Private-equity investors have become major players in the healthcare sector over the past couple of decades, particularly in the US. And even with an economic slowdown or possibly a recession on the cards, there’s little sign of that interest waning.
Why private equity is targeting healthcare
Healthy returns
Private-equity investment in healthcare has surged over the past two decades, from $5 billion (bn) in 2000 to around $206bn in 2021. In the decade up to 2023, total private-equity investments in healthcare amounted to nearly $1 trillion, accounting for almost 8000 acquisitions of healthcare facilities in the US.1
Healthcare’s appeal to private equity is easy to see. The healthcare sector has consistently outperformed the broader market, driven by demographic trends such as an ageing population, a rising middle class and the increasingly chronic threat posed by disease. Since the MSCI World Health Care Index began in 1994, it’s delivered annualised returns of 10.73%, compared with the 7.74% generated by the MSCI World Index.2
Healthcare benefits from defensive characteristics and, driven by secular growth trends, is also able to generate strong earnings growth. Moreover, rising costs threaten the affordability of healthcare, so those who are concerned about making a social impact can help stave off a looming healthcare crisis by investing in innovative companies in the sector.
Healthcare: two decades and more of outperformance
Recession unlikely to dampen enthusiasm
Healthcare’s appeal is unlikely to lessen significantly even as US and global growth slows, according to Bain & Co. The management consultants point out that healthcare private equity ‘has proved more resilient than overall PE [private equity] activity in prior recessions, with a track record of quick rebounds and compelling returns coming out of the downturn’.3
Private equity has also taken off in Europe, where the opportunities for investors are even greater. That’s according to McKinsey, which cites fundamental tailwinds such as population growth, ageing populations, and an increase in the incidence of chronic disease. The management consultant adds that Europe’s predominately public-led healthcare systems ‘suffer from poor access to capital and are increasingly willing to accept private investment in care delivery to improve care efficiency, effectiveness, and access’.4
However, Bain & Co expects variations in how healthcare sectors are affected, with healthcare ‘provider businesses to be hit harder by a recession and inflation, while biopharma and life sciences tools businesses are likely to be more insulated’.
Information technology suppliers for the healthcare sector are also expected to be in demand. In 2022, there was particular interest in buyouts of firms that help to optimise business operations, especially given the possibility of a recession and the need to maintain cost controls and efficiencies, according to Funds Europe.5
The magazine added that interest in diagnostics is growing, given its potential to address the increasing incidence of ailments such as cancer, diabetes and heart disease as the world’s population ages.
ESG appeal
Moreover, Funds Europe quoted Yann Mauron, thematic private-equity manager at Pictet Alternative Advisors, as saying that investment in private healthcare can increase the social factor within ESG investing. Rising costs threaten healthcare’s affordability and hence the ability of the most vulnerable to access it. Investing in innovative companies in the sector can thus have a very positive social impact.
Private equity’s drive into healthcare seems certain to continue, given the insatiable appetite for healthcare and the mounting pressure on governments to fund that demand. One potential challenge could be the growing debate in the US about the impact of private equity on the nation’s healthcare system.
1 https://nonprofitquarterly.org/how-private-equity-is-swallowing-up-health-care-and-what-to-do-about-it/
2 https://www.msci.com/documents/10199/1f9ea641-ec95-47f9-9214-6594377a6027
3 https://www.bain.com/globalassets/noindex/2023/
bain_report_global_healthcare_private_equity_and_ma_2023.pdf
4 https://www.mckinsey.com/~/media/McKinsey/Industries/Private%20Equity%20and
%20Principal%20Investors/Our%20Insights/Finding%20untapped%20potential%20in
%20European%20healthcare%20service%20providers/
Finding-untapped-potential-in-European-healthcare-service-providers-vF.pdf
5 https://www.funds-europe.com/insights/private-equity-why-the-healthcare-sector-appeals-to-private-equity-so-strongly
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