Investors are already hesitant to invest in young companies. Finally, healthcare tech companies can grow by acquiring and repackaging proprietary data for their customers. PE healthcare candidates should be neither start-ups nor enterprise systems, and they should address an unmet market need. By Andres Saenz. Andres Saenz. Similarly, a workforce-management company has successfully pursued acquisitions of companies that cover adjacent areas of healthcare-workforce management, including solutions for contingent-workforce payment and vendor management. Investors must also evaluate the company’s operations to ensure that the right talent and processes are in place. In 2018, private equity funds managed by Blackstone – together with Canada Pension Plan Investment Board and GIC – acquired a majority stake in Thomson Reuters’ Financial & Risk business, now known as Refinitiv. Total disclosed deal value reached $78.9 billion, the highest on record, and the deal count of 313 was in line with the 316 deals of 2018. Investors were especially excited about HCIT tied to payers (as illustrated by the Zelis Healthcare/RedCard Systems investment) and biopharma (such as eResearch Technology, or ERT), in addition to ongoing interest in provider IT (such as Waystar). Their levers range from buy-and-build, to buy-and-merge, to commercial excellence tactics that will grow organic sales. Timing is an important factor, regardless of the submarkets PE investors decide to address. The best candidates demonstrate new revenue-creation opportunities, increase the efficiency of existing processes, and reduce costs or risks. The summary of a study by National Bureau of Economic Research: The past two decades have seen a rapid increase in Private Equity (PE) investment in healthcare, a sector in which intensive government subsidy and market frictions could lead high-powered for-profit incentives to be misaligned with the social goal of affordable, quality care. 5. A way to diagnose whether a product meets a need is to ascertain whether customers have identified the problem and asked for solutions. Marathoner. Press enter to select and open the results on a new page. 6 Nikhil Sahni, Pooja Kumar, Edward Levine, and Shubham Singhal, The productivity imperative for healthcare delivery in the United States, February 2019. Large buyout firms continued to show interest in healthcare-heavy assets. The McGuireWoods Healthcare Private Equity Team previously published a multi-part series highlighting some of the more active private equity investors in the healthcare space. Along with capital, they bring industry knowledge, broad networks, and deep expertise that help companies grow, create jobs, and deliver high-quality healthcare to many more people. BelHealth Investment Partners — Founded in 2011, BelHealth is a healthcare private equity firm focused on lower middle-market companies. This paper studies … Healthcare technology companies have historically gotten less attention from private equity (PE) investors than they might warrant. We strive to provide individuals with disabilities equal access to our website. Consistent with most of the past two decades, North America remains the most active region, and provider and related services the most active sector. ArchiMed is a leading private equity firm focused exclusively on the healthcare industry. 6. This method should eliminate companies that simply provide interesting software from consideration. Such assets are worth their higher multiples. Private equity-backed practices also try to increase revenue by adding more-lucrative procedures, according to doctors interviewed by Businessweek. For instance, Blackstone Life Sciences partnered with Novartis to create Anthos Therapeutics, a biopharma company dedicated to developing therapies for cardiovascular disease. 1 Private equity funds, senior and mezzanine lenders, investment bankers, C-level executives, consultants and principals in the healthcare and life sciences industries. tab, Engineering, Construction & Building Materials, McKinsey Institute for Black Economic Mobility. Elina Onitskansky, Prashanth Reddy, Shubham Singhal, and Sri Velamoor, “Why the evolving healthcare services and technology market matters,” May 2018. Practical resources to help leaders navigate to the next normal: guides, tools, checklists, interviews and more. In the face of growing macroeconomic instability around the globe, total disclosed deal values climbed to $78.9 billion dollars in 2019, the highest values on record. Furthermore, that investment has not kept pace with total healthcare private-equity deal volume or total divestiture volume over the past three years (Exhibit 4). As with technology road maps, the company should have a corresponding hiring plan, organizational structure, and training plan that accounts for future growth. Based in New York, the firm seeks to investment between $20 million and $50 million in healthcare companies providing services and products and distribution. When we look across sectors, nearly all of the increase in deal value came in biopharma and related services. Nontech healthcare companies can sometimes have technological components that bolster their core (nontechnological) services or products. Since the original publication, we have seen even more PE investors turn toward healthcare investments, new healthcare-focused funds form, and healthcare PE deal activity continue at a staggering … ArchiMed is a leading private equity firm focused exclusively on the healthcare industry. With a proven track record of success, our team provides expert guidance to platforms through every stage of the transaction process. 