and accelerate those changes."

The desire to enable more efficient delivery of care across the globe is one of the strengths that Bain predicts will help keep PE interest in the sector high.  Additionally, the report cites strong exit channels, due to robust public equity markets and hungry strategic buyers.  The healthcare industry is also likely to see strategic firms carving out more non-core assets. Bain expects carve-outs will continue to be an important source of assets for PE investors, especially for the larger funds seeking $1 billion-plus scale assets, and particularly while strategic players are busy digesting all of the M&A activity from 2014.

Key findings from the Bain report 

• The payer sector continued to capture investor interest in 2014, tallying 12 buyout deals worth $5.3 billion, up from 8 deals worth $3.9 billion in 2013.
• The provider and related services space remained the most popular sector for PE investors in 2014, representing nearly 50 percent of the year's global healthcare buyout deal volume.
• Medtech activity was high especially in Europe, as well as in China, where regulatory changes spurred fast-track technology approvals for medtech products and fueled private investment in the provider space.  Overall, large corporate carve-outs helped buyout deal values soar to nearly five times the level seen in 2013.
• In 2014, Europe was a high point turning in four of the top 10 deals of the year.  PE buyout investments in healthcare in Europe totaled $9.6 billion across 58 deals in 2014, compared with $3.2 billion across 62 deals in 2013.
• North America was strong by the numbers but sobering by sentiment with a persistent shortage of large, well-priced assets to meet the demand of bigger investors.  Healthcare private equity buyout investments totaled $15.6 billion across 80 deals in 2014, up in volume but down in count from $9.8 billion across 90 deals in 2013.
• South America also turned in one of the year's biggest healthcare buyout deals, thanks to Bain Capital's approximately $860 million (2 billion Brazilian real) acquisition of health insurance operator and healthcare provider Intermedica Sistema de Saude SA.
• Following a record-breaking year in 2013, healthcare PE buyout investments in Asia Pacific showed continued strength in 2014 – 45 deals worth $3.5 billion were announced throughout the year, compared with 50 deals worth $3.2 billion in 2013.  In a key pivot, developing markets (China, India) saw a majority of the deal value versus developed markets (Japan, AUS, Korea) that prevailed in prior years.

PE's role in creating healthcare category leaders

Despite strong PE interest in the healthcare sector, fierce competition and high valuations make it imperative for investors to find assets with strong potential for value creation.  According to Bain, investors will increasingly need to look at earlier stage opportunities to get ahead of disruptive trends, as well as focus on later stage efforts aimed at finding or building category leaders – those with clear depth in a specific category, rather than breadth across multiple categories.  Bain's research shows that these companies have a higher likelihood of generating strong returns.

"More and more investors want to do healthcare deals, which drives up the price of acquisitions and therefore requires a sharper pencil to hone in on the type of deals – in the right sectors and geographies – that will deliver the greatest returns," said Jain.  "Finding or building category leaders is an opportunity to invest in the winners."

Looking ahead: 2015 and beyond

Throughout the remainder of 2015, Bain expects PE firms to continue taking advantage of attractive exit opportunities and investing in portfolio creation activities to best position their assets for eventual exit.  For new investments, Bain identifies several trends that will likely emerge:

• Funds will continue to aggressively pursue carve out assets.
• Funds will start to look beyond "gem" assets (category leaders) and obvious turnaround situations to "middle-of-the-road" assets where the path to category leadership is less obvious, but is viable with post-acquisition effort.
• Funds will continue to invest in a wide variety of segments, including but not limited to:  provider assets in emerging markets, especially China and India; population health management, driven by the changing healthcare landscape in the U.S.; and healthcare product opportunities that arise as usage and buying behaviors evolve.

To receive a copy of report or arrange an interview with its authors, contact:  Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102

# # #