Global private equity interest in healthcare continues to surge with deal activity hitting record levels in 2018, driven in large part by eight major buyouts valued at greater than $2 billion, according to a recent report.
Private equity deals last year rose 50% to $63.1 billion, topping 2017’s level of $42.6 billion, and deal count rose to 316 in 2018 from 265 in 2017, according to Boston-based consulting company Bain & Company. There was strong investment activity across all regions and in sectors such as healthcare IT, provider and biopharma, Bain & Company reported.
The activity in 2018 included 18 deals greater than $1 billion each in disclosed deal value, pushing larger assets to levels that are out of reach for most buyers. Eight deals in 2018 were valued at greater than $2 billion each, versus just four in 2017, and several mega deals.
Unlike in 2017, when only one such transaction closed, 2018 saw four assets trade for more than $4 billion, including the largest buyout in at least the past decade, according to the report.
“Last year was an incredible year for healthcare deals,” Nirad Jain, co-head of Bain & Company’s global healthcare private equity and corporate M&A practices, said in a statement. “Despite an especially volatile fourth quarter for both global markets and certain political landscapes that contributed to a strong sense of unease among most investment professionals, healthcare’s sturdy fundamentals and track record of strong performance were a beacon for investors seeking a safe haven.”
Jain added, “When combined with a glut of dry powder, increased fundraising and higher fund allocations, competition for healthcare assets intensified throughout the year—and, even today, shows no signs of abating.”
The 10 largest healthcare buyouts in 2018 accounted for about 60%, or $38 billion, of total disclosed deal value. Among those deals were private equity firm KKR’s acquisition of Nashville-based physician services provider Envision Healthcare for $9.9 billion and the acquisition of Athenahealth by Veritas Capital and Evergreen Coast Capital for $5.7 billion. A consortium of investment funds controlled by CVC Capital Partners bought Italian pharmaceutical group Recordati for $7.4 billion. Optum and Summit Partners acquired staffing firm Sound Inpatient Physicians for $2.2 billion.
Along with health IT and providers, home care and hospice drew strong interest from investors in 2018, according to the report. The most prominent deal in this area was TPG and Welsh, The Carson, Anderson & Stowe’s partnership with Humana to acquire Curo Health Services for $1.4 billion, coming on the heels of the consortium’s 2017 acquisition of Kindred Healthcare.
North America remains the most active region accounting for the most deals and highest values, and provider and related services remains the most active sector, the report found.
The European and Asia-Pacific regions also reached historically high levels in value. In Europe, a handful of large buyouts, including two biopharma deals, led to a significant increase in deal values. Asia-Pacific deal volume grew by 44% as investors looked to tap into demand from a healthcare consumer class that has continued to grow in recent years.
The Bain & Company report also found that exit volume and value both declined in 2018 from the year earlier, returning to historical norms. Volume fell to 112 in 2018 from 116 in 2017, the lowest level since 2012. This followed the spike in activity from 2012 to 2015, as funds now have cleared their books of the vast majority of assets acquired prior to the past recession, according to the report.
Disclosed exit value fell to $31.6 billion in 2018 from $44.4 billion in 2017, driven by a 43% decline in the value of exits to corporates.
Additionally, corporate M&A in healthcare grew to a record $435 billion in 2018, surpassing the previous high of $432 billion in 2015. In recent years, corporate healthcare companies have increasingly turned to and relied on M&A for revenue and shareholder growth, Bain & Company reports.
To get deals done amid intense competition, funds took more creative approaches to transactions, said Kara Murphy, who co-leads Bain & Company’s healthcare private equity practice.
“They’re seeking partners to help spread the risk or looking to public companies for carve-out or take-private opportunities, particularly as public valuations become increasingly attractive compared with private market offerings. Investors are also expanding their value-creation theses beyond traditional category- or geographic-leadership buyouts to address the challenge of multiple expansion likely becoming an outdated lever for returns,” Murphy said.
Looking ahead to 2019 and beyond
The consulting firm expects the likelihood of a recession will be palpable throughout 2019. Returns in healthcare private equity markets have proven resilient through such storms in the past, however, and its likely investor demand for what Bain & Company calls “recession-resistant” assets will endure.
“However, the jury is out on whether this vintage of healthcare deal returns will be as good as previous vintages. As uncertainty permeates public stock and debt markets and returns from multiple expansion wane, more deals may become increasingly difficult to justify,” the report said.
“Investors will no longer be able to rely on market-wide multiple expansion to generate returns,” Jain said. “Disciplined, data-driven funds will find their way to top-quartile deals by backing winning companies, deploying a systematic value-creation playbook and doing their part to transform the global healthcare industry.”