Call it a Covid-19 paradox. In our 10^th annual report, we explore how healthcare private equity not only survived a global pandemic in 2020 but also showed remarkable resilience, posting another very active year. The industry’s historical outperformance during recessions may have roused greater investor interest relative to other parts of the economy. Ample dry powder in search of opportunities, along with capital markets’ strong appetite for exits, created fertile conditions for investment. As a result, even with the pandemic upsetting all manner of business activities and deal processes, healthcare deal volumes jumped higher than record 2018 and 2019 levels despite a 14% decline in volume across private equity globally.

Meanwhile, the total disclosed value of healthcare deals declined for the first time since 2015, due to a convergence of several factors:

• The coronavirus and subsequent lockdowns suppressed or disrupted deal activity in several sectors, particularly among potentially high-value deals. Business owners sidelined some assets rather than attempting a sale amid weaker market conditions.
• No blockbuster transactions on the order of the 2019 $10.1 billion Nestlé Skin Health deal occurred during 2020.
• Some of the largest assets wound up transacting to special purpose acquisition companies, or SPACs.

This year’s report explores a number of key healthcare private equity developments.

Macro trends

• Covid-19’s diverse effects. In terms of the types and mix of deals that closed, Covid-19 had sharply different effects on each sector and even segments within a sector. While the situation is still evolving, some lessons have emerged, as detailed in “The Covid-19 paradox” chapter.

Sector trends

• Technology to modernize administration, support telehealth, or help patients make decisions. Pressures on healthcare providers and the shift toward alternative sites of care helped support healthcare IT growth and activity in 2020. Especially active areas were healthcare IT assets that promote care management across alternate sites, or innovative healthcare payment platforms and payer models that modernize obsolescent administrative operations or help patients understand and navigate coverage options. Further, companies that support modernization of activities across the value chain, from clinical trials virtualization to telehealth, also attracted greater interest.
• Derivative moves in biopharma services and life sciences. With many investors hesitant to assume molecule risk directly, some investors looked for investment opportunities across pharma services and life sciences tools and services as derivative moves aided by tailwinds in the sector. These included broad platform strategies as well as those focused on key segments including specialty contract research organizations, contract development and manufacturing organizations, packaging, cold chain logistics, commercialization and marketing services, and intellectual property tools and products that have category-leading positions in growing life-science segments such as cell and gene therapy.
• Significant investment in next-generation models. Across the healthcare spectrum, businesses are working to develop next-generation models for care delivery that would represent a step change from current practices. Areas for innovation include disruptive primary care, triage and home care models, and employer-based care navigation.
• Hunting in healthcare provider segments that are new to buy-and-build strategies. With many traditional healthcare provider assets staying on the sidelines, investors sought out less-penetrated segments (new to buy-and-builds), where they can execute a similar platform or buy-and-build playbook, or those that can facilitate the shift to home-based or outpatient care settings. Some investors also sharpened their focus on risk-bearing targets, particularly Medicare Advantage providers operating under capitated models. Behavioral health was particularly active.

Regional trends

• Asia-Pacific’s surge. For the first time, the Asia-Pacific region logged more deals than North America and Europe. Deal value was heavily concentrated in the second and third quarters of the year, possibly due to the earlier and shorter effects of the pandemic in key Asian countries. Investment trends varied widely by country and sector; for instance, the healthcare provider sector showed substantial in-hospital activity in China, but more alternate site deals in Japan. Private equity funds generally were willing to do a broader range of deals with more structures and more variable risk profiles. Some regional private equity activity began reaching earlier into company life cycles to the point where they overlap and compete with venture funds.

Financial trends

• The return of the initial public offering (IPO) as an exit vehicle, and the rise of special purpose acquisition companies (SPACs). Both the size and number of IPOs rose sharply in 2020, with disclosed values reaching their highest levels since the global recession more than a decade ago. Some of this IPO growth stemmed from the spike in SPAC activity, but capital markets have a strong appetite for healthcare assets, and the scarcity of true gem assets drives strong valuations as they come to market.

Looking ahead, one obvious and unanswered question concerns what timing and shape the rebound will take after the coronavirus abates. Many scenarios could play out, but investors will need to disentangle the impacts of Covid-19 from the rest of an asset’s business fundamentals.

Other factors inject uncertainties into future investments as well. Regulatory and policy decisions such as surprise billing legislation, drug pricing actions, medical device regulation, and changes to public insurance availability may have major consequences for entire healthcare subsectors. Savvy investors will develop a clear understanding of the implications of any change in order to inform their decisions, as policy shifts will create both risks and opportunities. Investors should keep an eye out for models that can have direct or derivative value in the future, such as enabling healthcare IT or innovative models that can transplant proven concepts from one care setting to another—for example, Medicare Advantage strategies applied to traditional Medicaid or commercial populations.

Despite these shifts, healthcare should remain an attractive industry for investment because of its strong demographic and demand foundation, the supply-constrained nature of many businesses, and a strong pipeline of innovation.

Indeed, although Covid-19 has caused widespread challenges, the changes wrought by the pandemic also create new business opportunities. With private equity funds looking to put dry powder to work, and the ongoing rise in demand for healthcare, competition for attractive opportunities will intensify among both financial sponsors and corporate buyers. As competition and multiples grow, this will raise the bar for generating attractive returns, which will increase the complexity and importance of robust diligence and value creation planning.