Proving resilience
The healthcare sector continues to provide compelling investment opportunities despite global macroeconomic headwinds
Faisal Dhalla: Rising interest rates have had knock-on effects for healthcare deal activity. Higher borrowing costs made new investment and acquisitions in the sector more difficult, especially for healthcare businesses carrying high levels of debt and relying on financing to drive growth.
That said, there are signs that the interest rate cycle has peaked and during the first quarter of 2024 activity and interest have definitely renewed. Private equity sponsors are eager to get back to doing deals after a quiet period, and healthcare is a good place to start.
Vincent Buscemi: M&A activity overall may not be at the highs of 2021, but it depends on where you are in the healthcare space that matters. Some sub-sectors of the market remain relatively buoyant, while others have softened. There are a number of factors at play here, ranging from market sentiment and regulatory and economic uncertainties, to shifts in investor focus and priorities. It is not just about the risk profile of healthcare per se.
Sarah Skuse: It is also worth noting that, relative to private equity-backed deals in other sectors, healthcare has remained quite resilient. Healthcare is needs-led and not discretionary, providing private equity sponsors with protection against downside risk.
Healthcare is needs-led and not discretionary, providing private equity sponsors with protection against downside risk
Skuse: Buy-and-build strategies have proven an effective way to maintain deployment through the cycle, particularly in sub-sectors such as supported living and specialist care, where firms can buy a platform company and work with a strong management team to deliver operational excellence and expand through acquisition.
Buscemi: The medtech subsector – which encompasses a variety of areas ranging from drug discovery, genomics and diagnostics through to medical devices and wearables – is a diverse and dynamic space that has generated sustained deal flow for sponsors.
One trend within medtech that has been particularly interesting has been the use of AI and robotics, which have already fundamentally impacted certain spheres of healthcare, most notably in the diagnostic specialties such as radiology and pathology. AI, for example, can sift through and prioritise imaging, detecting patterns and anomalies, freeing up clinical time and improving and supporting diagnostic accuracy.AI is also accelerating drug discovery and development, where its great promise is in efficiency and costs savings. AI has already been proven to assist drug researchers to rapidly explore vast areas of chemical space in a fraction of the time that would otherwise be taken in lab work.
New technologies and their opportunities will require incumbents to adapt their business models, and M&A will provide a pathway for established companies to acquire third-party technology and integrate it into existing products, or to provide diversification through new verticals.
The backdrop for M&A is increasingly more supportive, and we have seen sponsors coming back to market in numbers, making decisions and deploying capital
Dhalla: Dental has been another sub-sector where dealmaking has continued to progress. The sector is still fragmented, and dental consolidation investment strategies have consistently delivered operational efficiencies and economies of scale. Independent practices that have joined larger groups have benefited from better support services and technology, allowing dentists to focus more on patient care.
In addition to consolidation, the development of dentistry treatments and technological improvements are also supporting long-term growth and profitability. Digital imaging and dental software, for example, have enabled dentists to undertake complex restorations faster and more efficiently, and to offer more advanced treatments, attracting more patients.
There is also an increased awareness of the importance of oral health more generally, which has increased demand for dental services. Cosmetic dentistry is also growing at pace. With revenues increasing across a number of streams, dentistry has been an especially attractive healthcare sub-sector for private equity sponsors.
Buscemi: Macroeconomic factors such as interest rates and inflation are going to continue to influence investor appetite, as well as political uncertainty. These broader factors are influencing investor behaviour across multiple sectors.
Overall, however, the backdrop for M&A is increasingly more supportive, and we have seen sponsors coming back to market in numbers, making decisions and deploying capital.
Skuse: Cooling inflation is good news for the sector, and we are optimistic about M&A prospects. Cost certainty is crucial for dealmakers when it comes to establishing valuations and confidence is returning to the market.
The development and construction of new healthcare facilities has been particularly slow because of inflation and its impact on labour and construction cost, but is positioned to return to its historical run rate as inflation comes down.
With revenues increasing across a number of streams, dentistry has been an especially attractive healthcare sub-sector for private equity sponsors
Dhalla: As a firm we are active across all healthcare sub-sectors, so we gather insight into what is resilient, and, as previously mentioned, dental is one area that continues to go from strength to strength. We have noted a significant uptick in the amount of corporate dental work that we are doing. We are acting for more consolidators in the market; both established players and newer platforms moving into the sector.
