Down but not out: HCPE remained resilient in 2022
Healthcare private equity (HCPE) activity remained strong in the face of rising geopolitical tensions, high inflation, slumping stock markets, and spiking interest rates. Indeed, 2022 is poised to be the second-highest year on record for HCPE in disclosed deal value and deal count. The number of deals is expected to fall about 20%–30% from 2021’s all-time high of 515 deals to around 400 deals in 2022, roughly in line with 2020 (see Figure 1).
Abrupt changes in central bank policy to combat inflation in both North America and Europe led to a tight credit market that limited large-check financing. Anecdotally, funds suggested that traditional credit financing above $1 billion is largely unavailable, which may delay potential megadeal activity into 2023 or beyond. Available credit has come at much higher interest rates than the past few years, which led funds to take different approaches to financing to get deals done.
Deal flow in H1 2022 maintained the record-setting pace of 2021 and a strong Q1 pipeline persisted into Q2, but geopolitical uncertainty due to the Russian invasion of Ukraine in concert with global inflationary pressures changed the trajectory for the year. Global HCPE deal volume fell in Q3, and while the 96 deals in Q3 2022 is more than any quarter in 2019, funds that had been slammed with deal flow in 2021 felt a marked slowdown from prior quarters (see Figure 2).
Even with the global uncertainty that began early in the year, there were still some impressive exits, with 35 exits valued above $500 million by the end of the third quarter. 2022 will end up with many strong showings for HCPE exits despite the slowdown from the record pace set in 2021. This demonstrates that investors are still willing to lean into compelling macro themes with strong platform assets. Notable exits include:
- Warburg Pincus exited its investment in primary, specialty, and urgent care provider Summit Health-CityMD through an $8.9 billion sale to VillageMD with support from Walgreens Boots Alliance (WBA) and an affiliate of Evernorth, a subsidiary of Cigna Corporation.
- Nordic Capital exited its investment in British specialty diagnostics firm The Binding Site in a deal with Thermo Fisher Scientific Inc., valued at around $2.6 billion.
Narrowing focus: Activity shifted to more resilient investments
Beginning in Q2, funds started to become more selective, seeking pockets of opportunity in choice sectors, subsectors, and geographies. Funds looked for businesses resilient to a potential inflation-driven downturn or ways to take advantage of falling public valuations.
From a healthcare subsector perspective, life sciences continued to attract interest from buyout funds, and we have seen a shift in activity toward healthcare information technology (HCIT). Investors see long-term HCIT opportunity around redefining care delivery and accelerating clinical breakthroughs, and in 2022, there was particular interest in buyouts for businesses that will help optimize operations, especially given the possibility of a recession.
Six of the top 10 deals were in biopharma, life science tools, and related services, demonstrating that PE funds found ways to mitigate the binary pipeline risk of biopharma assets, often by investing in organizations that provide products or services to a broad set of industry participants (see Figure 3).
From a geographical perspective, activity slowed overall, but Asia-Pacific saw a strong interest in large deals, with three deals valued at over $1 billion, reflecting the growing maturity of the market. Deals valued at more than $1 billion in Asia-Pacific in 2022 included Evident, CitiusTech, and iNova Pharmaceuticals.
Healthcare technology and technology-enabled businesses continued to be a very active sector with investment themes focused on honing clinical, operational, and financial workflows as well as data plays across stakeholders.
- Workflow management: On payer workflow, TPG closed a $2.2 billion deal for Change Healthcare’s claims-editing business, ClaimsXten. Bain Capital acquired LeanTaaS, which provides software solutions for optimizing operations and capacity management.
- Remote/home care: General Atlantic and CVS led a $300 million Series D investment in Biofourmis, a virtual care and digital medicine-focused HCIT company.
- Revenue cycle: Veritas Capital merged two revenue-cycle management (RCM) companies—Coronis Health and MiraMed Global Services—to create a multispecialty RCM platform.
- Clinical data: THL acquired a majority stake in Intelligent Medical Objects, an HCIT data enablement company that brings quality clinical data to a range of use cases to inform better patient care, including clinical documentation and population health management.
- Life science data: Norstella—which is backed by Hg Capital, Welsh Carson Anderson & Stowe, and Warburg Pincus—added Citeline (formerly Pharma Intelligence) to its pharmaceutical technology platform via merger. At deal close, the $5 billion company is one of the largest pharma intelligence solution providers, spanning five brands that make up Norstella: Evaluate, MMIT, Panalgo, The Dedham Group, and now Citeline.
Abrupt changes in central bank policy to combat inflation in both North America and Europe led to a tight credit market that limited large-check financing. Anecdotally, funds suggested that traditional credit financing above $1 billion is largely unavailable, which may delay potential megadeal activity into 2023 or beyond. Anecdotally, funds suggested that available credit has come at much higher interest rates than the past few years, which led funds to take different approaches to financing to get deals done.
