Mid-market healthcare-focused funds—which range between $500 million and $4 billion in assets under management—have historically outperformed the broader market (see Figure 1), benefiting from continued innovation and evolution of their investment strategies. They have also been able to maintain buyout deal activity and exits since 2020 even as the broader healthcare buyout market struggled, as exemplified by Webster Equity Partners’ successful exit from the specialty-care medical group Retina Consultants of America.  

Figure 1

This performance has translated into strong fund-raising. Mid-market funds with healthcare exposure have raised about $59 billion since 2022, exceeding fund-raising in the previous three years by about 40% (see Figure 2).

Figure 2

A shift toward derivative provider-related targets

Provider deals historically accounted for 55% of deal volume in mid-market firms (see Figure 3), with the majority focusing on physician groups or retail health providers in the US. While traditional provider deals remain prevalent, changing market conditions have shifted provider deal activity toward derivative acquisitions, with firms targeting areas such as services and healthcare IT rather than provider groups. Other sectors, such as biopharma and medtech, have also seen a growing share of buyouts as mid-market activity shifts away from the provider sector.

Figure 3

Derivative provider deals fall into several categories. In the provider space, services-focused business models include healthcare staffing (such as Knox Lane’s majority acquisition of All Star Healthcare Solutions), supply distribution, and lab services. Healthcare IT offerings include revenue cycle management (RCM), workforce planning solutions, practice management, core systems of record, and patient engagement (such as Altaris’ purchase of Sharecare). Business models that address the macro pressures facing provider groups—higher labor costs, difficulties hiring or retaining staff, increased reimbursement pressures, and revenue integrity—have gained strong traction. Consequently, investments in these derivatives have surged since 2022, with deal volume growing at a compound annual growth rate (CAGR) of about 36%.

Continued interest in biopharma

Mid-market activity in biopharma has maintained its pace since the 2021 deal surge, despite the broader market retreat across all healthcare PE segments—including a decline in mid-market provider deals, traditionally the largest category. Multiple PE firms within this segment have developed specialized knowledge about biopharma and life sciences, which allows them to gain early conviction and close deals in some cases, especially for high-quality assets or ones that don’t make use of typical buy-and-build strategies. Armed with this knowledge, firms are willing to take on technical risks that more generalist healthcare firms have historically avoided. Separately, these firms have focused on founder-owned businesses, where they have been able to avoid potential bid-ask spread issues that exist in other healthcare subsegments.

These PE firms have also been willing to broaden their focus and acquire companies that may not fit the traditional biopharma or life science services categories. For instance, they may buy assets that support testing, inspection, certification, or compliance. Supporting commercialization and healthcare IT has been another area of focus, with some opportunistic investments in contract development manufacturing organizations (CDMOs). The year saw several notable acquisitions in biopharma IT, including WindRose Health Investors’ acquisition of SubjectWell and GI Partners’ acquisition of eClinical Solutions, reflecting a trend toward platforms that enhance digital infrastructure and operational efficiency in the sector (see Figure 4).

Figure 4

Moving beyond scale  

Many mid-market PE firms have leveraged a “buy-and-build” investment strategy, where tuck-in acquisitions with multiple expansion have provided a meaningful portion of deal returns. This approach proved successful for many investors but has become more challenging in the current environment. Multiple attractive investment opportunities still exist within the provider space—underpinned by fragmented end markets and benefits to scale—but broader value-creation levers have become more important. These include centralized infrastructure and synergies through capability and capacity expansion.

There is no single generic playbook. Value-creation strategies need to be tailored for each asset and subsegment. Examples include: 

• Physician practices. Some specialty groups can expand into ancillary services, such as establishing ambulatory surgery centers for a cardiology practice, maintaining the genetic testing lab for a fertility group, or incorporating radiology services into an orthopedics group. Most physician practices can benefit from enhancing operational efficiencies by centralizing and/or building processes for billing, procurement, IT systems, and process optimization for their core clinics. These investments can enhance patient experience, increase provider efficiency, and lead to higher profits. Firms can also unlock the benefits of value-based care (VBC), although success in this area has varied, as provider execution of the VBC model is still nascent in many subsegments.
• Contract research organizations (CROs) and CDMOs. Mid-market PE firms can support building additional capacity or developing new capabilities—such as new types of material or injection molding—or adding new product categories through acquisitions of smaller entities. Through these additions, PE firms improve efficiency, capitalize on increased scale, and deliver on cost reductions.
• Healthcare IT. Large scale can pave the way for additional investment in product capabilities and adjacent offerings while centralizing infrastructure to reduce future tech debt.

To win in this market, mid-market firms will also need to continue increasing their depth of internal expertise. Tech-focused (and increasingly all) investors require playbooks that incorporate the impacts of generative artificial intelligence (AI). Investors focusing on biopharma and life sciences will need to contend with a more specialized peer set. In the provider segment, understanding varying economic models, such as the buy-and-bill component of oncology practices, will be critical.

LPs continue to be attracted to mid-market funds, given their strong track record of performance and innovation. However, to stay competitive and continue generating strong returns, mid-market firms need to further deepen their expertise and invest in more robust value-creation strategies to tackle the increasingly complex and ever-evolving deal climate, especially given the current macro challenges curtailing sponsor exits (see the chapter “Maximizing Exit Value: An Imperative for Both Sellers and Buyers”).