The specialist will see you now
How GPs are adjusting to an industry in flux
For many investors seeking specific sector exposure, deciding on a specialist fund over a generalist is a key decision, often based on balancing potential for higher returns against diversification considerations.
Yet in some sectors the line separating the two may be starting to blur.
In healthcare, recent developments have seen specialist funds embrace bigger deals while generalists have moved to beef up technical knowhow within their health investment teams.
In Europe, a significant portion of PE healthcare exposure comes through generalist funds. Historically, however, specialists have proven to deliver more consistent returns, thanks to a deeper understanding of a complex market with strong, long-term fundamentals.
During the vintage years 2000-2019, for example, healthcare buyout specialists delivered a median result of 1.95x net TVPI and a 22.3% net IRR, surpassing the 1.75x net TVPI and 17.1% net IRR of generalist GPs, according to research published by Schroders in January.
Schroders’ report highlights how specialist funds have shown consistent performance across periods, with a 19.8% net IRR during 2000-2009, and 22.3% between 2010-2019, compared with generalist funds which returned 13.6% and 19.5% respectively.
If the more mature US market – where specialised healthcare funds are more widespread – serves as a guide, then specialisation is likely to increase on the eastern side of the Atlantic.
A veteran investor with 20 years of experience in the European healthcare market, Paul Tomasic, head of European healthcare at Houlihan Lokey, tells Real Deals that the specialisation trend has “significantly increased” during the last five years. It reflects a strategic response mirroring the ever-evolving sector landscape.
“Specialist investors such as GHO and Archimed are increasingly targeting bigger investments,” explains Tomasic. “Many GPs have also increased their depth in sophistication and started to combine healthcare sector expertise with regional advantages. Notable investors such as SHS in Germany, Impilo in the Nordics and Merieux Equity Partners in France are clear examples of this.”
Many GPs have increased their depth in sophistication and started to combine healthcare sector expertise with regional advantages
Denis Ribon, chairman and founder of Archimed, notes: “Healthcare is certainly one of the sectors – with tech and financial services – where specialisation is needed because of corresponding specific scientific, regulatory, medical and technological features.”
With the healthcare sector becoming a diverse and multifaceted industry, specialist GPs have increasingly started to focus on niche sub-sectors and areas where they have a competitive advantage, maximising their ability to identify and capitalise on unique investment opportunities.
“In the current healthcare deal environment, we are seeing more non-structured processes and minority/majority (as opposed to full buyouts). Such deals favour the specialist investors who can ‘unlock’ these situations through their network or by acting more nimbly and quickly, given their deeper, embedded experience and expertise in the space,” says Tomasic.
What also helps specialists navigate the healthcare landscape is their in-depth knowledge of regulatory frameworks and compliance issues, allowing them to minimise the risk of regulatory setbacks and legal challenges.
“The most crucial characteristic for a deal to be successful today is its ability to swim with the tide of dynamics driving healthcare systems and to be able to avoid any potential pitfalls, particularly against a backdrop of trickier regulatory risks,” highlights Tomasic.
The rise of specialists also has implications for recruitment, as top-quality senior management and board-level talent becomes increasingly difficult to find, globally but especially in Europe.
Specialist funds with a strong sector reputation have a competitive advantage in attracting top talent. Having this “talent advantage” at their disposal arguably lowers the execution risk on investment and becomes a powerful commercial driver, explains Tomasic.
Alan MacKay, managing partner and founder of GHO, highlights how sectors such as technical healthcare require a heightened level of sophistication and a deeper understanding of the fundamentals. That tends to favour specialists ahead of generalists, who may require additional time and resources to familiarise themselves with latest developments.
“Whereas if you're a specialist like GHO, you're living in total immersion, talking technical healthcare every day of the year, allowing you to move much more quickly and confidently,” he says.
If you're a specialist, you're living in total immersion, talking technical healthcare every day of the year, allowing you to move much more quickly and confidently
The ‘crème de la crème’ of GPs in the sector are winning the competition by further verticalising their competencies, integrating a new range of sub-sectors, sharpening their expertise and making them competitively inaccessible to generalist GPs.
