Last year saw near-record levels of deal action in the healthcare sector both in terms of volume and value, officials at Bain & Company reported this week.
Analysts said that the arena remains resilient despite a downturn in the second half of 2022. Biopharma and life sciences as well as value-based care and artificial intelligence (AI) are areas experts are advocating investors watch in 2023. Six of the top 10 deals last year were in biopharma, life science tools, and related services, Bain found.
“Healthcare private equity has earned a recession-proof reputation, typically outperforming overall private equity activity during economic downturns,” said Kara Murphy, co-lead of Healthcare Private Equity at Bain. “While the space is resilient, investors will face continued challenges ahead as interest rates and labor costs continue to climb, and credit continues to be tight. As our clients invest to deliver better healthcare, they will need to differentially focus on value creation planning in diligence and post-close.”
Deal value reached more than $90 billion, which is down from $151 billion in 2021, but still above amounts reported in previous years. Bain also highlighted a good amount of dry powder available and a track record of gains that attracts healthcare specific funds.
Funds are tapping into new sources of capital, experts said with an eye on carve-outs and public-to-private deals.
Within biopharma, life science tools and related services, more than 600 healthcare buyout deals have been completed over the past five years globally. This year the bar is high for investors to win the right deals as the competition remains strong and valuations have been higher, according to the analysis.
Value-based care investment centers on primary care and Medicare Advantage as there are investment models driven by a need for traditionally fee-for-service groups to participate in risk-based arrangements. Bain predicts interest in more capability-enhancing technology as fee-for-value arrangements (like those offered by Oak Street Health and Amazon’s One Medical) capture 15-20% of the market share from the traditional fee-for-service groups such as regional clinics and hospitals.
Another trend can be found in technology investment with generative AI and healthcare IT efforts gaining backing. New services related to AI include imaging and text generation, according to Bain. Meanwhile in healthcare IT (HCIT) buyout volume was the second highest on record, with biopharma IT and payer IT following investment in provider IT.
This year presents a number of challenges and opportunities for private equity funds in the space although uncertainty remains around exits related to the SPAC and IPO market as well as debt financing related to healthcare companies. Still, Bain analysts remain upbeat on the sector.
“Experienced life sciences investors are starting to consider earlier-stage assets,” they wrote. “Sponsors with limited life sciences experience are building expertise and deal theses in targeted areas like biopharma IT.”
All told, officials see continued promise despite possible headwinds for healthcare investors due to macroeconomic uncertainty. They reiterate that while the sector is down it should not be counted ‘out’.