Private equity’s success relies upon forward-looking expectations about which firms are best positioned to capitalize on market conditions. The healthcare market poses unique challenges. Although healthcare targets may have the profit opportunities that appeal to PE firms, the volatile legislative and reimbursement environment can turn a “smart bet” into an albatross.
A recent report from McKinsey & Company on private equity and healthcare showed that healthcare investments returned the highest global total returns to shareholders (15% between 2010 and 2015). The consumer staples category came closest to that return, with 13% in the same time period.
Within the healthcare market, Biotechnology delivered the highest global total returns, 27%, between 2010 and 2015. “Payors and PBMs” and medical devices each returned 15%, while investments in Big Pharma returned 14%.
Through December 9, private equity firms have made 132 healthcare acquisitions. Nearly one-third were for long-term care facilities (29%), which begs the question of whether the primary motivation was for the real estate or the healthcare services side.
Although PE firms often do not disclose financial terms on deals, the combined total of the 132 transactions now stands at $15.7 billion, approximately 7% of the current $239.6 billion on the books through December 9.
The Blackstone Group made the priciest purchase so far this year with its acquisition of TeamHealth Holdings Inc. (NYSE: TMH) for a total of $6.1 billion, or $43.50 per share. TeamHealth provides outsourced medical services to approximately 3,400 acute and post-acute facilities worldwide, and the deal was announced on October 31, 2016.
The second largest deal, on August 9, 2016, was EQT Partners Inc.‘s acquisition of Press Ganey Holdings (NYSE: PGND) for $2.35 billion, or $40.50 per share. Press Ganey, a healthcare performance improvement company, provides patient experience measurement, performance analytics, and strategic advisory solutions for health care organizations across the continuum of care.
The Other Services sector accounted for 20% of the deals. This year, the most popular subsector of Other Services, as far as PE interest goes, is contract research organizations (CROs) or research labs that support CROs, accounting for five of these 27 deals.
Another subsector, healthcare staffing agencies, ranked second within the Other Services sector, with four PE acquisitions in 2016. Other notable mentions were dental practices and urgent care centers, with three acquisitions each. This data validates the tendency for PE firms to target ancillary services with less governmental reimbursement risk.
eHealth and Physician Medical Group acquisitions tied for third place, with 13 PE acquisitions each. On the digital health side, PE firms tend to target companies that specialize in payment technology. Of those 13 acquisitions, five targeted revenue cycle management (RCM) companies, and three specialize in either analytics for value-based payment systems, cost management solutions, or electronic invoice systems. The remaining eHealth targets included one telehealth company, one healthcare IT security company, and one SaaS workforce solutions provider.
Within the Physician Medical Group sector, PE firms target dermatology practices. So far this year, private equity has acquired six practices. Gastroenterology (two), a primary care practice and an optometry practice (one deal each) were among the 13 deals announced through December 9.
Behavioral health companies accounted for nearly 7% of PE firm acquisitions, with nine deals so far this year. This sectors consists of several sectors, including addictions, eating disorders, inpatient psychiatric hospitals, and programs for individuals with development disorders. In 2016, PE firms have gravitated towards substance abuse centers, announcing six deals targeting addiction-based treatment centers.
Despite the strong competition from strategic buyers, private equity firms are constantly searching for their next healthcare investment. We’ll give you a full report of 2016’s activity in the coming months.