7 Click "accept all cookies” to continue browsing the site with its full range of features enabled. 8. © Healthcare Private Equity Association 2500 Williston Drive Charlottesville, VA 22901 United States [email protected] Healthcare is a dynamic sector undergoing significant change. It outperformed the broader PE market, representing 18% of all disclosed deal value, up from 14% in 2018 (see Figure 1). Dealogic; Multiples are calculated using data from announced (and not withdrawn) deals greater than $5 million for which transaction multiples are available. our use of cookies, and Featured Companies Featured companies are operating and private equity platform companies interested in networking with others in the investment community. However, the industry will soon have no choice but to catch up—fast. Investors showed more appetite for taking on reimbursement risk and pipeline risk. Rising disease rates, new innovative therapies, increased enrollment in Medicare Advantage and continued (though slowing) growth in pricing will more than offset ongoing government reimbursement pressures and consolidation in some sectors. By the time a company is a target of a PE firm, its solution should be comparable to competitors’ offerings in its ability to meet customer needs. However, data-privacy regulations, the need for consent (often from patients), intellectual property, data quality, or simply a lack of customer participation often prevent companies from achieving this kind of growth. The healthcare sector is drawing interest from private equity investors this year, with seven deals announced since Jan. 25. By Andres Saenz. The sector rose by $24.2 billion, including major deals such as the Nestlé Skin Health carve-out and also a number of others over $1 billion, such as Advarra and China Biologic Products Holdings. Likewise for healthcare tech data, which was found by searching for the term “healthcare IT.” There were no size restrictions for deals. That trend was certainly on the path to continue in 2020 when the COVID-19 pandemic brought everything to a screeching halt. A Boston-based private equity firm with more than 25 years of experience in healthcare investing. The due-diligence process should help investors make sure that no vertical- or market-specific elements could make a product difficult to scale beyond its original context. March, April and part of May saw private equity investment in healthcare come to almost a standstill. We know healthcare. Our experienced private equity team has advised on hundreds of healthcare deals covering the gamut of clinics, hospitals, inpatient/outpatient services, practice management, laboratory services, information technology, managed care, devices and supplies, business processing outsourcing, revenue cycle management and more. For example, to meet a wider array of customer needs and expand the amount of data it can aggregate, a provider of clinical-trial data-management software is moving into analytics and benchmarking by methodically acquiring companies that offer complementary products and services. Corporates come with a set of complementary capabilities. February 19-20, 2020. In the early days of the healthcare tech market, most healthcare tech firms presented more appropriate investments for venture-capital and growth-capital funds, but many are now mature enough to benefit from PE investment and guidance. If a team does plan to expand, investors should confirm that plans exist to credibly mitigate the risk of encountering hurdles in new markets. For more than 30 years, AGG’s team of healthcare attorneys has been a trusted advisor to private equity funds and their portfolio companies as they look at the legal hurdles of investing in healthcare industries. Disclosed deal values rose 29% to $40.8 billion and count rose 13% to 126. Bookmark content that interests you and it will be saved here for you to read or share later. There are many obstacles to private investment in healthcare industries, from state restrictions on who can own a medical practice to HIPAA, Stark and anti-kickback … It is one of high returns due to the extensive use of debt. © Healthcare Private Equity Association 2500 Williston Drive Charlottesville, VA 22901 United States [email protected] Netflix used data to compete in movie and TV production. Common uses of proprietary data are performance analytics and benchmarking. It can often be difficult to obtain accurate and comprehensive information about the relevant markets, making due diligence challenging. Various trends, including funding deficits in public healthcare systems and price pressures on pharmaceuticals, have driven healthcare players to seek ways to reduce operating costs and improve productivity. 