Healthcare is a resilient industry, and private equity (PE) has taken notice. As firms scour the market searching for attractive assets to add to their portfolios, PE investors have refined their targeting strategies.

Specialization among PE firms has intensified. Many are courting healthcare category leaders as well as innovators that have the best likelihood of producing a return on investment in five to seven years. While much of the PE deal-making activity has remained within the provider segment, firms also see potential in data analytics, efficiency tools, and consumer-facing offerings.

Deal value and the sheer number of assets under management reached record highs in 2020. By all accounts, PE will become a major influence in healthcare over the next several years.

Here are a few key features PE firms look for when making healthcare investments.

1. Proven quality

National health expenditures grew to $3.8 trillion in 2019, accounting for 17.7 percent of U.S. Gross Domestic Product. And with costs on a consistent growth trajectory, industry stakeholders universally agree that the spending trend is unsustainable.

The only way to produce more value is by improving the quality of care to the degree that the system can achieve better results for each dollar spent. PE recognizes this imperative.

That’s why investors are actively looking for healthcare businesses that not only deliver quality but also have a way to quantify it. Reputation alone isn’t enough. The most attractive asset targets are those that have quality measures in place with a critical mass of data demonstrating exceptional performance in meeting those standards.

Clinical providers or health IT companies that provide remote patient monitoring, for example, must have some evidence of cost avoidance, patient engagement, and improved outcomes.

Businesses that show a track record of proven outcomes will be far more attractive to PE than those that do not. Remember that PE firms represent their investors, who expect the portfolio companies to deliver on a rather broad definition of quality and value.

2. Unique potential

When PE firms think of potential, they certainly think of future profitability. But digging deeper, other factors figure into PE forecasts.

Any healthcare company that has a one-of-a-kind offering or a unique position in the market interests private investors. The potential to be a market disrupter increases with this type of differentiation. With the benefit of fresh capital and a comprehensive marketing strategy, a clever product or service can quickly accelerate revenue growth.

Reimbursement potential is another variable to consider. For clinical or direct care-related services, market wisdom tells us that what gets paid, gets delivered.

Case in point: In March 2020, the Centers for Medicare and Medicaid Services (CMS) announced it would reimburse physicians for a wide range of telehealth visits. Commercial payers rolled out (or reiterated) their telehealth payment policies as well, and the number of virtual visits spiked. Not surprisingly, PE investment came along in tandem.

Referral sources are also a value-added feature. While a locus of clinical trust might be overlooked by PE firms that don’t often invest in healthcare, those that understand the market also know the importance of trusted relationships because they represent an essential pipeline of new business.

3. Advanced technology

Portfolio companies backed by PE investors are always on task to increase efficiencies and reduce costs. Innovative technologies that automate processes, for example, contribute to operational success. Tech-enabled tools that support clinical decision-making or preventive efforts help avoid downstream costs.

Beyond that, any technology platform that can deliver grist for the data-analytics mill offers a value-creation lever for PE investors. In other words, PE will be able to harvest more from their portfolio companies by putting their collective cache of data to work.

Healthcare has accelerated its adoption of advanced technology from the early days of electronic medical records to today’s AI and machine learning capabilities. There’s no doubt PE firms will find more value in technology-oriented companies that can collect and act on data.

4. Insightful leadership

To be clear, a good team makes a big difference to PE investors. It’s not a matter of personality as much as it is a matter of nimbleness and resourcefulness in the executive suite. When leaders demonstrate proactive moves in the market or insightful approaches, the company’s future value becomes more apparent.

Many PE firms take an extremely high-level position among their portfolio companies, bringing capital and broader business savvy. At the same time, they need existing leadership to keep the day-to-day operations running smoothly. If they feel they can reliably align with existing executives or managers, that’s to their advantage.

Of course, there are plenty of instances where the PE firm restructures existing leadership as part of its investment strategy, especially in the case of mergers among portfolio companies. Even then, the best leaders often have a way of landing in important roles in the merged organization.

5. Good corporate citizenship

Integrating the elements of value means identifying the non-financial aspects that make a particular business a wise investment for PE. That’s why they’ve started seeking more healthcare organizations that “do well by doing good.”

Quality scores, customer satisfaction, and marketing are important factors here. For example, PE might examine Hospital Consumer Assessment of Healthcare Providers and Systems results, Healthcare Effectiveness Data Information Set rankings, and Medicare star ratings.

Portfolio companies that earn the public’s trust promise a brighter future and help the PE firm attract more investors. For example, there’s inherent value in a company that supports local charities, offers employees tuition assistance, or uses environmentally friendly practices.

Our Take: As PE firms seek to differentiate themselves, many will develop expertise in the healthcare space. Their more mature approach will result in the refinement of their investment goals, and only the best assets will be considered. That means healthcare companies with high-quality performance, innovative technology, and outstanding leadership will be the ones to gain access to the bank of capital PE offers.

 

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