Healthcare investing — high risk and high reward?
Many private market funds have had a difficult time raising — as well deploying — capital over the last couple of years.
In the private equity space the largest and most prominent funds have continued to be able to raise funds, but less prestigious ones have been struggling to. Even for those that are managing to raise capital, it is typically taking longer, as limited partners are scrutinising funds more closely.
One of the best strategies smaller and less established PE firms can adopt in the face of this situation is to hone their specialism within a particular area, ideally one which has the potential to deliver outsized returns.
Multinational law firm Mcdermott Will & Emery has highlighted healthcare as a sector which it might be especially advantageous for funds to specialise in, in its summer 2024 Private Markets Update.
“Funds focused on healthcare investments show signs of bucking these trends as capital floods into highly specialised firms. The lower middle market specifically has served as a viable target for capital in search of above market returns in this sector,” Mcdermott Will & Emery says.
“The combination of outsized returns and a socio-political impact investment opportunity in healthcare has led to an LP base that is willing to bear risks and deploy capital. These LPs are also attracted to the competitive advantage afforded to firms that focus on a highly specialised market, such as healthcare.”
It is indeed true that healthcare has a proven track record of delivering outsized returns. A 2022 analysis by consultancy Bain of PE investments between 2010 and 2021 found that healthcare private equity investments outperformed those in all other industries by about six percentage points, delivering a median internal rate of return of 27.5%, compared to 21.1% across all other sectors.
What accounts for this? Those touting the investment case for healthcare will typically point to the sector’s strong demand fundamentals and recession-resilience. But this, whilst important, can’t account for these outsized returns alone, since healthcare’s strong demand story is hardly a secret and so should therefore to a certain extent already be priced into the market.
Part of the reason for healthcare’s outsized returns must be that it is an incredibly complex sector and one that carries significant regulatory, reputational and technological risks. The business of healthcare is exceptionally important but, in part for that very reason, is very difficult to get right.
And this makes having deep sector expertise all the more critical for funds looking to invest in this area. But for those that are able to position themselves as healthcare experts, and then deliver, the payoff can be substantial.
We would welcome your thoughts on this story. Email your views to Martin De Benito Gellner or call 0207 183 3779.
