After a slow 2020 for new investment, digitalization, aging populations, and increased attention on mental health may give the healthcare industry a shot in the arm
After a slow 2020 for new investment, digitalization, aging populations, and increased attention on mental health may give the healthcare industry a shot in the arm
The spotlight on healthcare has never shone brighter than it did in 2020, but private equity investment in the sector slowed sharply. As carers were applauded and bio pharmacists graced the covers of magazines, the aggregate value of global healthcare deals in the private equity space fell from $72bn to $51bn over 2020, as reported in Preqin’s 2021 Global Private Equity & Venture Capital Report. The 30% fall in the value of private equity healthcare investment was substantially higher than the 7% fall in global deal value.
However, declining investment levels should not be taken as a lack of interest in the sector. It’s likely that inflated valuations meant many GPs focused their efforts on building and exiting portfolio companies, which was reflected in a modest increase in the number of exits from 213 in 2019 to 217 last year.
High entry multiples for acquisitions may also be a factor in a relative increase in growth capital investment (Fig. 1). With the US’s large public spending on healthcare, equal to around 18% of GDP in 2019, and acceptance of the profit motive, the North American healthcare market remained the most popular destination for growth capital in 2020 overall, despite the number of deals falling slightly from 2019.
Growth capital investment in European healthcare has rebounded particularly well so far in 2021. The number of completed deals in the region is already over half of the total in 2020, with growth capital accounting for almost 10% of all private equity-backed deals in the sector (9 out of 97 deals), compared with 7% last year (17 of 240 deals).
In short, the pandemic year was no major outlier for growth capital in European healthcare. As the vaccine roll-out continues, and government stimulus has prevented the economy from shrinking as much as was initially feared, 2021 is looking optimistic for growth capital. Indeed, 39 deals have so far been transacted in Europe, compared with 97 in the whole of last year, according to Preqin data. Similarly, 41 healthcare buyout deals have been announced or completed, compared with 109 in 2020 (Fig. 2).
Top Destinations for Growth Capital
Within Europe, the UK, France, and Germany are the clear leaders in healthcare investment and have recorded by far the most growth capital deals over the past decade (Fig. 3).
So far in 2021, seven growth capital healthcare deals have been completed in Europe, and a further two have been announced. These include the $536mn announced investment from Nordic Capital in LEO Pharma, a Danish pharmaceutical R&D company; the planned $100mn investment from KKR in Denmark’s Nordic Bioscience, a biotechnology firm; and a $50mn deal between Trustar Capital and Swiss company MedAlliance.
Market Forces in Healthcare
As deal activity picks up pace in Europe, there are several key factors that are opening up opportunities in the sector. Many healthcare providers are prioritizing the improvement of IT systems, according to management consultant Bain & Company. Increased digitalization is a common theme in healthcare systems worldwide, but Germany’s parliament was ahead of the game in November 2019 when it passed legislation enabling doctors to prescribe digital healthcare solutions, such as apps, to patients. Patients can claim back the cost of these digital prescriptions from Germany’s statutory health insurance system. Germany has called for “an end to the paper chaos,” but many more countries want healthcare to go online. Besides easy accessibility of patient documents, the focus will also lie on increasing the use of data analytics for early diagnosis and preventative care, with the aim of decreasing costly and unnecessary hospital admissions.
In medicine and pharma, gene and cell therapies will attract further investment, including those for messenger RNA vaccine technology. Interest in mRNAs is rising after the success of German company BioNTech’s technology, which was used in the Pfizer COVID-19 vaccine. BioNTech’s founders, Özlem Türeci and Uğur Şahin, are continuing their research to develop a cancer vaccine using mRNA.
Another area of attention is Europe’s aging population, which is creating its own healthcare needs. The World Economic Forum recently said that health systems “are ill prepared” to respond to the needs of older people, where an integrated approach is often needed to manage a variety of ailments rather than treat one single disease.
Lastly, as the cost of mental health issues has been exacerbated by the pandemic, new services are being launched, from video therapy to chatbots offering cognitive behavioral therapy (CBT). Burnout was already a major concern among employers pre-pandemic, and many employees believe structural changes will be necessary going forward.
As Benjamin Franklin once put it, nothing in life is certain but death and taxes. Investing brings many uncertainties, too, but as COVID-19 has sped up an evolution that may otherwise have taken decades, investors will find new opportunities in healthcare.