Amidst growing economic and sociopolitical instability across the globe, healthcare private equity outperformed other asset classes in 2018, with disclosed deal values soaring almost 50% to $63.1 billion.
Findings published by Bain & Company showed that healthcare assets attracted investors at record levels last year, with values topping last year’s total of $42.6 billion while deal count rose to 316 in 2018 from 265 in 2017.
The performance was largely driven by strong investment activity across all regions and in sectors such as healthcare IT, provider and biopharma. This included 18 deals greater than $1 billion each in disclosed deal value, pushing larger assets to levels that are out of reach for most buyers.
“Last year was an incredible year for healthcare deals,” said Nirad Jain, co-head of Bain & Company’s global healthcare private equity and corporate M&A practices. “Despite an especially volatile fourth quarter for both global markets and certain political landscapes that contributed to a strong sense of unease among most investment professionals, healthcare’s sturdy fundamentals and track record of strong performance were a beacon for investors seeking a safe haven. When combined with a glut of dry powder, increased fundraising and higher fund allocations, competition for healthcare assets intensified throughout the year—and, even today, shows no signs of abating.”
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The rise in healthcare deal values stemmed primarily from large buyouts, Bain’s report said, as eight deals in 2018 were valued at greater than $2 billion each, versus just four in 2017, and several mega deals. Contrast this with stats from 2017, when only one such transaction closed, 2018 saw four assets trade for more than $4 billion, including the largest buyout in at least the past decade.
From a geographical perspective, North America continues to maintain its dominance for the most deals and highest values, though the European and Asia-Pacific regions reached historically high levels in value.
Europe witnessed a handful of large buyouts, including two biopharma deals, resulting in a significant increase in deal values. Asia-Pacific deal volume, meanwhile, grew by 44% as investors tapped into demand from a healthcare consumer class that has continued to grow in recent years.
In a return to historical norms, exit volume and value both declined in 2018 from previous year. Deal volume fell to 112 in 2018 from 116 in 2017, constituting the lowest level since 2012. This followed the spike in activity from 2012 to 2015, as funds now have cleared their books of the vast majority of assets acquired prior to the past recession. Disclosed exit value fell to $31.6 billion in 2018 from $44.4 billion in 2017, driven by a 43% decline in the value of exits to corporates.
Corporate buyers also demonstrated great appetite for the sector, pushing corporate M&A in healthcare to a record $435 billion in 2018, surpassing the previous high of $432 billion in 2015. In recent years, corporate healthcare companies have increasingly turned to and relied on M&A for revenue and shareholder growth.
“To get deals done amid intense competition, funds took more creative approaches to transactions,” said Kara Murphy, who co-leads Bain & Company’s Healthcare Private Equity practice. “They’re seeking partners to help spread the risk or looking to public companies for carve-out or take-private opportunities, particularly as public valuations become increasingly attractive compared with private market offerings. Investors are also expanding their value-creation theses beyond traditional category- or geographic-leadership buyouts to address the challenge of multiple expansion likely becoming an outdated lever for returns.”
Looking ahead, the report said the likelihood of a recession will be palpable throughout 2019, and sociopolitical uncertainty may prevail. Returns in healthcare PE markets have proven resilient through such storms in the past, however, and “investor demand for these fundamentally strong, recession-resistant assets will endure. Buyers with a robust healthcare acquisition playbook are best positioned to make smart investment decisions that will generate strong returns in the years ahead.”
“Investors will no longer be able to rely on market-wide multiple expansion to generate returns,” said Jain. “Disciplined, data-driven funds will find their way to top-quartile deals by backing winning companies, deploying a systematic value-creation playbook and doing their part to transform the global healthcare industry.”
Date: May 06, 2019