This letter introduces Bain’s 2019 Global Healthcare Equity Report. Explore the contents of the report here or download the PDF to read the full report.

Dear colleagues,

Healthcare private equity just finished a truly banner year. In the face of growing economic and sociopolitical instability across the globe, healthcare assets attracted investors at record levels in 2018. An especially volatile fourth quarter for both global markets and certain political landscapes produced a strong sense of unease among most investment professionals. Yet healthcare’s sturdy fundamentals and track record of strong performance were a beacon for investors seeking a safe haven. When combined with a glut of dry powder, increased fund-raising and higher fund allocations, competition for healthcare assets intensified throughout the year—and shows no signs of abating.

Consider the high-level tally: Disclosed deal values surged almost 50%, to $63.1 billion, topping last year’s level of $42.6 billion, and deal count rose to 316 in 2018 from 265 in 2017. We tracked strong investment activity across all regions and in sectors such as healthcare IT (HCIT), provider and biopharma.

Investors made a mark with 18 deals greater than $1 billion each in disclosed value, pushing larger assets to levels that are out of reach for most buyers. We witnessed some of the largest healthcare buyouts of all time as investors made big bets on category leaders across sectors.

Corporate buyers also jumped in with enthusiasm, pushing corporate M&A in healthcare to a record $435 billion in 2018, surpassing the previous high of $432 billion in 2015. In recent years, corporate healthcare companies have increasingly turned to and relied on M&A for revenue and shareholder growth.

In order to get deals done amid intense competition, funds took more creative approaches to transactions. For large or more complex assets, more buyers sought partners to help finance the deal or spread the risk. Some PE funds looked to public companies for carve-out or take-private opportunities, as public valuations became increasingly attractive compared with private market offerings. Funds also explored assets across a wider range of the risk spectrum, from stable core assets to higher-risk growth assets. To deal with the challenge of multiple expansion likely becoming an outdated lever for returns, investors are expanding their value-creation theses beyond the traditional category- or geographic-leadership buyout.

To adapt to all of the above, funds are building capabilities to take unique risks, doing diligence earlier and preparing more thoroughly for operating a new asset. Investors need to expand, accelerate and intensify their process for buyouts, and they should be guided by four principles.

• Develop a clear playbook and the right capabilities for the chosen strategy. When investors dedicate larger portions of their funds to healthcare investments while simultaneously facing increased competition, their strategy may need to change. Can they continue to double down on areas of current focus? Or should they expand the aperture for investment in terms of sectors, check size, deal theses and approach to value creation? And how far can they expand without finding themselves spread too thin? Assessing the capabilities required for success and strengthening areas demanded by the investment strategy will be critical for buyers going forward.

• Develop the value-creation plan early. Given current valuation levels, multiples may no longer expand the way they have in the past. Instead, investors must increasingly derive returns from commercial and operational levers. Buyers should begin developing the value-creation plan during diligence and cocreate with, and hold company management accountable for, an execution plan that shows a clear path to value creation. This requires a more proactive mindset, thinking several moves ahead to build relationships with operating advisers and management teams.

• Execute next-generation diligence. Given the increased competition for a limited set of assets, funds are writing larger checks and moving quickly to win deals. As such, investors will look for more ways to drive value from an acquisition and pull forward value-creation planning into diligence. Being laser focused and realistic about the commercial and operational return levers during diligence will enable funds to make wise investments. Best-in-class investors think years ahead about which spaces and assets to invest in and then position themselves to win by doing their homework early. They also realize the traditional market diligence no longer suffices. Savvy investors will use other chapters of the diligence playbook, conducting an integrated diligence to assess profit improvement and growth levers—and to identify potential disrupters that can pose both risks and opportunities.

• Take a creative path to get deals done—if you can. Funds no longer pursue only traditional buyouts to generate returns for investors. Partnerships, growth investing and take-privates are just a few of the creative approaches firms are taking. But not every buyer can execute these variations flawlessly, because they require internal capabilities that take time to develop. Funds that leverage existing strengths and platforms can generate meaningful value by doubling down on their portfolios as an acquisition vehicle.

Looking ahead, the likelihood of a recession will be palpable throughout 2019, and sociopolitical uncertainty may prevail. Returns in healthcare PE markets have proven resilient through such storms in the past, however, and we are confident that investor demand for these fundamentally strong, recession-resistant assets will endure. Buyers with a robust healthcare acquisition playbook are best positioned to make smart investment decisions that will generate strong returns in the years ahead.

We hope you enjoy this year’s Global Healthcare Private Equity and Corporate M&A Report, and we are excited to continue our dialogue with you over the coming months.