Health Care Industry Continues to Provide Opportunities for Private Equity Investors

In 2015, health care will remain an important area of for private equity investors who capture targeted opportunities. Merger and acquisition activity (M&A) peaked in 2014, though opportunities for strategic partnerships between investors and healthcare firms still do exist.

M&A: In 2014, the health care industry experienced unprecedented M&A activity, as corporate health care firms recognized that the high, non-cyclical growth rates they had enjoyed in the past were unlikely to continue.  The firms that merged attempted to populate their portfolios with growth assets, rid themselves of low-growth assets, and take advantage of financial opportunities such as tax inversions.  This level of M&A activity seems to have peaked in 2014.

Private Equity: In 2015, investors will still face hurdles to generate high returns on their investments, due to high valuations persisting from 2014, a small number of large-scale assets, and keen competition from strategic buyers and investors.

Current opportunities for investment include carve-out assets that continue to hit the market, as strategic firms keep repositioning their portfolios for growth.[1] Recent strategic partnerships that have taken advantage of carve-out assets include 1- Water Street Healthcare Partners, LLC, a strategic investor who specializes in growing, middle-market healthcare companies, partnering with Walgreens in a deal that merged Walgreens’ Take Care Employer Solutions worksite health business with Water Street’s CHS Health Services worksite health business, and 2-Madison Dearborn Partners’ (MDP), a private equity firm, partnering with Walgreens on the carve-out of Walgreens’ home infusion business, whereby Walgreens sold fifty one percent (51%) of its infusion services business[2] to MDP.

Funds are expected to continue to invest across a wide variety of segments, including:

  1. Population health management, driven by the changing health care landscape in the US;
  2. Next-generation behavioral health, where behavioral health clinics in the US take more of a role in managing the overall health of their populations;
  3. Dermatology, as growth in the aesthetics product portfolio enable clinics to further insulate themselves from reimbursement risk;
  4. Physical therapy, where consolidation by chains will likely accelerate;
  5. Retail health (e.g., dental and veterinary clinics), which continues to offer insulation from reimbursement risk as well as consolidation opportunities;
  6. Contract Research Organizations (CROs), where fragmentation persists despite the level of private equity activity over the past few years; and
  7. Over-the-counter (OTC) manufacturers, including vitamins, minerals and supplements, where there remains significant opportunity to “pre-consolidate” assets to bring them to sizes that are attractive to large strategic buyers.[3]The opportunity for healthcare investors is still large, and the potential for strong returns remains. Funds should focus on sourcing assets that best fit with their investment strategies, and essay to bring those assets to full potential in order to earn high returns on their investments.

[1] Carve out assets are assets generated from a parent company selling a minority share of a child company, usually in an initial public offering (IPO), while retaining the rest. The child company has its own board of directors and financial statements, but benefits from the parent company’s resources and strategic support.  The parent company may eventually sell the rest of the child company in the open market, also called a partial spinoff.

[2] Infusion therapy is the practice of administering specialty drugs to patients intravenously, either via injection or catheters, in a variety of settings.

[3] Source: Global Healthcare Private Equity Report 2015, Bain & Company.