Forbes.com

Strong vital signs draw private equity to healthcare

With its steady growth and global pressure to rein in costs, the healthcare sector has all of the symptoms of an attractive private equity play.

By Graham Elton, Bill Halloran, Hugh MacArthur and Suvir Varma

Published on April 30, 2013
min read


This article originally appeared on Forbes.com. Private equity investment naturally gravitates to industries that are experiencing buoyant demand and pressure to become more efficient. With its steady growth and global pressure to rein in costs, the healthcare sector has all of the symptoms of an attractive PE play. Patient demand is robust worldwide. In emerging economies, broad populations are gaining access to modern healthcare for the first time. And in the advanced economies, governments, health insurers, employers and other private payers are overhauling reimbursement formulas and restructuring healthcare delivery systems. As we describe in Bain & Company’s Global Private Equity Report 2013, this combination of healthy vital signs is luring PE investors around the world. The number and value of PE buyouts in healthcare accounted for roughly 11% of all deals consummated worldwide in 2012. The majority of deal activity focused on providers (such as free-standing urgent-care clinics and physical therapy centers) and services (from physician practice management to healthcare information technology). From region to region, healthcare deal activity reflected differences in the regulatory environment and health insurance coverage models. In Europe, private equity acquirers looked for assets like nursing homes and medical laboratories that would enable them to take advantage of more efficient purchasing of supplies across country borders. Across Asia, PE investors in the providers and services segment are branching out to fund labs and specialty medical centers and explore concepts in retail healthcare delivery. In the US, where healthcare faces sweeping changes accelerated by the Affordable Care Act, two hot themes in particular have sparked private equity interest. First, PE investors targeted physician management organizations, making serial acquisitions of smaller medical practices that they roll up into larger, more efficient groups. In particular, PE funds are assembling groups of practitioners, both in traditional hospital-centered specialties in such areas as radiology and neonatology as well as in emerging fields of hospital-focused specialization like neurology and general surgery. PE investors are also building independent practice associations (IPAs), or groups of doctors with a diverse range of capabilities who together can provide the all-encompassing patient care and case management services that recent health reform measures try to promote. The second hot opportunity for private equity investment has been the retail health category, spanning traditional specialties like dental clinics and urgent-care facilities, as well as emerging areas from fertility to cosmetic surgery. Reimbursement terms in many of the health retail categories are attractive, because they are affordable to payers and patients who pay out of pocket for some services. Also, most segments within retail health are highly fragmented and underpenetrated, presenting opportunities for growth through merger and acquisition as well as organic expansion. Physiotherapy Associates, a leading provider of outpatient rehabilitation, capitalized on the opportunity to roll up clinics and practitioners in the physical therapy field. Under PE ownership, the company grew to 700 locations across 35 states. Court Square Capital Partners, a New York–based firm, bought the company last year and has continued the expansion, having acquired one clinic and opened four new ones since the deal closed. Healthcare will remain a vibrant—but highly competitive—sector for private equity investment in 2013. The sector’s appeal has raised competition for assets to a fever pitch. Because there are so many sensitive moving parts to a retail health enterprise, shaping a value-creation plan begins with a thorough due diligence process that explores these critical areas: Market dynamics. The check-up begins with a detailed evaluation of the underlying market dynamics, including the target company’s mix of patient versus third-party payment and how much reimbursement pressure the business faces from payers. The perspective of stakeholders. Successful acquirers take the temperature of how key stakeholders—particularly patients and clinicians—assess the value proposition the target company offers. Scale. What is the relative scale the target company enjoys in its local market, and what’sits ability to win additional share? Potential for expansion. A prospective acquirer needs to weigh the target’s potential to expand—either by opening new clinics or through further acquisitions. Management capabilities. A prospective private equity acquirer needs to take careful measure of the capabilities of the management team, ensuring they have the energy, skills and experience needed to realize the company’s growth potential. Written by Hugh MacArthur, Graham Elton, Bill Halloran and Suvir Varma, leaders of Bain & Company’s Private Equity Group.

