Despite the global pandemic, 2020 deal activity flourished among private equity (PE) investors in healthcare. The market’s resilience during economic downturns has made it particularly attractive to PE firms, especially those with substantial amounts of dry powder.

But it’s hardly business as usual for investment houses. As they refine their target objectives and look more broadly at value creation, many are rethinking some of their baseline approaches for 2021.

1. Due diligence

Healthcare entities face significant regulatory changes this year, ranging from permanent loosening of restrictions around telehealth to federal efforts that aim to expand value-based payment mechanisms. Firms understand the inherent risk in an industry as highly regulated as healthcare, but where their portfolio companies intersect with new policy, transparency will be the key to fully appreciating an asset’s true potential.

2. Valuations

Fund managers are optimistic that healthcare will transition to the post-pandemic era with an eye for efficiency and consumer-centricity. But they remain cautious about overinflated valuations this year. There’s no denying that the pandemic produced some winners and losers, however, the return to “normal” will be anything but.

3. Future potential

Creating value among portfolio companies is the overarching quest for healthcare private equity leaders. And many are discovering that healthcare’s evolution calls for the kind of capabilities many established businesses seem to lack. Tech-enabled care delivery, data analytics, cross-discipline partnerships, and tools that support risk-bearing arrangements are among the new must-haves.

Healthcare subsegments that attract private equity

While private equity investment was traditionally a deal-making business, it has advanced to become a strategic business-building business. In other words, it’s less about the pure financial features of a deal and more about the total impact the business can generate.

In this regard, investors have found a number of gems on the provider side of healthcare. They believe there are returns buried there that go beyond patient volume. Here are just a few hints of where PE interest lies.

1. Behavioral health

This is an extremely active subsegment right now. Part of the attraction is that behavioral health has the right combination of demand, unmet need, and opportunity for consolidation. What’s more, the services delivered also enhance communities and improve quality of life for individuals and their loved ones, which is a positive mission to rally around.

Take for example TPG’s $1.2 billion investment in LifeStance, an assembly of clinical professionals licensed in 23 states and Washington, D.C., that delivers in-person care as well as telehealth. It’s billed as the nation’s largest outpatient mental health business.

What was attractive for TPG was LifeStance’s geographic reach, the telehealth component, and the fact that it’s an in-network player. All these elements add up to a win for patients who want convenient, covered services as well as a win for payers who need to expand their networks in broad strokes.

The merits of behavioral healthcare aren’t lost on medical providers either. Patients with chronic conditions tend to have anxiety, depression, and other diagnoses that contribute to poor outcomes. Health systems and practices operating under value-based contracts could partner with LifeStance as a complement to chronic care. And that referral source adds to business value.

2. Home care, home health, and hospice

It’s widely known that hospitals and skilled nursing facilities are high-cost sites of care. Public and private payers have a range of programs aimed at reducing utilization, with an increasing focus on home health. The growing selection of connected tech tools are quickly enabling cost-effective options for care in the home.

Chronic care is a natural fit for at-home clinical intervention — after all, chronic conditions are far more dependent on everyday life issues than anything that happens in the clinical setting — but innovators are also finding ways to expand the application to include post-acute and even acute care. As the use cases increase, so too does the opportunity for investment in a host of fragmented players that might be combined into a powerhouse.

The big challenge in this space remains workforce shortages, of course. But a close second is the need for robust, interconnected technologies that integrate at-home service effectively into the traditional workflow of clinical care. Build that, and the payers will follow.

PE’s attraction comes from home health’s compelling value proposition: It provides care at a lower cost. As it turns out, 2020 was a record year in terms of PE deal activity — a clear sign of optimism.

3. Women’s health

With women making the majority of health decisions in the home, it’s no wonder services tailored to women get a second look from PE investors.

In one recent example from February, Shore Capital launched Together Women’s Health, which combines Eastside Gynecology Obstetrics and Comprehensive Woman’s Care, two Detroit-based practices with seven locations in all. Shore plans to grow the newly created business by offering solutions for practice operations, finance, accounting, marketing, human resources, and IT.

Trends also indicate one of the growth areas for women’s health might include fertility services. Currently, 19 states have passed insurance coverage laws related to fertility, creating a favorable legislative environment to grow related service lines.

Globally, the women’s health market represents about $44 billion, and awareness programs have generated high utilization of screening and wellness services specific to women. The outlook remains positive.

4. All things health IT

Private equity houses are captivated by promising solutions that can reduce inefficiencies in the delivery system, banking on the fact that every healthcare business needs to run lean in order to maximize revenue. And there’s plenty of opportunity to enhance revenue cycle management, simplify administrative tasks, and automate processes in providers’ back offices. But that’s not all.

Data-driven operations have become minimum requirements across the market. And this digitization of healthcare is changing business models and inspiring all sorts of buy-and-build combination strategies.

The hunt is on for attractive health IT assets. Both healthcare and technology investments outperformed the average return produced by other sectors, creating enthusiasm and activity in the space, according to Bain & Company. However, in 2019, valuations remained high because of the competition among the suddenly crowded field of investors.

In fact, assets with a proven technology component are commanding a premium price that makes it seem as if COVID-19 never happened, according to Bass Berry & Sims.

Our take: Understanding the nuances of the healthcare space will serve the PE houses well. As they aim to squeeze added value from their portfolio companies, they must also anticipate the real-world viability of the latest and greatest offerings. As we’ve seen ourselves too many times, solutions that look good on paper don’t always gain traction among healthcare’s biggest influencers.

Ready to accelerate the growth of your healthcare portfolio companies? The Canton & Company team of experts can unlock the value you need in today’s rapidly changing healthcare market. Contact us today!