Despite a 20 per cent dip in deal value in 2015 versus 2014, Bain & Company's Fifth Annual Report on Healthcare Private Equity finds that opportunities remain plentiful for creative, nimble investors.
The report brands 2015 a "year of juxtaposition" for healthcare investors. It was a strong year for healthcare players, marked by record corporate M&A and robust private equity (PE) investments and exits. However, activity was partially constrained by high levels of competition, lofty valuations, volatility in capital markets, and concerns about recessions in many regions by year's end. As a result, most investors ended the year focused on shoring up their portfolios for a potentially challenging 2016, sticking close to strategies that served them well in the past, such as pursuing category leading assets and seeking partnerships with corporate buyers.
While total deal volume rose by 6 per cent from 188 deals in 2014 to 199 deals in 2015, total deal value decreased by about 20 per cent – USD29.6 billion in 2014 to USD23.1 billion last year. It was clear, however, that funds put meaningful capital to work, as the number of deals worth USD1 billion or more grew from five in 2014 to eight in 2015. The number of exits rose 8 per cent over 2014, to 145, with strong sponsor-to-sponsor and sponsor-to-corporate sales offsetting a drop in the number of assets exited via IPO. Last year also set a new record in healthcare M&A with total value for 2015 climbing 2.5 times higher than the average annual deal value over the previous decade, driven by both macro and healthcare-specific trends.
"Healthcare is a staple in PE investors' portfolios because of its benign fundamentals and resistance to economic ups and downs, particularly when investors bet on assets that are shielded from regulatory impact," says Kara Murphy, a partner in Bain's Global Healthcare and Private Equity Practices, who co-authored the report. "We expect the sector will only grow in importance during times of macroeconomic turbulence, which will create greater competition for deals as well as plenty of opportunities for PE investors who are prepared and willing to be creative in getting deals done."
The report finds investments in provider and related services comprised over half of global deal value in 2015 – up from USD8.1 billion in 2014 to USD12.7 billion last year – making it the most active healthcare sector. Deal count rose slightly to 93. As the industry's ability to diagnose, monitor and treat chronic diseases continues to grow, Bain anticipates more investment opportunities will emerge, and significant fragmentation in many of the sector's segments leave room for continued consolidation and buy-and-build strategies. In light of these and other industry trends, Bain also sees investors continuing to pursue higher risk opportunities in pharma, for example, or taking on more advanced deal structures, with the goal of generating ever-better returns in an increasingly competitive market.
By region, Asia-Pacific turned in another record-breaking year for deal value, which grew by about 40 per cent in 2015 spurred by increased deal size. India and China were once again the stand-outs, outpacing activity in the region's developed markets, which only saw a few midsize deals.
North America and Europe continued to attract the bulk of healthcare PE investments, with Europe delivering half of the year's top 10 deals due to continued consolidation of sectors that are highly actionable for PE. Still, deal value in both regions declined by 40 per cent and 17 per cent, respectively, as the largest deals last year were smaller than in 2014.
"Healthcare has been, and will continue to be, an important part of private equity portfolios," says Nirad Jain, a partner in Bain's Global Healthcare and Private Equity Practices and the report's co-author. "However, there is no doubt that macroeconomic signs are pointing to a global slowdown in the near future that will very likely coincide with the holding period for recent and upcoming investments. The silver lining for healthcare investors is that many of the strategies that served them well before will still prove effective in a downturn."
According to Bain, category leadership will continue to be an advantage. Those with depth, rather than breadth, in a specific category will be more likely to keep their seat at the table, even as their customers consolidate vendors to cut costs. These leaders are also more likely to have the financial strength to make investments through a downturn, potentially even bolstering their leadership by consolidating weaker players.
Buy-and-build strategies can also pay off in a slowdown, as falling prices may unlock opportunities for add-ons. Complex carve-outs, which are well-suited for PE buyers, may accelerate as corporate buyers look to streamline operations and free up cash. And corporate appetite for partnerships with PE firms will likely grow, especially where debt markets falter.
