Historically, healthcare has been an attractive area for private equity investment due to strong returns and low default rates.1 In the future, it should remain attractive and continue to be a stable sector for investment. It is unlikely there will be any decrease in the demand for healthcare in the near future, especially with America’s aging population.
Recently, however, there has been a slowdown in private equity healthcare deals. Between January 1, 2012 and September 11, 2012, there were 292 global private equity healthcare deals totaling $14.26 billion.2 Through the same period this year there have been 268 deals, yet they have totaled only $5 billion in value.3 While there have been a relatively high number of transactions this year, deal value is down roughly 65% year to year.4 Although there have not been many large private equity deals, there has been a great amount of activity in the middle-market. 5 In fact there may not have been much of a drop off at all from last year to this year if looking strictly at these middle-market deals.6 Similarly, venture capital healthcare investments have trended downward as well. Venture capital investments in healthcare were $1.16 billion in the third quarter of 2013, the lowest in the previous five quarters.7
While the opportunity for mega-deals may not currently be present, the sector remains a strong one. The downturn is likely due to temporary conditions, rather than chronic structural problems. For example, the Affordable Care Act has likely had a cooling effect on healthcare investment.8 As the program goes into full effect, much of the uncertainty it created for investors should be expected to dissipate leaving investors with time to react to its implementation. One interesting development that may provide an investment opportunity going forward is the increasing use of Information Technology in healthcare.9 Overall demand for healthcare will not be decreasing any time soon, but the increasing use of IT in healthcare highlights an interesting aspect of how that demand is allocated. Moving forward, investors may be best suited to create value by investing in middle-market healthcare companies, and in healthcare technology.
Bain & Company, Global Healthcare Private Equity Report 2013 (2013), http://www.bain.com/Images/BAIN_REPORT_Global_Healthcare_Private_Equity_Report_2013.pdf. ↩
Luisa Beltran, Private Equity Healthcare Deal Volume Plummets 65%, peHUB (Sept. 13, 2013), http://www.pehub.com/2013/09/13/private-equity-healthcare-deals-fall-65/. ↩
Lindsey Alexander, Don’t let the IPOs fool you. Healthcare deal activity and funding were down in Q3, MedCity News (Oct. 10, 2013, 9:14 AM), http://medcitynews.com/2013/10/dont-let-ipos-fool-healthcare-financing-q3/. ↩
Beltran, supra note 2. ↩
Kirk Falconer, Rebooting healthcare – venture capital investing in life sciences takes a new direction, peHUB (Oct. 7, 2013), http://www.pehub.com/2013/10/07/rebooting-healthcare-venture-capital-investing-life-sciences-takes-new-direction/. ↩