Healthcare has been, and will continue to be, an important part of private equity portfolios. However, macroeco-nomic signs point strongly to a global slowdown or a recession in the near future, very likely during the hold period for recent and upcoming investments. Experienced healthcare PE investors are weighing recession scenarios in their deal-making calculus as well as assessing their existing portfolios for vulnerabilities and for levers they can pull to improve growth and margin trajectories.
The good news for healthcare investors is that many of their favorite investment strategies will still be effective in a downturn. As previously discussed, as procurement departments cut costs by shrinking the number of suppliers to manage, category leaders will likely remain on the short list. Leaders also are more likely to have the fi nancial strength to make investments through a downturn, potentially even bolstering their leadership by consolidating weaker players. Buy-and-build strategies can also pay off in a downturn, as falling prices may unlock opportunities for add-ons. And corporate appetite for partnerships will likely grow, especially where debt markets falter. Complex carve-outs may even accelerate as corporate buyers look to streamline operations and free up cash.
For PE funds in the healthcare hunt, a number of sectors have captured keen interest to date in 2016, including
• HCIT, especially the segments of coding, data and analytics, revenue cycle management, alternate site IT and digital health in China;
• providers, especially in fragmented segments and developing markets;
• physician practice management, including behavioral health;
• retail health, including ophthalmology, dermatology, dental and veterinary clinics;
• outsourced services, including manufacturing, product development and other services that benefi t from the desire of many biopharma and medtech companies to outsource more noncore activities;
• specialty generics and OTC products, including vitamins and supplements; and
• alternate asset classes, such as distressed debt, especially for specialized investors that can identify ineffi ciencies between an asset’s fundamentals and market pricing.
Looking ahead, healthcare investors should be prepared for even more competition for assets. Corporate interest is unlikely to abate. In addition, investors looking for recession-resistant assets will come to healthcare because under-lying demand typically remains strong in downturns. Sophisticated healthcare investors will recognize that the impact of a downturn will vary signifi cantly across segments. Segments that offer cost savings to the value chain may fl our-ish. At the same time, changes in consumer demand may hurt segments with high cash-pay components. And in the US, healthcare segments that are dependent on elective medical procedures may fi nd they have more exposure to consumer demand than in previous downturns given the growth of high-deductible health plans. Analyzing vulnera-bilities like these against the growth prospects and price of assets will be critical for healthcare investment decisions.
As investors consider new investments and shore up their existing portfolios to prepare for the downturn, they should keep a few key questions in mind.
• What is the strategy for the downturn? Management teams need to be ready for a world where healthcare consumption becomes even more price sensitive, with a strategy to turn that shift to their advantage. Further-more, they should have a clear plan for investment through a downturn, since exit values will hinge on future growth potential even in a slow- or no-growth market.
• Where is there room for margin improvement? After a number of years of generating returns from multiple expansion, a downturn will keep multiples more measured and make margin improvement a critical driver of value. Management teams should make deliberate choices around where to play (which customer segments, which geographies) and how to win (which go-to-market model, which capabilities to excel at vs. what can be good enough). They should eliminate activities that divert focus and resources away from the company’s core drivers of value.
• What is the path to exit? For some funds, it may be prudent to sell now to lock in solid returns and free up capital to invest if valuations decline. In other cases, locking in exits with corporate partners may be an attractive option. And in many cases, a buy-and-hold strategy combined with strong portfolio activism may be the best path to superior returns.
As seasoned investors know, turmoil creates opportunity. Today’s healthcare investors should button up their current assets and stay nimble, so they can act upon the attractive opportunities that will emerge in the years ahead.
Global
Tim van Biesen in New York ([email protected]) Kara Murphy in Boston ([email protected]) Americas
Joshua Weisbrod in New York ([email protected]) Nirad Jain in New York ([email protected])
Asia-Pacifi c
Karan Singh in New Delhi ([email protected]) Vikram Kapur in Hong Kong ([email protected]) Europe, Middle East and Africa
Franz-Robert Klingan in Munich ([email protected]) Michael Kunst in Munich ([email protected])
Reporters and news media: Please direct requests to Dan Pinkney
[email protected] 646-562-8102
Acknowledgments
This report was prepared by Bain’s Healthcare Private Equity practice and a team led by Lauren Christman, a senior consultant in Bain’s Healthcare practice. The authors would like to thank Rebecca Levinsky, Tina Strasse, Andrew Criste and Justin Doshi for their contributions, John Peverley for his research assistance and John Campbell for his editorial support. We are grateful to the Healthcare Private Equity Association, particularly Karen Kajmo and Diane Daych, for their collaboration on this report. We are grateful to Dealogic and AVCJ for the valuable data they provided for this report.
For more information, visit www.bain.com