Despite annual variability in deal activity, healthcare carve-outs have been on an upward trajectory since 2010 (see Figure 1). This trend has been propelled by a mix of public companies trying to improve shareholder value and PE firms eager to acquire sizable assets. Successful carve-outs offer a favorable outcome for both the parent company and PE buyer. They allow public companies to improve margins and focus on revenue growth while reducing leverage and complexity. Meanwhile, PE funds can buy overlooked assets with strong potential for value creation under new ownership.

Given reduced sponsor-to-sponsor deal activity since the peak in 2022, the combination of carve-outs and public-to-sponsor deals has drawn all types of investors around the globe (including middle-market and large cap). These investors seek to deploy capital in scalable assets across all healthcare sectors (biopharma, medtech, provider, life sciences) with value-creation potential (see Figure 2).

Figure 1

Figure 2

The importance of execution

Successful carve-outs give PE firms access to undervalued assets with the potential for value creation while enabling public companies to divest slow-growth or non-core lines of business. Although carve-outs can have more variable returns for PE buyers, they can deliver an internal rate of return (IRR) roughly 20 percentage points higher than that of other buyouts when executed successfully (see Figure 3).

Figure 3

From the strategic seller perspective, one factor contributing to the rise in healthcare carve-outs is that total shareholder returns (TSR) for public companies are heavily influenced by revenue growth. In fact, revenue growth contributes to TSR roughly two times more in pharma and about seven to nine times more in medtech than all other levers combined (see Figure 4). Thus, by slicing away lower-growth segments, companies can boost overall growth rates and enhance shareholder returns.

Figure 4

On the buy side, public company carve-outs offer significant value-creation opportunities. Business units that are carved out often have been used as cash cows to fund higher growth segments of the public company’s portfolio, frequently laboring under limited investment and attention from the parent firm.

Management’s focus on these units can sometimes be limited. As a result, they may struggle to retain top talent, operate under outdated salesforce incentive structures, or rely on suboptimal territory designs that lag changing market demands. The lack of strategic focus can also lead to greater complexity, including unnecessary spending on unused but shared resources, a high number of stock-keeping units (SKUs), and geographic mismatch.

Amidst these challenges, acquiring carved-out business units can present a meaningful upside for their new owners if they reduce complexity and implement agile ways of working. With the appropriate investments, new owners can attract and retain top talent, propel growth, and support multiple expansion (see Figure 5), which has the potential to be at higher levels than typical buyouts, in the context of numerous value-creation levers and potentially low acquisition multiples.

Figure 5

How two funds saw value-creation potential

To illustrate how private equity can make use of these dynamics to create value in carve-outs, let’s examine two recent deals.

KKR’s portfolio company, IVIRMA Global, a leader in assisted reproduction, acquired Eugin Group, an in vitro fertilization provider, from Fresenius SE to accelerate revenue growth and enhance operational efficiency. While reproductive medicine is considered an attractive, recession-proof market, Eugin did not align with Fresenius SE’s broader strategy to refocus on core activities and streamline its portfolio, which analysts expect will unlock long-term value. For KKR, the combination of IVIRMA and Eugin creates an opportunity for significant value creation by centralizing functions within the global provider group and contributing additional funds to fuel growth. The combined entity strengthens IVIRMA’s position as a top-tier competitor in a rapidly evolving fertility provider market.

The second deal involves the Carlyle Group and Atmas Health acquiring Baxter International’s kidney care unit, rebranded as Vantive. Carlyle has expertise to support Vantive’s investment in digital solutions, help the company facilitate a market shift toward peritoneal dialysis within kidney care, and promote advanced services within the broader organ therapy space. With Vantive as a standalone entity, Carlyle can help streamline the business’ focus and foster further growth. Through this carve-out, Baxter will be able to reduce debt and improve leverage, thus freeing up capital to fuel growth in its core businesses.

Coordinating an integrated diligence framework

While carve-outs are becoming increasingly common, they remain more complex and fundamentally distinct from full asset or share purchases. As a result, these partial acquisitions tend to have a higher margin for error and greater variability in performance when compared with standalone acquisitions. Unlike buyout acquisitions, in which assets can operate independently with limited to no change on Day 1, carve-outs require substantial operational adjustments from the start to guarantee business continuity. Several other factors contribute to the complexity of carve-out deals:

• The asset is typically not completely separated on Day 1. Transitional service agreements are often required for a period of time after close. In medtech and pharma, in particular, there are several countries where buyers cannot take over operations on Day 1, limiting their ability to start executing on value-creation opportunities.
• Sellers have much more information than buyers. Sellers’ knowledge of capabilities, technologies, and customer relationships gives them an edge in negotiations, particularly around transfer pricing and cross-selling agreements. It also means that buyers must invest significant time upfront to ensure they understand exactly what is in vs. out of the asset perimeter.
• Unexpected complexity is common. The cost of full separation often exceeds expectations, and complex talent retention, customer retention, and contract/lease separations may present additional hurdles.

Carve-out deals require a fully integrated diligence and value-creation plan to ensure business continuity. This Day 1 plan should encompass commercial and operational due diligence findings, potential risks and opportunities from disruptive trends such as generative artificial intelligence, and a detailed review of the asset perimeter to understand potential gaps for operational stability.

Continuity planning and initial capability building is critical during the sign-to-close period to minimize disruption for customers, suppliers, and employees. Buyers must be prepared to build these competencies across key functions—commercial, operational, and general and administrative. Equally important is evaluating cross-functional systems such as enterprise resource planning, infrastructure, and data management to ensure there are no operational interruptions.

Ensuring that the necessary capabilities are built and that existing operators continue to focus on business execution can help inflect a carve-out’s performance from Day 1 for the new owner. During the sign-to-close stage, carve-out buyers should keep the following levers top of mind:

• Remain grounded in the investment thesis. Buyers need to leverage their investment thesis as a foundational plan. That plan outlines the scope of their transformation ambition (financial implications such as headcount costs, transitional service agreements, and non-financial targets), informs value-creation priorities (where to focus and what to fix), and directs action on operating principles, organizational structure, governance, and resourcing. Aligning on, prioritizing, and executing the handful of decisions that will determine success is critical during this period.
• Address talent gaps and decision rights. Buyers must identify talent and capability gaps early so they can develop incentives to retain key talent and initiate external hiring to fill any holes. They should prioritize what is critical for Day 1 functioning; roles, responsibilities, and decision rights must be clearly defined in order to push the organizational structure to its desired future state.
• Align on go-forward processes and technology. Across IT, manufacturing and supply chain, and people and governance, buyers should understand what business processes and systems need to be separated from the parent company before Day 1, as well as how the existing operating model, ways of working, and technology should align with their future-state vision.
• Establish strong change management practices. Buyers should set up a separation management office to own day-to-day decisions, manage ongoing prioritization and sequencing of efforts, facilitate cross-functional collaboration, and disseminate organization-wide communications.

An integrated approach to carve-out deals from the beginning keeps buyers focused on key value levers and ensures that all insights are incorporated into the deal model, paving the way for post-deal success.