Will private-equity rave last?
Private investors continue to see strong value in many healthcare sectors
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