New York – April 17, 2019 – Healthcare private equity outperformed other asset classes in 2018. In the face of growing economic and sociopolitical instability across the globe, healthcare assets attracted investors at record levels last year.  Disclosed deal values surged almost 50 percent to $63.1 billion, topping last year’s level of $42.6 billion, and deal count rose to 316 in 2018 from 265 in 2017, due to strong investment activity across all regions and in sectors such as healthcare IT (HCIT), provider and biopharma. This included 18 deals greater than $1 billion each in disclosed deal value, pushing larger assets to levels that are out of reach for most buyers.

These are the findings from Bain & Company’s eighth Global Healthcare Private Equity and Corporate M&A Report, released today.

“Last year was an incredible year for healthcare deals,” said Nirad Jain, co-head of Bain & Company’s global Healthcare Private Equity and Corporate M&A practices.  “Despite an especially volatile fourth quarter for both global markets and certain political landscapes that contributed to a strong sense of unease among most investment professionals, healthcare’s sturdy fundamentals and track record of strong performance were a beacon for investors seeking a safe haven. When combined with a glut of dry powder, increased fundraising and higher fund allocations, competition for healthcare assets intensified throughout the year—and, even today, shows no signs of abating.”

Healthcare private equity and M&A by the numbers

The rise in healthcare deal values stemmed primarily from large buyouts, as eight deals in 2018 were valued at greater than $2 billion each, versus just four in 2017, and several mega deals.  Unlike in 2017, when only one such transaction closed, 2018 saw four assets trade for more than $4.0 billion, including the largest buyout in at least the past decade.

While North America continued to account for the most deals and highest values, the European and Asia-Pacific regions reached historically high levels in value. In Europe, a handful of large buyouts, including two biopharma deals, led to a significant increase in deal values. Asia-Pacific deal volume grew by 44 percent as investors looked to tap into demand from a healthcare consumer class that has continued to grow in recent years. 

In a return to historical norms, exit volume and value both declined in 2018 from the year earlier. Volume fell to 112 in 2018 from 116 in 2017, the lowest level since 2012. This followed the spike in activity from 2012 to 2015, as funds now have cleared their books of the vast majority of assets acquired prior to the past recession. Disclosed exit value fell to $31.6 billion in 2018 from $44.4 billion in 2017, driven by a 43 percent decline in the value of exits to corporates.

Corporate buyers also jumped in with enthusiasm, pushing corporate M&A in healthcare to a record $435 billion in 2018, surpassing the previous high of $432 billion in 2015. In recent years, corporate healthcare companies have increasingly turned to and relied on M&A for revenue and shareholder growth. 

“To get deals done amid intense competition, funds took more creative approaches to transactions,” said Kara Murphy, who co-leads Bain & Company’s Healthcare Private Equity practice.  “They’re seeking partners to help spread the risk or looking to public companies for carve-out or take-private opportunities, particularly as public valuations become increasingly attractive compared with private market offerings. Investors are also expanding their value-creation theses beyond traditional category- or geographic-leadership buyouts to address the challenge of multiple expansion likely becoming an outdated lever for returns.

Funds are adapting by building capabilities to take unique risks, doing diligence earlier and preparing more thoroughly for operating a new asset.  According to Bain & Company, investors need to expand, accelerate, and intensify their process for buyouts, guided by four principles:

1. Develop a clear playbook and the right capabilities for the chosen strategy. When investors dedicate larger portions of their funds to healthcare investments while simultaneously facing increased competition, their strategy may need to change.  Assessing the capabilities required for success and strengthening areas demanded by the investment strategy will be critical for buyers going forward.
2. Create a value-creation plan early. Given current valuation levels, multiples may no longer expand the way they have in the past. Instead, investors must increasingly derive returns from commercial and operational levers. Buyers should begin developing the value-creation plan during diligence and co-create with, and hold company management accountable for, an execution plan that shows a clear path to value creation. This requires a more proactive mindset, thinking several moves ahead to build relationships with operating advisers and management teams.
3. Execute next-generation diligence. Given the increased competition for a limited set of assets, funds are writing larger checks and moving quickly to win deals. As such, investors will look for more ways to drive value from an acquisition and pull forward value-creation planning into diligence. Best-in-class investors think years ahead about which spaces and assets to invest in and then position themselves to win by doing their homework early. They also realize the traditional market diligence no longer suffices.
4. Take a creative path to get deals done—if you can. Funds no longer pursue only traditional buyouts to generate returns for investors. Partnerships, growth investing and take-privates are just a few of the creative approaches firms are taking. But not every buyer can execute these variations flawlessly because they require internal capabilities that take time to develop. Funds that leverage existing strengths and platforms can generate meaningful value by doubling down on their portfolios as an acquisition vehicle.

A Look Ahead: 2019 and Beyond

Looking ahead, the likelihood of a recession will be palpable throughout 2019, and sociopolitical uncertainty may prevail. Returns in healthcare PE markets have proven resilient through such storms in the past, however, and Bain & Company is confident that investor demand for these fundamentally strong, recession-resistant assets will endure. Buyers with a robust healthcare acquisition playbook are best positioned to make smart investment decisions that will generate strong returns in the years ahead.

However, the jury is out on whether this vintage of healthcare deal returns will be as good as previous vintages. As uncertainty permeates public stock and debt markets and returns from multiple expansion wane, more deals may become increasingly difficult to justify.

“Investors will no longer be able to rely on market-wide multiple expansion to generate returns,” said Mr. Jain. “Disciplined, data-driven funds will find their way to top-quartile deals by backing winning companies, deploying a systematic value-creation playbook and doing their part to transform the global healthcare industry.”

Editor's Note: For more information or to arrange an interview, please contact Katie Ware at katie.ware@bain.com or +1 646 562 8107.

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