- All-equity deals: Funds have signaled an interest in pursuing all-equity buyouts that they may recapitalize when the public credit market improves.
- Club deals: We are seeing a continuation of club deals; last year, funds pooled together on large assets like Medline and Athena, and this year the motivation has shifted to solve for funding availability. For example, GHO Capital Partners and Vistria Group joined hands to acquire Alcami, a biopharma contract development and manufacturing organization (CDMO).
- Private credit: Firms like Owl Rock Capital, Ares Management, and BlackRock were willing to step in and provide large-debt financing via private debt, with Owl Rock suggesting they had the most requests for checks over $1 billion in their history.
As credit availability tightened, the average buyout deal size fell globally in Q3, particularly in Europe. While the total number of buyouts in Europe has hovered around 20–30 deals per quarter since 2021, the total disclosed deal value dropped in Q3 2022. PE sponsors also are shifting focus to M&A within their existing portfolios, for example, through HCIT tuck-ins, PPM roll-ups, especially in emerging specialties, and midcap biopharma platform building.
Outlook for 2023 and beyond
HCPE investors face greater competition for assets, higher interest rates from several central banks, tighter credit, labor shortages, and rising labor rates. But ample dry powder and a track record of returns ensured a strong year for HCPE investing that continues to attract healthcare-specific funds, and we expect this trend to continue in 2023. Despite the slowdown in HCPE deal flow in the second half of 2022, firms continued to create healthcare-focused funds and raise near-record levels of capital. Data from Preqin suggest that firms raised more than 300 HCPE-focused funds in 2022 for the second year in a row, and total assets under management for 2022 vintage funds also approached record highs.
Lower profits and lower multiples pushed public equity markets down globally in 2022. If those depressed multiples linger in 2023, it could lead to longer hold times that limit deal activity, meaning more competition for deals that do come to market. Investors will likely circle around resilient sectors: HCIT, biopharma, and life science tools are all particularly recession-resilient sectors based on their fundamental value propositions.
The current macro environment may also create opportunities for public-to-private deals, carve-outs, and opportunistic investments. Assets that face significant short-term market headwinds may warrant a closer look in 2023, and funds may find hidden gems by investing against prevailing popular sentiment or taking an opportunistic approach to depressed public valuations.
That said, each region will face discrete challenges.
North America: The Federal Reserve signaled it anticipates ongoing increases in the federal funds rate to attain a sufficiently restrictive monetary policy to return to around 2% inflation. This may continue to limit the availability of large-check financing. Economic signals are mixed, and year-over-year inflation seemed to step down in November even though the labor market remains tight. If the Fed’s policy moves induce a recession, funds may continue to shift investments to less risky, recession-resilient plays. In past recessions, government focused businesses (such as MA/Medicaid), HCIT, and pharma services have generally done well. But there are different puts and takes this time round as we come off pandemic-high enrollment levels in spaces like Medicaid, and investors may need to see through some near-term turbulence in assets exposed to biotech funding and technology capital budgets.
Europe: Europe saw the same limits in large-check financing as North America, and this may persist into 2023 as central banks raise rates to fight inflation. As more large-cap PE players move downstream toward smaller deals, midcap PE players are likely to respond to the increased competition by getting more specialized. Activity in the life sciences sectors will likely continue to grow more competitive in Europe, where a strong track record of innovation in biopharma and life-science tools creates attractive investment opportunities for funds that know the space.
Asia-Pacific: Within Asia-Pacific, the macro trends of rising labor rates, rising interest rates, and tight credit all have country-specific nuances, and central banks in China, Australia, India, and Japan have all responded differently. While each country faces specific short-term headwinds, HCPE investors in Asia-Pacific benefit from long-term healthcare tailwinds, large stores of Asia-Pacific-specific HCPE dry powder, and a maturing market with a strong pipeline of investable assets. Some HCPE investors have been diversifying their focus from China to markets like Southeast Asia, India, and Japan, as the market navigated the impact of multiple Covid-linked lockdowns, evolving policies, and geopolitical dynamics. That said, activity in China should remain robust, given growing interest from large buyout firms and venture capital.
Circumstances could change fast in 2023 or 2024, and activity could rebound quickly. Investors will be working hard to have their proactive strategies ready and connect with management teams so that they are in a position to act with speed and confidence, especially when the credit markets open back up for large-check financing.
There is likely to be a spread of potential outcomes for HCPE for the next year. Some signals continue to point to a global economic slowdown in 2023. In this scenario, funds may consider updating their downturn playbook based on the section Healthcare Private Equity in a Downturn. On the flip side, in the face of uncertainty in 2023, funds that lean into new sectors may be rewarded. Life Sciences: White-Hot Competition to Win the Right Deals offers a view on the challenges involved with investing in biopharma and life science tools and highlights success stories from those subsectors.
