Healthcare private equity market shows resilience with second strongest year on record, despite economic and geopolitical disruptions--preview of Bain & Company analysis

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Jan 10, 2023, 10:58 ET

Preview of Bain & Company's 12th annual Global Healthcare Private Equity and M&A Report reflects the continued resilience of the healthcare PE industry, with the second biggest year on record for dealmaking, only eclipsed by 2021's all-time high

BOSTON, Jan. 10, 2023 /PRNewswire/ -- Despite a tail of two halves, a near-record-setting pace of healthcare private equity dealmaking, in terms of both deal volume and value, continued last year on the heels of all-time highs registered in 2021, a preview of Bain & Company's 12th annual Global Healthcare Private Equity and M&A Report reveals today.

The Bain & Company analysis highlights the resilience of the healthcare PE (HCPE) sector with strong deal flow persisting in 2022 and dealmaking set to register its second-biggest year on record. This comes even in the face of turbulence from geopolitical uncertainty and disruption from spiking global inflation and rising interest rates, leading to tighter credit and financing conditions and a resulting weakening of overall private equity markets from the third quarter.

Despite the more difficult conditions for deals flowing from these global conditions, HCPE remained on course for its second strongest year on record in disclosed deal value and deal count, the study reports. The overall number of HCPE deals in 2022 is expected to have fallen in final tallies by about 20% to 30% – from 2021's all-time high of 515 deals to around 400 deals, leaving the 2022 total still in line with 2020's levels.

The HCPE market saw multiple factors contribute to the second half of 2022's fall-off in deal totals from the record level recorded for 2021. A crucial factor came from tighter monetary policy in North America and Europe as the major central banks sought to curb rising inflation, triggering a tightening in credit markets and limiting the availability of large-check financing while raising finance costs.

Geopolitical uncertainties, fueled by the war in Ukraine following Russia's invasion, in tandem with the global inflationary pressures, changed the trajectory for the year with global HCPE deal volume falling from Q3. Nevertheless, investors have remained willing to lean into these tougher conditions given that strong HCPE assets have ended 2022 with a continued track record of positive deal exits.

"Despite numerous factors we saw a clear continuation of 2021's pace this year and 2022 will still be the second-biggest year on record for HCPE," said Kara Murphy, co-lead of Healthcare Private Equity at Bain & Company. "HCPE has proven resilient in prior downturns and remains an attractive investment area. No two cycles are the same, however building on what we've seen as resilient sectors and growing regions will help mitigate the new challenges investors will face."

HCPE activity by funds became more selective from Q2, with a shifting focus to seeking areas of opportunity in certain sub-sectors and geographies.

Reflecting the growing maturity of the market, Asia-Pacific saw a strong interest in large deals, with three deals valued at over $1 billion. Interest in healthcare information technology (HCIT) and life sciences also increased in 2022. Significant investor attraction to long-term HCIT opportunities was apparent during 2022, with interest in buyouts for businesses optimizing their operations in the light of escalating recession risks in key economies. Life sciences also continued to be attractive to investors with six of the top 10 deals in biopharma, life science tools, and related services.

Into 2023, Bain & Company's analysis expects that HCPE investors will confront continuing higher interest rates in major economies as central banks continue to combat inflationary pressures, rising labor costs, and a further tightening of credit conditions.

However, Bain's study also concludes that more positive trends from 2022 set to continue into the new year are ample 'dry powder' for investment and the strong track record of returns that ensured a strong year for HCPE investing in the previous year and which continues to attract healthcare-specific funds.

At the same time, with lower profitability and lower deal multiples having pushed public equity markets down globally in 2022, if this trend continues in 2023, the report envisages that this could lead to longer hold times for HCPE investment that will potentially limit deal activity. Going into 2023, the more difficult economic environment may also create opportunities for public-to-private deals, carve-outs, and opportunistic investments, Bain's analysis finds.

"As in all cycles, circumstances can quickly change in 2023 or 2024, and activity could rebound quickly," said Nirad Jain, co-lead of Healthcare Private Equity at Bain & Company. "Investors will be working hard to have their proactive strategies ready and connect with management teams so that they are in a position to act with speed and confidence."

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