Are private equity healthcare opportunities thriving?

Healthcare isn’t immune to the conditions facing the rest of the market, but several long-term trends provide it with some resilience.

Longer life expectancy means more healthcare

The first of these is our ageing and growing population. Better nutrition and medicine mean that people around the world are living longer than ever before. According to the United Nations, the global population is three times higher than it was in the mid twentieth century.1 By 2050, it will reach 9.7 billion people, and more than one in five of these will be over the age of 60.2 

With a higher number of older people, instances of health problems, from common conditions to chronic diseases, are likely to increase. So too is demand for many aspects of healthcare, from services such as nursing homes, to faster development of specialty pharmaceuticals in areas like oncology.

Medtech driving new services and markets

In parallel, advancing technology and innovation are also driving growth in healthcare. Electronic healthcare records (EHRs) are among the most important tech-driven advances. Digital notes mean authorised healthcare providers can access and share patient histories, treatment plans and test results. In turn, clearer and more accessible information leads to more accurate diagnoses and more precise treatments.

Better pattern recognition, as offered by artificial intelligence (AI) and machine learning, is also improving diagnostic accuracy in the healthcare industry. And medtech is empowering patients, too. Wearable devices such as glucose monitors are helping some to take a much more active role in monitoring their health.

Evolving sub-sectors

Developments in specific healthcare sub-sectors also present interesting private equity investment opportunities. Precision medicine is making for more personalised therapies and more targeted and effective treatment plans. Pharmacogenetics, which is based on genetic testing, is one example. By studying how DNA responds to different medications, it can offer patients, including some of those with complex or rare conditions, highly specialised care.

Regional trends

Of course, there are also geographical considerations to take into account. Different regions and countries have different priorities and different healthcare funding patterns. In Europe, for instance, the biggest proportion of funding comes from governments. But this is starting to change, as the region begins to move towards private healthcare providers. This represents a compelling opportunity for investors to back the companies which are most able to meet this higher demand.

“Different regions and countries have different priorities and different healthcare funding patterns.”

The US, however, boasts the highest concentration of private equity healthcare deal activity. According to Pitchbook data, 59% ($79 billion) of the private equity invested in healthcare worldwide came from the US in 2022.3 But of course, healthcare investment is not limited to the US, and over the past decade healthcare investment in emerging countries has increased.

Risks and opportunities

While healthcare is ripe with opportunity for private equity investors, its expansive and intricate nature also presents them with a significant challenge. Risks associated with the sector include evolving regulatory dynamics and heightened public scrutiny. Moreover, healthcare’s historically high returns compared to other sectors make it very tempting for new investors, and as such, increasingly competitive.

For instance, private equity healthcare transactions initiated since 2010 have yielded a remarkable median internal rate of return (IRR) of 26.9%, surpassing the median for other industries by a substantial 560 basis points.4

Our diagnosis

For potential investors, choosing the right manager is crucial. In healthcare private equity, returns can vary significantly between the top and bottom-quartile funds. It's also important to recognise the notable performance differences between specialist and generalist investors.

In our view, the deep domain knowledge and expertise of specialist healthcare investors means they are most able to harness the sector’s trends. They are also best-placed to support the development of future healthcare solutions.