“We have five sub-sectors of technical healthcare that we focus on and we have five sub-sector groups, each with four or five members of our investment team really drilling down," says MacKay.
With healthcare sub-sectors becoming increasingly sophisticated, investors are urged to delve deeply into a new learning process. In particular, the biotech and pharmaceutical sectors are areas where a more profound understanding among investors could yield dividends.
Biotechnology and pharmaceuticals had a stellar year in 2023, with biopharma deals representing the biggest share of healthcare buyouts in Europe, and new modalities and innovative therapies such as glucagon-like peptide-1 (GLP-1) receptor agonists – the class of drug that includes weight-loss therapies such as Ozempic – transforming the investment landscape.
“The clinical achievements this year in the GLP-1 market have some interesting parallels with what we saw in disruptive tech advancements some years ago. That is, in addition to the core growth of underlying GLP-1 therapeutics, investors are starting to look at the ancillary or correlated benefits in related areas of medtech, pharma services and healthcare technology,” says Houlihan Lokey’s Tomasic.
“The scale of the market opportunity in GLP-1 will also cause seismic shifts in these related silos that serve or are impacted by the growth of GLP-1s,” he adds.
Medical devices and technologies are also rapidly innovating, with significant activity in key sub-sectors within diagnostics, dental, hospital supplies and patient mobility.
Investors are increasingly seeing medical device investments in the context of overall patient or healthcare system workflows, overlapping with trends in healthcare technology, automation, supply-side delivery and patient outcomes.
Other sectors such as healthcare services, life sciences and research, and healthcare IT and digital health, have also significantly advanced thanks to new tech trends such as the rise of AI, which has been “absolutely key” especially in drug discovery, says Ribon.
“Healthcare AI and generative AI are everywhere these days, and are a threat as a disrupting factor for businesses but also present big upsides at the same time. I think managing this well will be all about timing,” adds Damien Gaudin, partner at Riverside Europe.
Healthcare AI and generative AI are everywhere these days, and are a threat as a disrupting factor for businesses but also present big upsides
Thanks to their structure, specialised GPs such as GHO and Archimed are able to develop deep industry knowledge, build strategic partnerships and drive value creation within their portfolio companies. Once those processes are completed, scaling up is a relatively simple process.
“We take hidden gems in Europe and got them to America and vice versa – it’s a transatlantic outlook,” explains GHO's MacKay. Former portco Caprion Biosciences, a specialist in immunotherapy laboratory services headquartered in Montreal, Canada, highlights the simplicity of having knowledge and network at the right time.
“The business’s major shareholder was the Quebec Development Authority and they didn’t want us to operate outside of Quebec, not even outside Canada. We thought it would have been a great waste, as the business had the potential to become a global success,” explains MacKay.
The GP acquired the shareholding with the promise to keep the head office in Montreal – and within six weeks, they opened a facility in Belgium.
“We did €17m in the first 12 months of revenue just by being in Europe,” he highlights.
Another example of how knowledge is key comes from GHO’s portco medical device business Sanner, a family business founded in 1894. In that case, the GP embarked on a two-year relationship, as Sanner was initially reluctant to enter into a partnership. Today, the CEO retains a 45% stake, and the company has embarked on a transatlantic scaling with successful expansion into the US.
According to Archimed, the successes of the French GP's recent acquisitions and exits are directly related to different types of specialisation that strengthened the investment cycle.
To name a few, Ribon highlights how life science tools specialist Popylus required regulatory and sub-sector knowledge; CRO Namsa required deep regulatory and sub-sector knowledge; and investments in IVD ZytoMed and medtech specialist Ad-Tech would have simply been impossible without deep scientific and international experience of the sector.
All of which might suggest a gloomy prognosis for generalist healthcare GPs. However, given their ability to provide sectoral diversification, generalists are still managing to surf trends and secure interesting deals within the healthcare space.
