This article is part of Bain’s 2020 Global Healthcare Private Equity and Corporate M&A Report. Explore the contents of the report here or download the PDF to read the full report.

Uncertainties pervade any market, and the next few years could see geopolitical changes—from the US presidential and congressional election in November to Brexit—as well as a possible recession. While a recession has not yet emerged, that possibility has permeated investors’ thinking as they evaluate how portfolio companies would perform in a downturn.

The good news: In recent past recessions, healthcare companies showed great resilience by posting stable returns. That suggests that the industry will fare relatively well should another economic downturn materialize. According to Bain analysis in an exclusive partnership with CEPRES, a digital investment platform and transactional network for the private capital markets, healthcare PE investments made from 2006 through 2008 returned nearly a full additional turn more on invested capital vs. non-healthcare PE investments during the same period.

Regardless of potential macroeconomic gyrations, the environment for healthcare deals should continue to shine. Healthcare’s structural dynamics remain strong, including aging populations, a growing incidence of chronic disease, and rising wealth in emerging economies, which drives demand—sometimes outpacing supply of healthcare services, as is the case in Asia-Pacific. With technological innovation so prevalent in everything from drug trials to payments, private capital will continue to flow to tech-enabled solutions that help improve care, reduce complexity and take out costs.

The growing stores of PE dry powder, in short, must be put to work. Because investors view healthcare as a safe harbor in heavy weather, they will continue to direct capital to the sector.

For the year ahead and even further out, we expect to see growth in deal activity across geographic regions. In North America, uncertainty around the November election might pull deals forward to the first half of the year.  

Europe could be a more nuanced story. Many assets in retail health, for instance, have been building scale through add-ons and plan to hit the market in 2020. Investors will maintain keen interest in HCIT and providers, particularly those companies that can scale across borders.

That said, investors will scrutinize asset valuations and walk away from prices deemed too high, especially for assets of lower quality or lacking a clear upside. In other cases, a shift in industry structure has made it more difficult for assets to trade. The eventual success of any deal in Europe will hinge on a solid upside case and value creation plan.

Turning to Asia-Pacific, the continued undersupply of healthcare goods and services relative to demand from the burgeoning middle classes will drive innovation and investment in the space. Obviously, the effects of the coronavirus bear watching in China and possibly other countries. However, specific developments within countries will also spur opportunities, such as the Chinese government’s volume-based procurement program in drugs, which should favor local pharma companies as eventual winners.

A few investment themes look primed to heat up:

• companies that incorporate data as part of their competitive advantage;
• HCIT that addresses the many pain points for payers, providers and patients, including disruptive primary care;
• risk-bearing providers with boundaries blurred between provider and payer;
• outsourced services within medtech and pharma;
• retail health platforms of many flavors, in a trend toward consumerism;
• next-generation specialty platforms, including radiology and women’s health;
• behavioral health;
• payer activity across the value chain from funding, care management, care delivery, and member recruitment and engagement;
• life sciences tools and diagnostics;
• next-generation pharma technologies such as gene and cell therapies; and
• US companies that support growth in Medicare Advantage and companies that help contain the cost of self-funded employer plans.

Regional or sector specifics aside, it is clear that investors will have to sharpen their focus on operating fundamentals rather than relying on the multiple expansion they could count on in recent years. Returns built on expanding multiples served to cover up missed targets for improving revenues and profit margins. That allowed some GPs to look like heroes when in fact their deal models missed the mark.

At some point soon, the multiples froth will fizzle, exposing any shortcomings in operating fundamentals. We will continue to see winners who creatively assemble companies from nothing and find paths to strategic exits. In addition, the GPs who quietly plan for value creation during diligence, then hit their deal revenue growth and margin projections, will continue to outperform. These heroes will succeed by not only rolling up their sleeves for the hard diligence work up front, but also by following through while they own the asset. That’s what will allow them to shine above their peers.

This article is part of Bain’s 2020 Global Healthcare Private Equity and Corporate M&A Report. Explore the contents of the report here or download the PDF to read the full report.