2. Strong targets must have a record of customer success, which can involve a “soft” element that requires due-diligence teams to use perception to arrive at insights that aren’t necessarily reflected in conventional metrics. David Champagne is a partner in McKinsey’s London office, where Alex Davidson is a consultant, Jamie Littlejohns is an associate partner, and Dmitry Podpolny is a partner. Cimarron Healthcare Capital is a Salt Lake City-based healthcare-focused private equity firm. EY Global Private Equity Leader. The average deal size rose roughly 25% as funds focused more on larger assets. Healthcare technology companies have historically gotten less attention from private equity (PE) investors than they might warrant. As in past years, corporates used M&A to build their core capabilities and place option bets on potential disrupters in their respective industries, while simultaneously divesting underperforming and noncore assets. Furthermore, that investment has not kept pace with total healthcare private-equity deal volume or total divestiture volume over the past three years (Exhibit 4). 2 It’s clear that HCIT has advanced to a new stage. But private equity investors will have to sharpen their focus on operations. Another solid year means healthcare expanded its share of overall deal activity. What’s more, investors are sometimes unable or unwilling to underwrite high multiples for healthcare tech companies for fear that the assets are not worth their valuations; venture-capital funding tends to bid up healthcare tech companies’ valuations, after which interested PE investors must compete against each other as well as established healthcare players for targets. Another solid year means healthcare expanded its share of overall deal activity. Accelerating Growth Ampersand leverages its sector expertise, expansive operating networks, and global presence to support entrepreneurs in building market leading companies. Our mission is to help leaders in multiple sectors develop a deeper understanding of the global economy. Learn more about cookies, Opens in new Biopharma had an exceptional year as disclosed value grew 146% to $40.7 billion. Because platform providers are exceptionally difficult to replace, companies need to become standard-setters now and win disproportionate returns later—or position themselves to be acquired at a premium by the eventual platform provider. The UK healthcare and pharmaceuticals sector continues to thrive. Based in New York, the firm seeks to investment between $20 million and $50 million in healthcare companies providing services and products and distribution. Healthcare tech companies can provide or facilitate anything from electronic medical records to clinical-trial management software (interactive). Dive Brief: Private equity interest in healthcare hit a record again in 2018, according to Boston-based consulting firm Bain & Company. Private equity firms utilize our comprehensive due diligence of healthcare targets to help uncover and assess key issues and regulatory and compliance risks associated with an investment and rely on the sophisticated guidance of our healthcare regulatory and compliance and investigations counsel. For example, material-tracking software in clinical settings, especially in surgical and critical-care environments, can capture data that allow hospitals and healthcare providers to improve clinical performance, procurement processes, and material-management practices. Healthcare tech investment from PE firms is also stymied by PE funds’ fear of threats and disruption to healthcare tech companies. Firms are reluctant to invest in healthcare tech for structural and cultural reasons, but discerning investors can find many opportunities in the industry, which is projected to grow 14 percent per year through 2023. Financial sponsors used a range of creative deal approaches, including partnering, looking to public markets, maintaining minority positions in investments and expanding their value-creation theses. cookies, McKinsey_Website_Accessibility@mckinsey.com, The productivity imperative for healthcare delivery in the United States, Why the evolving healthcare services and technology market matters, Private Equity & Principal Investors Practice. Issues include risks such as high-impact events, often related to compliance, that could shatter credibility and damage key customer relationships. Investors that take decisive action while focusing on targets with growing businesses that compete in attractive markets, with strong prospects for growth, can benefit most. Since the original publication, we have seen even more PE investors turn toward healthcare investments, new healthcare-focused funds form, and healthcare PE deal activity continue at a staggering … Reinvent your business. 1. For healthcare tech companies, strategic M&A and roll-ups can facilitate geographic expansion, allow companies to pursue adjacent business lines, and potentially monetize data. Enhanced Healthcare Partners is a private equity firm focused exclusively on healthcare industry investments. Santiago Comella-Dorda, Krish Krishnakanthan, Jeff Maurone, and Gayatri Shenai, “A business leader’s guide to agile,” July 2017. Having access to both healthcare and technical experts will help investors evaluate the strength of the market as well as targets’ core business and growth prospects. Because many healthcare tech solutions do not fully address customers’ needs, good-to-great solutions can establish market leadership positions relatively quickly, even with sales cycles that can stretch into years. Or, expand the section below to learn about the types of cookies we use and review your options. In the adjacent field of corporate M&A, deal value rose roughly 24% in 2019 on the back of two megadeals: Bristol-Myers Squibb’s acquisition of Celgene for $97 billion and AbbVie’s purchase of Allergan for $85 billion (both deals included net debt). As the components of its larger business evolve, the company is attempting to create an additional revenue stream from data as a service and as a subscription product. We know healthcare. Attractive markets should be growing and have room for growth. Structural factors create opportunities for further growth. March, April and part of May saw private equity investment in healthcare come to almost a standstill. The past two decades have seen a rapid increase in Private Equity (PE) investment in healthcare, a sector in which intensive government subsidy and market frictions could lead high-powered for-profit incentives to be misaligned with the social goal of affordable, quality care. North American activity rose modestly, and disclosed value jumped to $46.7 billion, compared with $29.6 billion in 2018. A Boston-based private equity firm with more than 25 years of experience in healthcare investing. Please click "Accept" to help us improve its usefulness with additional cookies. The summary of a study by National Bureau of Economic Research: The past two decades have seen a rapid increase in Private Equity (PE) investment in healthcare, a sector in which intensive government subsidy and market frictions could lead high-powered for-profit incentives to be misaligned with the social goal of affordable, quality care. Here we highlight ways that these firms can identify winning healthcare-tech investments. As the UK’s leading healthcare private equity firm, LDC is an active investor in the sector. The McGuireWoods Healthcare Private Equity Team previously published a multi-part series highlighting some of the more active private equity investors in the healthcare space. Due diligence must therefore go beyond standard measures of customer experience such as customer satisfaction scores and include in-depth customer interviews to understand demonstrable customer impact and check for serious issues. Private equity firms invested over GBP140 billion across 1,227 healthcare deals in 2019, with the sector now accounting for 14 per cent of total deal value. Accelerating Growth Ampersand leverages its sector expertise, expansive operating networks, and global presence to support entrepreneurs in building market leading companies. In 2018, private equity funds managed by Blackstone – together with Canada Pension Plan Investment Board and GIC – acquired a majority stake in Thomson Reuters’ Financial & Risk business, now known as Refinitiv. Stefan Biesdorf and Florian Niedermann, “. Upward movement in those regions was partially offset by a decline in Asia-Pacific volume due to declining activity in China; however, disclosed value in the region was still over 60% above its five-year average, reaching the second-highest level since the most recent recession. Likewise for healthcare tech data, which was found by searching for the term “healthcare IT.” There were no size restrictions for deals. Incumbents and corporates are already trying to establish themselves as platform providers, and those that succeed are likely to become the standard for their portion of the healthcare value chain. Exacerbating the complexity of deal sourcing and due diligence is the difficulty of effectively coordinating healthcare and technology teams within PE firms. How private equity can improve the health of healthcare. Management should contain a mix of healthcare and technology experts who understand the solution and its opportunities for growth. In recent years, well-managed healthcare tech companies have performed even better, with some exits at 23 to 25 times EBITDA. These help us to remember the choices you made in the past, like the language you prefer. Private-equity-owned freestanding emerging rooms (ERs) are garnering scrutiny because of their proliferation and high rates. This assessment will likely require a combination of technical reviews and in-depth customer interviews to understand customer perceptions of the solution. Companies that can overcome these common but substantial obstacles would have a rare advantage over their competitors that cannot aggregate and repurpose customer data. In fact, the first cohort of European and US healthcare tech companies is now sufficiently mature for PE firms to consider as investment candidates. Preqin, press searches. Due diligence in healthcare tech requires the ability to evaluate customer needs, competitive dynamics, regulatory pressures, differences among geographies, and emerging sectors—without a developed base of customers or many competitors as points of comparison. 8 Many healthcare tech companies serve growing markets, and market positions, once secured—especially as part of a platform or suite of solutions—are often defensible. In fact, healthcare tech companies are already pursuing roll-ups: an eCOA company acquired seven small companies in the field between 2009 and 2017. Most transformations fail. 3. PE-friendly healthcare-tech investments must be scalable. Acquisition targets’ products may not necessarily contain proprietary code, but they should possess advantages that aren’t easily replicated by entrants from other fields. These are typically provided by third parties, such as social networks, to help deliver relevant content for you. Technological assessments from PE funds’ technology teams will also be necessary to confirm that the target has a sound, flexible tech stack (the frameworks and tools developers