GHO’s MacKay believes generalists have a lot to offer.
“Generalists use a bit more financial engineering than we do and they're probably better at that. But the main thing I see about generalists is that the big funds all have a dedicated healthcare team,” he says.
Ben Long, head of the healthcare sector at Inflexion, agrees, explaining that big firms such as the London-based GP can replicate the success of specialists thanks to the additional resources a large firm can call upon.
“We rely heavily on our network to originate deals, to source advisers on deals and to staff our boards once we have invested in companies, and that's reflected in the fact that we have a dedicated advisory board within our healthcare portfolio currently made up of nine people,” says Long.
If you look at the really good deals, they're ones where people already had an angle a long, long time ahead
The board includes CTOs, CCOs, chief people officers and sustainability experts who can compare notes and learn from a large database that includes 50 portfolio companies in multiple geographies across six sectors.
“When you look at the really good outcomes and investments, they're not originated by corporate finance advisers or investment banks; they might go to auction in the end but if you look at the really good deals, they're ones where people already had an angle a long, long time ahead,” he adds.
“Specialised teams are essential. A few years ago, M&A advisers were sending teasers, no matter what sector the investment opportunity was in – whether construction, tech, healthcare or other – it ended up on the same desk. This is changing rapidly,” explains Riverside’s Gaudin.
Riverside’s solution to compete with specialised funds was to implement a hybrid model with geographies and sector coverage several years ago.
“We’ve already seen tangible results with the ability to originate off-market deals, which is difficult as a generalist. Having deep content discussions with entrepreneurs is of utmost importance, whether you have time to prepare months in advance or within a couple of days when you're in a hot auction situation,” Gaudin explains.
GPs such as Inflexion or Riverside have been making investment choices based on knowledge tested in other business sectors, thanks to their pan-sector relationships and experience.
“If I gave you an example of value acceleration in practice, the most recent healthcare exit we've delivered is Pharma Spectra, which we sold to IQVIA, where we delivered 24% IRR,” Long says.
Inflexion originated that transaction completely off-market through its network. As software and data supplied to pharmaceutical companies was a core of the value creation strategy, the GP involved its value acceleration and talent team to focus on the digital side before the deal, aware that the business needed to improve the technology platform as a top priority – certainly an easier move for a GP that generally has a broader focus on business services such as Inflexion.
With pharmaceutical group A.Forall, one of Riverside’s European portcos, the GP used its retail sector knowledge as a tool to screen and help the business identify opportunities in the market. “Since our investment in the company, A.Forall successfully started to focus on drug shortages by offering solutions to healthcare professionals, allowing patients to get access to their treatments,” says Gaudin.
While generalists are able to draw on their experience accrued from exposure to a range of sectors, specialists’ focus may impact decision-making, where past experience may not be fully relevant or applicable in the changing healthcare environment.
In addition, specialists may give less consideration to some of the important, sweeping fundamental tailwinds – demographics, ageing population, etc – relative to some of the very detailed micro issues.
“Put another way, generalists may have the advantage of taking a step back to cross-compare trends in the healthcare sector with those in other sectors, resulting in them having a more fundamental appreciation of the relatively powerful market drivers in healthcare,” says Tomasic.
However, according to Archimed’s Ribon, generalists are by their nature predisposed to excel in sectors such as consumer, business services or general industrials, rather than specialist sectors. “Even their sector-focused funds deliver significantly lower returns than true specialised players,” he says
Even [generalists'] sector-focused funds deliver significantly lower returns than true specialised players
Overall, healthcare remains a promising sector for European investors, creating a wide range of opportunities for private equity investors and institutional investors that back them.
“Healthcare is very stable and it’s good for co-investing as well. We're very lucky there are currently a lot of LPs who like co-investing and they'd rather do it in a stable sector like healthcare instead of a volatile sector like energy or consumer. We're fortunate to be in a good place that LPs like right now,” says MacKay.
Yes, I expect it to increase
No, I expect my allocation to remain the same
Yes, I expect it to decrease
