Vikram Kapur and Franz-Robert Klingan, partners with Bain & Company’s Global Healthcare Private Equity practice, look at the growth of private equity activity in healthcare last year and where the hot spots are going to be in 2019.
Healthcare private equity is on a tear. It just finished another record year in 2018, with 316 announced deals valued at US$63.1bn – a marked increase over US$42.6bn across 265 deals in 2017. The industry’s sturdy fundamentals and track record of strong performance were a beacon for investors seeking a safe haven (Figure One and Figure Two).
When combined with a glut of dry powder, increased fundraising and higher fund allocations, competition for healthcare assets shows no signs of abating.
Activity and disclosed value rose in every region, an increase that was especially
pronounced in Asia Pacific, where the volume of announced deals grew by a hefty 44% (Figure Three). Across all regions, the provider sector was yet again the most active. It accounted for more than half of total deal activity and disclosed value (Figure Four).
Although the US remained the world’s largest healthcare investing market last year, with 149 deals worth US$29.6bn, here we will focus the trends in Europe and Asia Pacific.
Europe: Robust activity despite regulatory uncertainty
As Europe’s economy slows, the perceived safety of the healthcare industry has continued to attract investor interest. Total disclosed deal value in the region surged about 40%, to US$17.8bn in 2018, in part due to large deals in the biopharma and medtech sectors.
Retail health played a prominent role during the year. Investors have been expanding buy-and-build strategies in retail health by moving into more countries, a tack motivating several deals in veterinary and dental services. There is a limit, however, to the extent of cross-border growth by retail health platforms, mainly because of reimbursement system and language constraints.
Investors also continued to show a willingness to take on reimbursement risk by investing in healthcare-heavy assets. Funds have stepped up investments in providers as they develop more sophisticated ways to underwrite this risk and dial back the level of uncertainty. More than one-third of European investments in 2018 had some direct reimbursement exposure.
While a majority of deals still get sponsored by European investment vehicles, Chinese investors are also looking for opportunities to gain experiences or capabilities that they can apply back in China. Inner Mongolia Furui Medical Science partnered with Astorg Partners to acquire a minority stake in Echosens, a manufacturer of liver diagnostic equipment, for US$200m, as one way to accelerate growth in North America and China.
More broadly, other regulator and political trends represent opportunities in the short term, even if they raise uncertainty in the longer term.
Pending German reforms Germany, the largest European healthcare market, is mulling a series of reforms, including tariffs for hospital finance and regulatory requirements for running retail health chains.
Brexit While investors gained a better view of Brexit’s potential impact on the EU healthcare landscape, negotiations over Great Britain’s EU withdrawal continue. Brexit could lead to a shortage of healthcare workers, presenting both opportunities and risks throughout the system.
Medical device regulation reform New regulations will increase the cost of medical device R&D and manufacturing by raising the standards for clinical data and approvals; however, they also will provide investors with increased certainty through more standardized risk classifications and through improved transparency.
General Data Protection Regulation Implemented in May last year, GDPR is likely
to add costs for companies, possibly triggering a need for additional capital and deal activity.
Demand for European healthcare assets should hold steady in 2019 as investors continue to seek stability in their portfolio and adjust to the changing regulatory landscape.
We expect an uptick in certain countries, such as the UK, and certain sectors, such as healthcare IT, as investors gain further confidence about dealing with new regulations.
China and other Asia Pacific investors are likely to increase their activity in Europe to continue learning about segments, such as home care, that probably will take on more relevance and expand market access in domestic markets.
Asia Pacific: Meeting surging consumer demand for healthcare
Rising incomes and aging populations in Asia’s largest markets, China and India, have significantly strengthened demand for access to healthcare, in turn driving demand for healthcare deals. As a result, 2018 saw a sharp increase in healthcare buyout activity in the region. Investors made 88 deals, with a total disclosed value of US$15.8bn, up from US$7.2bn across 61 deals the prior year.
In China and India, consumer demand fuelled the provider sector in particular, including the region’s largest of the year, Brookfield Business Partners’ acquisition of Australian hospital provider Healthscope for US$4.1bn.
As China continues to address the growing healthcare needs of a large, aging population and a likely upcoming surge of chronic diseases, it will increasingly look to supplement its local innovation engine with global expertise.
Many large, global funds have bought into the Asia Pacific growth story through dedicated local arms.
Some of the world’s largest buyout firms are closing record-setting Asian funds after a dip in the early 2010s; KKR’s Asia Fund III closed US$9.3bn of funding in mid-2017, the largest fund in the region. More than one-quarter of Asia Pacific deals during the year involved US- or Europe-domiciled acquirers that see great opportunities in a fast-growing healthcare economy.
Stiff competition among both corporates and buyout funds has prompted many investors to consider creative or alternative deal structures and strategies for the region.
Funds have been teaming together to acquire larger assets, and investors also continued to seek public-to-private transactions, including the take-private of iKang Healthcare Group by Chinese fund Yunfeng Capital and Alibaba Group Holding Limited for US$1.2bn. This deal represented one of the last of the US-listed major Chinese assets to be taken private.
Investors across the region also deployed buy-and-build platform strategies that have been common in North America and Europe for years.
In Southeast Asia, TPG acquired a portfolio of 39 pathology laboratories from Healthscope for US$207m and then announced intentions to add on Innovative Diagnostics, with further intentions to continue growing the footprint.
And in India, KKR invested in Max Healthcare through its portfolio company Radiant Life Care to create one of the largest hospital networks in northern India.
Stabilising regulatory changes in China washed through the medtech sector, spurring an increase in growth-stage assets. The Made in China and Healthy China 2030 initiatives, along with a restructuring of the distribution systems for drugs and devices, have encouraged more medtech innovation in the country.
Meanwhile, the first substantial wave of healthcare buyouts in Asia Pacific are reaching the end of their holding periods, leading to several high-profile sponsor- to-sponsor exits. WestBridge Capital and Madison Capital Partners acquired Star Health and Allied Insurance from a consortium of PE investors for US$1bn, was one of the top ten global exits by value in 2018.
These trends have not let up despite concerns that economic growth in China is slowing.
As companies explore ways to increase access to healthcare, trends, such as digital healthcare solutions, should gain steam in China, India and other countries, fuelling interest in companies such as Good Doctor, Wedoctor and Alodokter.
Investors will continue to seek deals in the provider and medtech sectors, and explore creative ways to deploy capital, such as public-to-private takeovers.
Companies such as Australian primary care giant Healius, which rejected a takeover attempt from its largest shareholder, Jangho Group, in January 2019, will no doubt continue to attract interest from investors across the region and beyond.