work with). Private equity has record amounts of capital that needs to be deployed, but valuations and pricing are being severely affected by current market volatility. Such markets should also present material barriers for entry. By contrast, in the broader PE market the average size dropped for the first time since 2014. Investors should also speak to nonmanagement employees to understand if best practices such as agile methodologies are embedded in the company. Family man. Products, services and HCIT supporting R&D and commercialization efforts of drugmakers continue to be of highest interest, but early-stage technology investment also continues to grow. Looking ahead, the healthcare and life science sectors are set to continue to be highly sought-after for private equity investors, due to the previously mentioned trends. People create and sustain change. We are private equity investors with over 110 years of combined experience and more than 25 healthcare investments. Investors can identify such markets by their low technological penetration, high levels of paper use, and regulatory trends that encourage or force the use of technological solutions. Please use UP and DOWN arrow keys to review autocomplete results. Explore the contents of the report here or download the PDF to read the full report. For example, a consortium led by Leonard Green & Partners and Ares Management Corporation acquired Press Ganey Associates, the industry leader in patient surveys, for $4.2 billion. Thus, this approach can yield rich returns and augment an already strong position. How can investors gain a foothold, even as the ground shifts beneath their feet? Investors focus on creating good returns even if they don’t rely on expansion of multiples. The authors would like to thank Roerich Bansal, Bede Broome, Fredrik Dahlqvist, Martin Dewhurst, Greg Gilbert, Basel Kayyali, Brandon Parry, Prashanth Reddy, Shubham Singhal, Eli Weinberg, and Brenda Zhang for their contributions to this article. Only targets with target regions of North America, Western Europe, or developed economies in Asia–Pacific are included. Please try again later. Learn about We sit at the crossroads of entrepreneurship, innovation, capital and world-class leadership in healthcare. Private equity firms utilize our comprehensive due diligence of healthcare targets to help uncover and assess key issues and regulatory and compliance risks associated with an investment and rely on the sophisticated guidance of our healthcare regulatory and compliance and investigations counsel. Buyout funds also retained minority interests in assets upon exiting, allowing these funds to lock in a portion of gains at current valuations while also maintaining access to continued upside. Together, we achieve extraordinary outcomes. Gilde Healthcare is a specialized European healthcare investor managing EUR 1.4 billion (USD 1.5 billion) across two fund strategies: venture & growth capital and private equity. More PE funds are investing in healthcare, and more individual funds are trying to allocate more of their capital to healthcare. Yet despite a less favorable macro environment, global buyout deal value reached $444 billion, lagging 2018 but on par with the past five years. PE firms should invest in such companies now to capture disproportionate benefits. In that context, individual companies usually fulfill a specific need—for example, digitizing core processes or providing digital health solutions. Private-equity investment represents only 6 percent of all healthcare corporate-divestiture activity. Several factors account for the industry’s durable investment performance, notably strong underlying demand for healthcare. We are comfortable making minority or majority investments and seek to partner with business owners and managers who share our focus on long-term value creation. Never miss an insight. Our members are passionate about healthcare. There were more than 300 private equity deals in the healthcare industry in 2019, and the healthcare sector has continued to draw private equity investors over the past year. The best way to ensure success in sourcing and evaluating deals in healthcare tech is to have PE firms’ healthcare and technology teams collaborate throughout the process. We use cookies essential for this site to function well. Data and analytics have become prominent, as two notable deals of the year involved companies that create and compile data for customers—Definitive Healthcare and Press Ganey. In every country changing its regulations, private equity investors should do scenario planning around the probable consequences. The fear of high multiples is related to the difficulty of identifying good assets from the large number of available deals and opaque markets. For instance, some companies provide services and products to support pharma companies’ medical affairs functions, which often come with a software tool such as a workflow-management tool for publications. Family man. These burgeoning digital needs translate into significant opportunities for healthcare technology providers, companies that provide technology-enabled solutions for healthcare industry players. To evaluate how well the company attracts and retains talent, investors should examine employee-churn data and interview a cross-section of employees for insights on the company’s talent blind spots.

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