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May 24, 2022

By Ben Bacon and Eric Bragg

Through the pandemic, few sectors experienced such an explosion as healthcare. Overall, healthcare accounted for nearly 20% of US GDP in 2020. Deal-making in 2021 for private equity rose for the fourth consecutive year. Nearly one in every four PE buyouts was priced above 20x EBITDA. Two continually rising sectors of IT and healthcare accounted for a substantial amount of overall deal activity.

As evidenced at HIMSS 2022, the healthcare association’s annual gathering that featured a dedicated investment breakout panel series, private equity firms have developed very aggressive strategies to maximize their funds in the healthcare industry.

Accountability

“You can sense the profit motive,” David Buchanan of Oak Street Health shared during one session. “You have to ask what the underlying business model is for the investment. If the model is successful, how does it impact individuals or society at large?”

As more hospitals move away from fee-for-service (FFS) to value-based care (or “full-risk”) models, studies show that patients spend less for better outcomes and that hospitals have reduced costs with improved care.

Performance

Many critics felt that a lot of the organizations seeking private equity funding were distressed, simply looking for debt relief. The opposite has shown to be true; post-acquisition, hospitals boosted profitability, in particular by navigating cost per patient.

To wit, a 15-year study found that PE-owned hospitals saw greater increases in operating margins and charge-to-cost ratios than non-PE-owned hospitals.

Growth

Investor funding helps drive important growth in areas like renovations, new facilities, and digital infrastructure.

Ash Goel of Bronson Healthcare Group told HIMSS attendees that traditional healthcare can be limited by its ability to invest, since it is inherently risk averse.

“​In regard to growth, investment and change, i​​t’s [often] an all-or-nothing model that scares people. A parachute, like PE, helps ease the risk. It’s very difficult to get people to buy in to change. Having an accelerant, like investor money, helps drive change.”

Resilience

In the face of market struggles heavily influenced by the years-long pandemic and rocketing inflation, healthcare has remained resilient, making it a particularly attractive industry for investment.

The same performance continues to hold true for private equity, which marked another year of record growth.

As markets buckle under volatility, public-to-private deals marry two high-performing sectors in a union far better equipped to thrive.

While public exits were a rising trend in 2021, many firms appear to be pursuing private offramps. Record levels of fundraising and sky-high exit multiples make the market far more attractive.

Action

Firms have clearly laid the groundwork for the go-forward plan: Healthcare is a key area of industry diversification and performance.

Beyond traditional provider platforms like hospitals, firms are aggressively pouring capital into nursing homes, ambulatory surgery centers (ASCs), behavioral health, telemedicine, labs, dental, dermatology, devices, and technology.

The worldwide magnifying lens across the industry demonstrated that healthcare companies are often poised for explosive growth, while also making painfully apparent the necessity to address laggard technology progress.

There is a strong sense of urgency that the next few years will be crucial for technology transformation, thrusting organizations rapidly forward. Non-organic growth has been a stalwart in healthcare, accounting for ~$600 billion spread across more than 3,000 deals in 2021.

Firms will aim to swiftly capitalize on this growth, with technology transformation playing a vital role in consolidation, streamlining, and insight-driven decision making.

Ben Bacon is a Managing Director with Infor’s Private Equity Practice. In his 20-year career, Ben has worked alongside hundreds of brands as a member of a variety of advertising agencies, global technology companies, and software leaders. He is in his fourth year with Infor, where he helped establish the analytics practice for private equity.

Eric Bragg is a Senior Managing Director with Infor’s Private Equity Practice. Eric’s 30-year career in private equity includes roles as Managing Director at Deloitte Consulting’s HCM and SAP practices. As Alliance Director at Kronos, he collaborated with colleagues to establish private equity as a channel.

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