Global Healthcare Private Equity and M&A Report
Healthcare private equity (HCPE) investors face greater competition for assets, higher interest rates from several central banks, rising labor rates, tighter credit, and, most recently, questions arising from disruptions in the banking sector. But ample dry powder and a track record of returns ensured a strong year in 2022 for HCPE investing that continues to attract healthcare-specific funds, and we expect this trend to continue in 2023. Despite the slowdown in healthcare private equity deal flow in the second half of 2022, firms continued to create healthcare-focused funds and raise near-record levels of capital in 2022. Data from Preqin suggests that firms raised more than $15 billion in new buyout capital for funds where healthcare is the exclusive or core focus, which has happened in only two other years in the last two decades—2019 and 2021.
In 2023, each region will face discrete challenges.
- North America: The Federal Reserve recently announced its smallest rate hike since March 2022. However, uncertainty remains high given recent high-profile bank failures and questions about how the Federal Reserve will navigate the conflict between stamping out excess inflation and potentially exacerbating the recent issues in banking. Once the overnight rate begins to stabilize, it may give banks enough predictability to extend larger checks, and deal activity may pick back up. That said, if the Fed’s policy moves induce a recession, or contribute to a banking crisis, funds may continue to shift investments to less risky, recession-resilient plays. In past recessions, government-focused businesses (such as Medicare/Medicaid), healthcare IT, and pharma services have generally done well. But there are different puts and takes this time around as we come off pandemic-high enrollment levels in spaces like Medicaid, and investors may need to see through some near-term turbulence in assets exposed to biotech funding and technology capital budgets.
- Europe: Europe saw the same limits in large-check financing as North America, and this may persist into 2023 as central banks respond individually to different signals. As more large-cap private equity companies move downstream toward smaller deals, midcap private equity companies are likely to respond to the increased competition by getting more specialized. Activity in the life sciences sectors is likely to continue to grow more competitive in Europe, where a strong track record of innovation in biopharma and life-sciences tools creates attractive investment opportunities for funds that know the space.
- Asia-Pacific: Within Asia-Pacific, the macro trends of rising labor rates, escalating interest rates, and tight credit all have country-specific nuances; central banks in China, Australia, India, and Japan have all responded differently. While each country faces specific short-term headwinds, healthcare private equity investors in Asia-Pacific benefit from long-term healthcare tailwinds, large stores of Asia-Pacific-specific HCPE dry powder, and a maturing market with a strong pipeline of investable assets. Some healthcare private equity investors have been diversifying their focus from China to markets like Southeast Asia, India, and Japan, as the market navigated the impact of multiple Covid-linked lockdowns, evolving policies, and geopolitical dynamics. That said, activity in China should remain robust, given growing interest from large buyout firms and venture capital.
How will the macroeconomic environment impact the healthcare investment landscape in 2023?
There is a range of potential outcomes for healthcare private equity in 2023. Some signals continue to point to a global economic slowdown. However, potential signs of slowing inflation may mean we avoid the more severe downturn scenarios. This uncertainty raises the importance of thorough diligence and early planning for value creation.
There are several supporting questions to consider as we look ahead to 2023:
- How will the key sources of capital and debt financing evolve? Funds are pushing into new sources of capital, tapping high-net-worth individuals and retail investors. Meanwhile, sovereign wealth funds have emerged as both partners and competitors for private equity deals. On the debt side, as the syndicated financing markets cooled, investors turned to private credit. In this evolving landscape, private credit may have a larger share of the leveraged buyout market than ever before.
- How broadly will investors look for carve-outs and public-to-private deals? Several high-profile planned separations and potential public-to-privates have already been announced for 2023. While the S&P 500 healthcare index largely recovered lost ground, public listings remain depressed in sectors like medtech and life sciences tools. Can a more proactive approach to identifying potential public-to-privates or carve-outs yield better opportunities?
- How will interest and competition in the life sciences sectors evolve? Experienced life sciences investors are starting to consider earlier-stage assets. Sponsors with limited life sciences experience are building expertise and deal theses in targeted areas like biopharma IT. European funds have disproportionate exposure to Europe-based assets on the forefront of life sciences innovation. Will global funds reallocate capital to Europe to compete more actively?
- What is the next frontier for value-based care? Scale deals by corporations (such as CVS’s purchase of Oak Street Health and Amazon’s acquisition of One Medical) may signal that value-based care models are maturing. How will investors adapt value-based care models to new specialties and new populations?
- How are investors considering capital allocation in Asia-Pacific? Global megacap funds seem to be increasing their exposure to Asia-Pacific, but which countries see the most interest continues to evolve. Are India and Southeast Asia the next hot spot?
- How will the healthcare industry adapt to recent artificial intelligence breakthroughs? 2022 was a big year for generative artificial intelligence (AI), with new services emerging in imaging and text generation. AI is already accelerating therapeutic discovery, optimizing supply chains, and automating payer and provider back offices. Yet use cases for generative AI are only just emerging, with stakeholders watching with a mix of enthusiasm and anxiety.
- How will regulatory changes shape the private equity landscape? Regulatory changes will continue to shape investors’ approach. For example, in the US the Inflation Reduction Act’s implications for biopharma may be felt downstream in related services businesses and within pharma distribution. Recent CMS rulings may impact Medicare and Medicaid-focused businesses.
- What is the outlook for exits? The initial public offering (IPO) and special purpose acquisition company (SPAC) exit path largely dried up in 2022, but as the S&P 500 healthcare index rebounds to the levels and performance of 2021, healthcare may be one of the first industries where IPOs return. Sponsor-to-sponsor and sponsor-to-strategic exits remain common. For strategic exits, sponsors should think early about how to best position assets for exit and consider partnering with corporations as coinvestors.
Change is coming, and there will be winners who benefit from a new trajectory while others will have to pivot in response. Circumstances can always change fast, but healthcare investors are familiar with change and know that it creates opportunities to back the next winners.
This moment of disruption may prompt funds to reconsider their approach. Investors will be working hard to have their proactive strategies ready and connect with management teams so that they are able to act with speed and confidence.