Sector focus: Healthcare
Strong fundamentals, robust revenue models and scope for consolidation are key attractions of the healthcare sector, as Clearwater International’s Ramesh Jassal, director and international head of healthcare, and Stefan Sachsenhauser, managing director and head of healthcare in DACH, explain.
PE deal volume and value soared to all-time highs in 2021, with that momentum showing no signs of slowing
Healthcare is hot. PE deal volume and value soared to all-time highs in 2021, with that momentum showing no signs of slowing. Indeed, Q1 2022 saw healthcare (€11.1bn) overtake industrials and chemicals (€7.6bn) in terms of total deal value for the first time on record.
In a market buffeted by macroeconomic headwinds, Europe’s healthcare sector offers a number of fundamental attractions. Among these are an ageing population – and therefore rising demand for products and services – as well as a steady stream of therapeutic innovations.
On top of this is the need to tackle the massive elective surgery and other clinical and non-clinical healthcare waiting lists that have built up during the pandemic – an objective that is attracting a deluge of private capital and driving deals across the board. UK-based Veincentre – which is backed by Palatine and specialises in the treatment of varicose veins – is currently on the market. Meanwhile, Community Health and Eye Care, which provides services from general ophthalmology to eye surgery, was acquired by G Square Capital in Q3 2021.
Healthcare assets are demanding low to mid double-digit multiples
“Healthcare assets are demanding low to mid double-digit multiples, primarily because of the exacerbation of the last two years, highlighting a flight to non-cyclical performing sectors,” says Ramesh Jassal, Clearwater International’s international head of healthcare. “This is a considerable opportunity to invest because tackling the backlog of demand will take at least a decade to contract. In light of that, PE interest is showing no signs of abating because there is an option for investors to take a secondary exit later down the track, with fuel/equity story still left in the tank for the next investor.”
In most of Europe, provision of healthcare is underpinned by secure, publicly funded revenues – a big attraction for investors. “The beauty of public funding is that you have recurring revenues, good visibility of cashflows and longterm contracts over several years, which is a great equity incentive for PE investors,” Jassal says.
From drug development to dentistry, just about every subsector of the healthcare universe is attracting increased PE attention. Contract development and manufacturing organisations (CDMOs) are one particular area of focus. These businesses provide big pharma with outsourced drug development and production services. CDMOs are not new, but the critical role these outsourcers played during the pandemic has thrust them into the spotlight. More to the point, the CDMO subsector is highly fragmented and ripe for consolidation.
One reason for this is that pharma companies prefer to partner with fewer full-service partners
“Outsourced pharma services still reflect consolidation dynamics and provide opportunities for strategic growth, particularly in oncologics- and biologics-driven high-margin FDF segments of injectables and non-sterile liquids,” says Stefan Sachsenhauser, Clearwater International’s managing director and head of healthcare in DACH. “There is a clear trend towards one-stop solution providers, which explains why there is such a strong deal dynamic from the corporate level. Big pharma is asking for strategic rather than transactional partnerships. It’s not enough anymore to be a specialist in one of the individual value chain functions – and currently, there are specialists in development, in manufacturing, and in packaging.”
The consolidation dynamic can also be seen in the contract research organisation (CRO) subsector, which handles R&D for pharma companies. “One reason for this is that pharma companies prefer to partner with fewer full-service partners, so you are seeing continued consolidation in CRO businesses, who are looking to build on their speciality service gaps that provides a ‘one-stop shop’ such as clinical trial patient recruitment, decentralised clinical trials, commercialisation services and biometrics analysis, to mention a few,” explains Jassal.
Consumer-focused healthcare companies are also an increasing point of emphasis for consolidation efforts. “One area is in vitro fertilisation (IVF). It’s an emotional purchase for patients, with a high-level of demand for its services,” Jassal says. Among the notable PE deals in the IVF subsector in Q1 was Nordic Capital’s acquisition of UK-based fertility clinic group, Care Fertility.
Especially in provider care, distressed assets are another facet of the healthcare picture. “What we are seeing in Germany is that a lot of big groups operating hospitals and elderly care institutions are starting to divest distressed assets. This is an opportunity for foreign investors and/or operators with innovative care concepts to increase their footprint in Germany,” says Sachsenhauser. “The challenge for PE is to provide a well-balanced business model covering all the criteria – not just bottom-line optimised value creation and growth, but also the maintenance of quality care and good working conditions.”
the average LTM multiple for healthcare assets in PE transactions saw a significant rise in 2021
Another challenge facing PE bidders is growing competition from strategic investors and infrastructure funds – a point underlined by Wren House Infrastructure’s acquisition of UK-based specialist care provider Voyage Group. “Infrastructure funds are buying up assets that PE would usually compete for, which is giving PE a run for its money,” says Jassal. “Infrastructures’ cost of capital and their respective returns hurdle rate are lower than PEs, so they can afford to pay a bigger multiple.”
While the average LTM multiple for healthcare assets in PE transactions saw a significant rise in 2021, it was the only sector (alongside industrials and chemicals) where the deal multiple actually eased in Q1 2022 – suggesting that valuations are becoming less frothy.
So what might the future look like for dealmaking in the healthcare sector? “COVID-19 has accelerated the flight to stable, anti-cyclical markets,” notes Jassal. “There is a lot of cash in the market under PE ownership, who will continue to deploy that capital into healthcare, since it is safer in comparison to many other sectors.”