This article originally appeared on Forbes.com.

Private equity investment naturally gravitates to industries that are experiencing buoyant demand and pressure to become more efficient. With its steady growth and global pressure to rein in costs, the healthcare sector has all of the symptoms of an attractive PE play. Patient demand is robust worldwide. In emerging economies, broad populations are gaining access to modern healthcare for the first time. And in the advanced economies, governments, health insurers, employers and other private payers are overhauling reimbursement formulas and restructuring healthcare delivery systems.

As we describe in Bain & Company’s Global Private Equity Report 2013, this combination of healthy vital signs is luring PE investors around the world. The number and value of PE buyouts in healthcare accounted for roughly 11% of all deals consummated worldwide in 2012. The majority of deal activity focused on providers (such as free-standing urgent-care clinics and physical therapy centers) and services (from physician practice management to healthcare information technology).

From region to region, healthcare deal activity reflected differences in the regulatory environment and health insurance coverage models. In Europe, private equity acquirers looked for assets like nursing homes and medical laboratories that would enable them to take advantage of more efficient purchasing of supplies across country borders. Across Asia, PE investors in the providers and services segment are branching out to fund labs and specialty medical centers and explore concepts in retail healthcare delivery.

In the US, where healthcare faces sweeping changes accelerated by the Affordable Care Act, two hot themes in particular have sparked private equity interest. First, PE investors targeted physician management organizations, making serial acquisitions of smaller medical practices that they roll up into larger, more efficient groups. In particular, PE funds are assembling groups of practitioners, both in traditional hospital-centered specialties in such areas as radiology and neonatology as well as in emerging fields of hospital-focused specialization like neurology and general surgery. PE investors are also building independent practice associations (IPAs), or groups of doctors with a diverse range of capabilities who together can provide the all-encompassing patient care and case management services that recent health reform measures try to promote.

The second hot opportunity for private equity investment has been the retail health category, spanning traditional specialties like dental clinics and urgent-care facilities, as well as emerging areas from fertility to cosmetic surgery. Reimbursement terms in many of the health retail categories are attractive, because they are affordable to payers and patients who pay out of pocket for some services. Also, most segments within retail health are highly fragmented and underpenetrated, presenting opportunities for growth through merger and acquisition as well as organic expansion. Physiotherapy Associates, a leading provider of outpatient rehabilitation, capitalized on the opportunity to roll up clinics and practitioners in the physical therapy field. Under PE ownership, the company grew to 700 locations across 35 states. Court Square Capital Partners, a New York–based firm, bought the company last year and has continued the expansion, having acquired one clinic and opened four new ones since the deal closed.

Healthcare will remain a vibrant—but highly competitive—sector for private equity investment in 2013. The sector’s appeal has raised competition for assets to a fever pitch. Because there are so many sensitive moving parts to a retail health enterprise, shaping a value-creation plan begins with a thorough due diligence process that explores these critical areas:

Market dynamics. The check-up begins with a detailed evaluation of the underlying market dynamics, including the target company’s mix of patient versus third-party payment and how much reimbursement pressure the business faces from payers.

The perspective of stakeholders. Successful acquirers take the temperature of how key stakeholders—particularly patients and clinicians—assess the value proposition the target company offers.

Scale. What is the relative scale the target company enjoys in its local market, and what’sits ability to win additional share?

Potential for expansion. A prospective acquirer needs to weigh the target’s potential to expand—either by opening new clinics or through further acquisitions.

Management capabilities. A prospective private equity acquirer needs to take careful measure of the capabilities of the management team, ensuring they have the energy, skills and experience needed to realize the company’s growth potential.

Written by Hugh MacArthur, Graham Elton, Bill Halloran and Suvir Varma, leaders of Bain & Company’s Private Equity Group.