Last year was a record-breaking year for private equity investments in the healthcare industry, with a total disclosed deal value reaching $36.4 billion by the end of 2016. Mid-year reviews of 2017 indicate a downward trend in the number of private equity investments but a significant increase in the value of investments compared to 2016. According to the Global Healthcare Private Equity and Corporate M&A Report 2017 by Bain & Company, investors will want to increase the weight of healthcare in their portfolios given the growing population and increase in demand for healthcare.

With the ongoing regulatory reform and the uncertainty surrounding healthcare, Bain & Company suggests that investors are now focusing on areas less exposed to regulatory uncertainty. These include healthcare information technology, retail health providers and outsourced services. According to Global Healthcare Leaders Study: 2017 by Lazard, the industry is also expected to transform through the development of new pricing models ("value-based care"), which will replace the currently used fee-for-service model.

With more volatility in 2017, private equity funds continue to see healthcare as a safe haven – despite the legislative uncertainty in the United States. The report by Bain & Company recommended considering the following aspects when seeking healthcare investments going forward:

  • Consider assets beyond your comfort zone – ones that may be smaller, healthcare-heavy or located in other regions;
  • Develop and test all plausible scenarios;
  • Validate your value-creation plan during the diligence process; and
  • Consider creative approaches to your deal, including partnerships, spin-offs and M&A.

Similar to 2016 where corporate buyers accounted for 85% of healthcare deals, they are expected to offer continued competition to private equity investors. The approach taken by private equity investors tends to differ from that of corporate buyers. A corporate buyer may have wider industry knowledge and may know more about the market than a private equity fund. This is one of the reasons private equity funds go through a more rigorous process of commercial due diligence and corporate buyers tend to rely more heavily on internal analyses.

The more volatile the market gets, the more important it becomes to assess each opportunity before diving into a deal. The report by Bain & Company highlights approaches private equity investors take that could be useful if adopted by corporate buyers. One of approaches includes ensuring every deal meets the 'four Cs": The deal is confirmable, which means it articulates measurable goals to be test in the diligence process. It is chronicled, i.e., codified in writing. There is consensus surrounding the deal within the organization and lastly, the deal identifies how it will fill a growth or capability need and close the gap.

The author would like to thank Shreya Tekriwal, Articling Student, for her assistance in preparing this legal update.

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