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The global healthcare investment outlook is shifting.
In 2023, healthcare private equity (HCPE) investors face greater competition, higher interest rates, and uncertainty surrounding recent banking disruptions.
Around the world, leaders are discussing a prolonged recession. Investors are grappling with inflation and increased debt. The war in Ukraine has brought about an energy crisis, and socioeconomic disparity remains a problem.
These factors may cause investors to panic – yet most are in it for the long haul. And in the longer-term, healthcare investment will almost certainly continue to grow.
What might this growth look like? This article will examine the macro environment and shed light on the signs which indicate that HCPE will continue to evolve in 2023.
Healthcare Private Equity: The Macro Environment
If history is any indication, HCPE will remain strong in a downturn. That said, no two cycles are the same – and though we experienced global recessions in 2000-2001 and 2008-2009, today, the macro environment looks different.
Here are just some of the factors affecting the current landscape:
- Geopolitical uncertainty resulting from the war in Ukraine and the corresponding energy supply constraints
- Inflation at higher levels than we’ve seen in decades
- Restricted credit access due to rising interest rates
- Investor uncertainty in the wake of bank failures
Not only that, but the global population is aging alongside lower birth rates – therefore shifting supply and demand.
And healthcare wage inflation is yet another contributing factor. Fuelled by the inflation of general goods and healthcare labor shortages, businesses must navigate cost increases paired with high demand. Workforce salaries comprise approximately 50% of hospital operating expenses – and an even greater percentage for healthcare businesses like home, personal, and hospice care.
Costs are at an all-time high. Yet reimbursement is only slightly greater than usual.
So what does this mean?
First, it’s important to note that despite the economic disruption and geopolitical conflict in 2022, the HCPE market completed its second-strongest year in history. Yes, deals may have fallen by 20-30% compared to 2021 – but last year still resembled 2020 levels.
The truth is that healthcare industry consolidation is driving momentum – particularly as firms and corporations continue to capitalize on their investments. Even with low 2022 EBITDA values for businesses, private equity firms may hold their investment through the downturn in 2023 and experience success in the long term.
6 Signs Healthcare Investment Will Grow in 2023
Looking ahead, a number of HCPE trends reveal that healthcare investment will continue to grow. Although the 2023 landscape features a great deal of economic uncertainty, stakeholders are hopeful – for several reasons.
Bain & Company’s Global Healthcare Private Equity Report 2023 went over some of the possibilities for 2023 and beyond in detail. From the life sciences to debt financing, this year’s HCPE growth trajectory includes trends such as:1. Growing interest in early-stage assets
More investors are looking at early-stage assets that focus on research and early development. Clinical research organizations (CROs) and specialized contract development and manufacturing organizations (CDMOs) are just two examples – but that’s not all. Contracted biopharma assets focusing on commercial-scale manufacturing (and those focused on late-stage drug development work) also attract investor interest due to their comparatively bright futures.2. Rising investments in healthcare IT
In 2022, the healthcare IT buyout was the second-highest on record. Provider IT, meanwhile, remains a driver in this space. But why is this? We believe the reason is simple. Given the abovementioned labor shortages and inflation issues, providers are searching for new ways to relieve margin pressure. Provider IT solutions that help healthcare providers optimize their resources and ultimately strengthen their margins have become more appealing in 2023.3. An increase in opportunistic opportunities
The current downturn has increased competition in distressed assets like SMID-cap biopharma companies. Investment in these assets will continue to grow. It’s worth noting; however, that sponsors must be mindful of how they structure deal terms. They must have conviction in these assets’ key strengths in order to get a high return when they are ready to exit. Acknowledging the nuances of macro uncertainty is essential in the interim.
4. A rise in public-to-private deal opportunities
Public markets continue to fluctuate. When being a publicly-traded company no longer seems beneficial, shareholders may opt to go private. We saw several examples in 2022, including Clayton, Dubilier & Rice, and TPG announcing plans to acquire animal-health tech giant Covetrus for approximately $4 billion in May. Similarly, Patient Square Capital made Hanger private last October in a deal worth $1.25 billion.5. More carve-outs and spinoffs
As companies pivot in a downturn, we can expect a growing number of HCPE carve-outs and spinoffs. Several deals illustrate this key 2023 trend. For example, companies like Medtronic, Johnson & Johnson, and 3M all announced plans to divest certain parts of their portfolio – and some are creating standalone healthcare companies. The goal here is to streamline portfolios and quicken the speed of revenue growth. Other corporations will likely follow suit.6. A focus on minority recapitalization
The benefits of minority recapitalization are extensive. Minority investments let buyers avoid refinancing their existing leverage. Instead, they can benefit from lenders’ familiarity with the business. Sellers, meanwhile, can use this approach to increase returns for their current limited partners – all while letting them hold a stake in the asset and focus on future growth. It’s no wonder this approach has become so popular in 2023.
Just because the near future is rife with uncertainty doesn’t mean HCPE has to be. By keeping the above trends in mind, healthcare investors can place strong bets and continue to thrive in the space.
Key Questions Looking Forward
As we consider the next few years, we must ask ourselves certain key questions. Healthcare private equity, after all, is experiencing a shift. The answers to the following questions will help us understand where things are headed:
- How will the healthcare industry leverage artificial intelligence (AI)?
Today AI contributes to therapeutic discovery, supply chain optimization, and payer and provider back-office automation. New use cases for generative AI are emerging by the day.
- How will the future of exits evolve?
Though initial public offering (IPO) and special purpose acquisition company (SPAC) exit outlooks faltered in 2022, experts believe IPOs will return to healthcare in the very near future.
In closing, 2023 has introduced a shift in healthcare private equity. Yet investors who act strategically will continue to profit – and so will the companies that innovate in this space. Our belief is that the U.S., Europe, and the UK should remain cautiously optimistic about the future.
Navigate the Healthcare Investment Landscape with Techspert
Some investors may feel uneasy about the current downturn, but healthcare is resilient. In fact, the industry remains at the forefront of private equity today. Even in the midst of a recession, healthcare investors are active – and innovators in our space should take note of the latest trends and changes.
Of course, companies in our space should work with a trusted partner in order to excel. This is where Techspert comes in. Our platform connects vetted experts with the people who need them most. With us by your side, you can collaborate, share timely insights and increase investment in your company.
Are you ready to get started? Please contact us for more information.