Will pri­vate-equity rave last?

Pri­vate in­vestors con­tinue to see strong value in many health­care sec­tors

Modern Healthcare - - Front Page - Me­lanie Evans

Health­care pri­vate-equity deals re­bounded af­ter the slump that fol­lowed the nation’s re­ces­sion and pre­ceded pas­sage of health re­form leg­is­la­tion. Now, in­vestors are scour­ing the mar­ket­place for com­pa­nies well­po­si­tioned un­der what many ex­pect to be un­cer­tain and more cost-con­scious years ahead for health­care spend­ing.

Pri­vate-equity ap­petite for health­care con­tin­ues to be strong since the pas­sage of the Pa­tient Pro­tec­tion and Affordable Care Act, which calls for far-reach­ing reg­u­la­tory and mar­ket changes to health in­surance—de­spite po­ten­tial up­sets as op­po­nents push to up­end the law in Congress and the courts, pri­vate-equity in­sid­ers say.

Competition for health­care deals has grown as in­vestors look to the in­dus­try for deals that won’t sour when the econ­omy does—as was the case dur­ing the re­cent re­ces­sion. Fu­eled by cor­po­rate cash stock­piles as the econ­omy re­cov­ers and credit mar­kets im­prove, de­mand for health­care deals has boosted prices for ac­qui­si­tion tar­gets, they say.

“The re­cov­ery was fairly rapid and sig­nif­i­cant,” says Tim Du­gan, man­ag­ing part­ner with Wa­ter Street Health­care Part­ners, a pri­va­tee­quity firm based in Chicago, of the val­u­a­tion buy­ers are will­ing to pay for re­cent deals af­ter val­ues slumped dur­ing the re­ces­sion. His firm does not in­vest out­side of health­care.

“It’s a good time if you have a busi­ness ready for sale,” he says.

Not all health­care busi­ness, how­ever, will find pri­vate-equity firms ea­ger to in­vest.

In­vestors did not dis­count po­ten­tial op­por­tu­nity and risk cre­ated when the health­care re­form law passed a lit­tle more than a year ago, pri­vate-equity ex­ec­u­tives say.

The law in­creases over­sight of health in­sur­ers, squeezes Medi­care pay­ment to hos­pi­tals and calls for sig­nif­i­cantly ex­panded in­surance cov­er­age by 2014.

Reg­u­la­tions have not yet been drafted for much of the law, and ef­forts to over­turn the law con­tinue. For in­vestors, some un­cer­tainty lingers, but nowhere near the de­gree that ex­isted dur­ing the de­bate prior to pas­sage, which led “to a dearth of cap­i­tal in the pri­vate mar­kets,” says Brian Miller, a part­ner with Lin­den Cap­i­tal Part­ners, a health­care and life science pri­vate-equity firm he co-founded. Miller also founded the Health­care Pri­vate Equity As­so­ci­a­tion.

“Cer­tainty is the friend of in­vest­ing,” Miller says.

Health­care in­sur­ers, med­i­cal imag­ing, lab­o­ra­tory and hospice ser­vices do not fare well un­der some pro­vi­sions of the law and are likely to have a harder time find­ing in­vestors, ac­cord­ing to pri­vate-equity ex­ec­u­tives in­ter­viewed for this story.

In­stead, in­vestors will wa­ger on com­pa­nies they say may de­liver greater ef­fi­ciency de­manded by pol­i­cy­mak­ers and em­ploy­ers seek­ing re­lief from ris­ing health­care costs. In­vestors say com­pa­nies likely to find fi­nanc­ing are those that ad­dress de­mand for more efficient med­i­cal care. Pres­sure to con­tain costs ex­isted be­fore health­care re­form, and the law is ex­pected to am­plify it.

Health­care in­for­ma­tion tech­nol­ogy, a sig­nif­i­cant strate­gic and cap­i­tal pri­or­ity in re­cent years, or ser­vices to man­age spend­ing or re­duce med­i­cal er­rors or hos­pi­tal read­mis­sions are ex­pected to be among the win­ners, they say.

“There’s a lot of vol­ume com­ing into the sys­tem,” Miller says of the up­com­ing ex­pan­sion of in­surance cov­er­age in 2014 un­der the law. But the ques­tion re­mains: “At what price do they come into the sys­tem, and can it be han­dled?”

Mak­ing a re­bound

In 2010, in­vestors poured $12.4 bil­lion into 217 health­care pri­vate-equity deals, ac­cord­ing to data from a yearly sur­vey by the pri­va­tee­quity re­search firm PitchBook. Last year’s ac­tiv­ity is up sharply from 2009, when the sec­tor saw 170 health­care pri­vate-equity deals that to­taled $5.2 bil­lion.

Last year’s in­vest­ment to­tal re­mains far short of ac­tiv­ity at the peak in 2007 when the sec­tor saw $41.3 bil­lion in­vested in 289 trans­ac­tions. In 2008, PitchBook re­ported 284 health­care deals that to­taled $20.3 bil­lion.

Wa­ter Street’s Du­gan says pent-up de­mand dur­ing the re­cent down­turn has con­trib­uted to in­creased competition among in­vestors for deals. “We do see steady and in­creas­ing in­ter­est from gen­er­al­ist” pri­vate-equity firms in­ter­ested in health­care, he says.

Sur­veys of pri­vate in­vestors, banks, other

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