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Soaring Private Equity Investments in Healthcare and Portfolio Management by Fund Managers

Investments from various sources of funds, from sovereign wealth funds to growth-equity and hedge funds, have been flowing into the healthcare sector driven by high returns, demographic tailwinds, and recession resilience. 

This is noticeable because of the increased investments of around $151 billion by the private equity firms in the global healthcare sector in 2021, as stated by the Bain & Company report. The healthcare deal value more than doubled to $151 billion in 2021 from $66 billion in 2020. The report also stated that the CAGR for healthcare from 2010-to 2021 was 11.1% against 7.6% for all other industries. As a result, the healthcare sector's returns have remained relatively good, with valuations reaching record highs. Thus, the median IRR during the said period for healthcare PE deals had outperformed at 27.5% against 21.1% in all other industries. Hence, revenue growth and multiple expansion through advanced care models and robust technologies have led to healthcare deal returns.


Portfolio Strategy For Private Equity Firms For Healthcare Investments

Fund Managers can approach the healthcare segment just like the other sectors. Moreover, the fund manager may not be a healthcare expert to understand the intricacies; still, they can understand the sector and develop strategies accordingly with the knowledge of investments and finance. For example, the healthcare strategies for private equity firms can control buyout investments, minority equity investments, investments in growth-oriented and established businesses, majority ownership in lower middle-market healthcare companies, etc.

The healthcare market presented initial investment opportunities for venture capitals. However, now most are in the mature stage for PE investment. Thus, the potential targets for PE firms can be midtier healthcare tech companies that have considerable growth potential of double-digit. Healthcare tech focuses on technology-enabled healthcare products and services. It is a vast field enabling and facilitating healthcare process functions. However, the investors feel that the healthcare tech assets are not worth their valuations and are often unable to write high multiples. In addition, the past decade saw vast expansions, and thus, achieving fast growth may be a bit harder as valuations continue to rise in the future. Therefore, the PE firms must pursue targets smaller than their typical investments in the healthcare sector. Besides optimizing midtier entities, PE firms can also focus on identifying corporates with function-wide platform providers. Such companies can cement their position in the healthcare value chain by providing data analytics services that would be difficult to replace.

The success in evaluating deals for PE firms lies in the collaboration of healthcare and technology teams because having access to experts from both fields will help evaluate the targets' growth prospects with its core business. Moreover, the potential candidates for PE firms can be entities addressing the unmet market needs and thus, have the ability for revenue creation, increasing the efficiency of the existing systems, thereby reducing costs. Investors can identify markets with high paper usage, lower technology penetration, and regulatory trends encouraging technological solutions so that it has scope for growth. The potential target should have the potential to meet the customers' needs in comparison to its competitor.

The PE technology teams can have technological assessments of the targets to ensure that the target company's offerings can meet customers' needs. The PE investments can be scalable only when the company has a roadmap for technology and product improvements along with R&D and offers proprietary data for the customers for benchmarking and performance analytics, keeping data privacy regulations in mind. The private equity funds fear the disruption risk to the healthcare tech sector from industry players benefitting from pre-existing relationships, disruptive start-ups, and large non-healthcare corporates. However, careful due diligence focusing on the insulated firms can mitigate the risks. The due diligence process involves competitive dynamics, customer needs, regulatory pressures, geographical differences, etc. Moreover, obtaining comprehensive and accurate information can be challenging, but establishing coordination between the tech and healthcare teams within PE firms can help overcome the complexity.


Private Equity Investments Paving The Way For Future Healthcare Transformation

Healthcare valuations are likely to grow, as evidenced by last year's deals. Moreover, revenue growth and multiple expansion are becoming essential sources of deal value. Thus, a portfolio manager who may not be a professional health expert but with investment knowledge can build a strategy just like any other sector.

The booming prospects of the healthcare sector looking to strengthen their business models can be the guiding force for private equity firms looking for favourable returns. Thus, private equity firms can look to invest in relatively mature healthcare companies with a growth equity strategy. Hence, the portfolio manager can look to focus on such companies as tech-intensive firms seem to accelerate across the healthcare sector. However, a thorough due diligence approach is needed to pick the potential targets that can be trend-setters in the healthcare value chain by meeting the customers' growing needs and playing a pivotal role in the healthcare sector's digital transformation.


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Maryna Chernenko

Maryna Chernenko

Managing Director

UFG Capital

Member since

25 May 2022



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