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What’s on the horizon for private equity

The healthcare sector has seen enormous enthusiasm and infusion of funds during the pandemic, and the pace of transactions shows no signs of slowing anytime soon.

Private equity (PE) interest in healthcare and life sciences has remained at an all-time high two years after the global Covid-19 epidemic began.

Several factors have contributed to this highly active market. A brief transaction slowdown in early 2020 resulted in a backlog of available deals and extra dry powder. Simultaneously, Covid-19 spurred demand for digital health solutions and opened doors for new technology to improve care delivery, access, and outcomes across the board. The pandemic also dramatically underscored the value of health data, clinical research, and biopharma development.

As the pandemic turns endemic and new variants emerge, PE investors are putting even more focus on these critical health and life sciences sectors. Like any other market, healthcare will continue to experience fluctuating demand, but if the challenges of the past two years have proved anything, it is that healthcare is a resilient investment.

Stakeholders looking to engage in this evolving and highly active market can position themselves for success by developing a deep understanding of the target entity’s regulatory, political, and economic context. Across the world, health systems may face common pressures, such as increasing costs, staffing recruitment and retention issues, as well as the challenges of aging populations and integration of care. However, the regulation and reimbursement of healthcare typically varies significantly country to country, reflecting as it does the political and social priorities of particular markets. These unique features can fundamentally alter the dynamics of a deal and, with transactions moving at record speed, it is more important than ever to come to the deal table fully prepared.

Countries around the world are facing similar healthcare demands and trends – an aging population; increasing adoption of health technologies; and the push toward consumerism in healthcare, i.e., equipping patients to be better informed on, and to make their own decisions about how to manage and deal with their health conditions. Tracking these trends can help investors understand where and how healthcare is evolving, and where there are opportunities to fuel growth.

Health providers and services. Looking at the trends shaping 2022, standout sectors include diagnostics and lab services, digital health and services, biopharma and its related services, and specialist health services.

In many areas, the demand for particular health services may have been altered by a country’s response to the pandemic and its reimbursement systems. For example, many countries report a slowdown in the diagnosis and treatment of behavioral health conditions, elective surgical care, and cancer diagnoses, resulting in increasing demand for investment and provision of these services.

Demand is also surging for specialized areas of medicine, such as fertility, women’s health, and behavioral health. Countries with public health systems experiencing care shortfalls may be more receptive to private investment to support these critical areas.

Biopharma and related services. The pandemic has shone a spotlight on the value of biopharma, and activity in this space is booming. Other hot subsectors for 2022 include cancer medicines, mRNA, immunotherapy, cell and gene therapy, companion diagnostics, and genetic testing.

Health IT and telehealth stands out as the subsectors that will attract the most attention from PE investors over the next three years. The challenges of the pandemic facilitated the rapid expansion of telehealth, home and point-of-care diagnostics, and other digital health applications, and demand for digital health is here to stay. Health systems are deploying health IT to improve not only healthcare delivery but also its administration. Data analysis and artificial intelligence applications have powerful potential to help providers manage patients appropriately, ensure that patients are treated in the right setting, and identify outliers in the care provided. Areas to watch include MedTech, remote monitoring, life sciences tools and diagnostics, and devices and wearables.

As healthcare investors pursue deals in 2022 and beyond, they should keep environmental, social, and governance (ESG) issues top of mind. Historically, engagement in the healthcare sector itself was viewed as sufficient to demonstrate ESG accountability, but that is no longer the case. In recent years, ESG topics have garnered headlines and increasing public attention. Limited partners are putting more pressure on PE firms to make ESG a high priority, and they want to see these principles reflected in the investments being made.

As part of due diligence, healthcare investors should examine a target’s sustainability practices – how does the organization use or reuse goods? How environmentally responsible are its building management practices and energy use? How does an organization recruit, incentivize, and retain staff in a way that balances the important contributions those people bring to the front line? Staffing issues currently raise particularly pertinent ESG issues for healthcare deals. Being able to hire and retain talent is vital to a successful investment vehicle. But in a field suffering from many healthcare staff reporting burnout, the recent great resignation, and an aging physician population, recruitment and retention are proving markedly difficult. Some stakeholders have turned to cross-border recruitment to fill staffing shortages, but recruiting across borders might raise ethical questions when there are resource disparities between the countries involved.

The recruitment and retention of healthcare professionals will remain a significant social consideration for healthcare investments for the foreseeable future. At the same time, the leadership and motivation of healthcare organizations remain crucial – healthcare services, in particular, remain an area where the policies to recruit, incentivize, and retain the right staff and, more importantly, build and enhance the right culture, can underpin the success of that organization.

The article is based on a report by McDermott Will & Emery.

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