The future of private equity
Last month I attended IPEM’s (HBI’s sister company) private equity conference in Paris.
Perhaps the most recurring theme from the two days of panel discussions was that the private equity industry is at a turning point.
The heady days of the 2010s, when it was possible to borrow at super-low interest rates to do leveraged buyouts, rapidly consolidate markets and then sell to another PE firm a few years later at a jacked-up valuation, are now over.
It seems clear that PE firms will have to work a lot harder to generate returns in the coming years, and that those returns will be, on average, a bit lower.
Last year we reported on an analysis of what accounted for the returns PE firms made from European healthcare investments by consulting firm Bain. Looking at 134 European healthcare PE deals between 2010 to 2021, the analysis found that a majority of 54% of the return on investment was accounted for by revenue growth of the acquired companies, 43% came from multiple expansion, and only 3% came from margin growth.
PE firms were very fortunate to be able to ride the wave of inflating multiples in the 2010s in an era of super-low interest rates. But now that this period is over, they will have to focus on the other levers for growing valuations in the coming years.
The good news for PE firms looking to invest in healthcare is that healthcare spending is only going to go up in the coming years, and the opportunity for private operators in Europe to help public systems with their ever-increasing burden of demand is only going to grow. High levels of organic revenue growth should therefore be a prime goal of any private healthcare group.
Market consolidation as a means to achieving revenue growth may now be a little harder, especially in sub sectors which are either already mostly consolidated or in which there are persistent regulatory barriers on private ownership of clinics. But I don’t think anyone is under any doubt that this will continue to be the primary lever that PE firms will be using to generate revenue growth and returns.
The final lever is by far the most difficult. Increasing margins by increasing operational efficiency is hard in any industry, but is perhaps especially difficult in healthcare, given how tight regulation is.
It’s also not entirely clear how strong PE’s track record is, as an industry, of being able to reliably achieve significant operational efficiencies. But in this brave new world of elevated interest rates in which returns are harder to come by, PE firms may be forced to double down and prove they can.
We would welcome your thoughts on this story. Email your views to Martin De Benito Gellner or call 0207 183 3779.
