Global Private Equity - Spotlight on the Industry

Unprecedented, and wholly unexpected deal volume in the last 12 months is creating significant challenges for Private Equity (PE) funds looking to invest in the healthcare sector. A panel of experts provides insight on how funds can get a slice of the action and not be left empty-handed.

At HPE New York 2021, we were joined by Paige Daly of Harvest Partners, Sean Dempsey from Sheridan Capital Partners, Carmine Petrone of Advent International, and Neel Varshney from Patient Square Capital, to discuss the key issues facing buyers in the healthcare market.

A major stumbling block to finding good deals in today’s market is that strategic buyers are flush with cash following 2020 and are actively looking to expand in the healthcare sector. If the pandemic has taught them anything, it’s that every other sector is vulnerable, while health will always be a priority.

Compounding the problem, the larger funds are now wading into the pool of middle-market deals. Some dedicated funds and larger sponsors are retaining management teams and looking at smaller deals for some of the buildups in healthcare services. This trend is pushing middle-market buyers, who simply can’t compete on price, to look at opportunities in the lower range. In light of these challenges, our panelists all agreed that the keys to success at the moment are preparation, speed, and conviction. Know exactly what you want, have everything in place, and throw your full weight behind it

PREPARATION

The most successful PE funds are establishing sectoral theses to identify those areas of healthcare where they want to invest. This helps narrow down a field that five years ago was reasonably small but is now flooded with niche segments. For example, in the United States, healthcare investment was traditionally focused on providers and facilities. The advent of IT started to open the field, but for a long time it predominantly consisted of mature medical records businesses. Now, IT is the driving force behind the creation of previously unthinkable and phenomenal opportunities for patients to manage their own care, through telehealth and wearable devices, particularly coming out of the pandemic.

Even within healthcare’s subsectors, funds need to decide whether they want to focus on the front line: the companies developing innovative pharmaceuticals to beat novel illnesses, or those businesses supplying the shovels in the gold rush: the companies developing tools to make clinical trials more streamlined.

Similarly, it’s vital to know what types of companies are most attractive. Some funds, for example, will find single asset exposure a bit too rich for their tastes; they prefer multi-product companies with proven management teams who they know, a track record of developing drugs efficiently, the ability to make go/no go decisions swiftly, and the commitment to jump on the winning drugs quickly.

Once the thesis is in place, it’s critical to study companies well before they come to market; if a fund is learning about a company only when it calls for investment, that fund has already lost the race. Competitors are tracking the companies they’re interested in so closely that it inspires the white papers they write. All our panelists are actively monitoring the businesses they think have potential.

SPEED

Funds need to tell the bankers up front who they’re interested in, and they need to have their legal team lined up and ready to go so they can jump on an opportunity before anyone else.

When it’s time to push the button, they need to be ready to differentiate themselves from an overcrowded market of buyers. Targets are attracted to plans for accelerating growth right out of the gate, so while all funds should be tracking which companies they are interested in, the most successful ones are already putting together teams that can be deployed into those companies as soon as the ink is dry, enabling them to rapidly handle even the most challenging situations, such as carve-outs.

It also pays to bring lessons from other sectors to enable quick wins that cement the relationship and prove the fund’s value. Centralising and streamlining processes across subsidiaries, for example, can bring benefits even when those subsidiaries have little in common.

CONVICTION

As a result of all this pre-planning, funds should know as much as they need to know to be confident they can push ahead when the opportunity arises. Our panel noted instances where they had requested additional information from targets but been told there was none. They had to take the decision on whether to wait for more certainty, or just lean into the deal. They waited, and the target went to someone with a stronger appetite for risk. It’s tricky to balance the need for speed with thorough diligence and the necessity of dodging landmines, so firms need to establish early just how risk-averse they and their lawyers want to be.

Our panelists agreed that the keys to success at the moment are preparation, speed, and conviction.

An interesting trend emerging among investors is their desire to stay with the investment. As funds are working on deals, they’re not just onboarding management teams, they’re also having constructive, ongoing dialogue with current investors on how they would work together moving forward. While this may take additional time to navigate, it’s a trend that will continue as more and more buyers want to stick with their winners, especially where they believe growth will continue. The in-depth research funds are undertaking is paying off in terms of return on investment, and if you’ve gone to that much trouble to identify and secure a winner, you’re less likely to be willing to walk away when it goes to the next level.

Our panelists agreed with The Next Evolution of Healthcare Private Equity report from WSJ Intelligence and McDermott, which found that healthcare IT and telehealth stood out as the subsector that would get the most attention from investors over the next three years. Opportunities are moving up to a size and scale at which a flagship fund can invest, while at the same time there are a host of smaller and very interesting startups suitable for the less cash-rich funds.

It’s critical to study companies well before they come to market.

It’s hard to ignore the amount of value that’s been created, but our panel was equally as excited by the opportunities for actively improving the healthcare sector to benefit end-users. Private equity investment targeted at making a business more efficient isn't about eliminating jobs, it's about putting capital into infrastructure, technology and more jobs so the existing healthcare workers can do their jobs better and, ultimately, improve people's health and save lives.

Fortune favours the brave, the prepared, and the ones who believe in what they’re doing. Only the nimblest and most committed funds are going to come through this period of extraordinary activity with portfolios of solid and durable investments.