Bain & Company’s third annual Global Healthcare Private Equity Report, their review of the significant trends of the past year and a look at some of the most compelling prospects for private equity investors in the healthcare sector in 2014.
Healthcare continues to be an attractive area for private equity investment as the landscape evolves. Similar to2012, several factors constrained mega-deal activity in healthcare, led by stiff competition from strategic buyers and rich valuations. Despite some dampening in investment activity, these trends had the welcome consequence of creating a robust exit environment. The number of portfolio company exits hit a 10-year high in 2013, with the majority going to strategic players and several making sizable IPOs.
When funds made large investments in 2013, they spread them fairly evenly across sectors, unlike the clustering of $1 billion-plus deals seen in the provider and services space in 2012. The biggest concentration of these large deals was in the pharma sector, including both traditional pharmaceutical assets and service organisations like contract outsource organizations (CXOs). The provider and services sector also remained strong around the globe and was especially popular in emerging markets such as India and Southeast Asia. Investments generally fell under one of three themes, with the fi rst two extending the trends set in motion in 2012: (1) prize assets in good markets with strong competitive positions and rich valuations; (2) value plays focused on targets with strong cash fl ows in mature businesses; and (3) earlier-stage assets in markets that are too new to offer big platform assets or clear favourites. Looking ahead, we are optimistic that the pace of investment and exit activity will remain brisk. Private equity funds should continue to see attractive opportunities for investment in both earlier-stage and larger assets. That said, it is getting harder to win in healthcare private equity given the rising level of competition within the private equity sector and from strategic investors. It is an open question as to whether we will see a bifurcation in fund strategy, with some funds investing simply to stay in the game long term and willingly accepting lower returns in their target investment segments while others go “heavier” into healthcare and take on more regulatory, reimbursement or technology risks with the hope of higher returns. Regardless of their approach, being smart about their investment strategy, staying focused on their deal sweet spot and growing the value of their portfolio companies will give fi rms an edge.