The volume of private equity deals in the healthcare industry spiked in 2020, even as total private equity activity fell.
Globally, healthcare private equity deal volume increased by 21% year-over-year to 380 deals last year, compared with 313 in 2019, according to a new Bain & Co. report on the state of global healthcare private equity in 2020. That's even as private equity activity across all sectors fell 14%.
"Personally I was shocked to see that volume was so high in 2020 just given all the unfortunate circumstances with the global pandemic," said Nirad Jain, co-head of Bain's global healthcare private equity and corporate M&A practices.
Less surprising to Jain was the report's finding that healthcare deal value fell 17% year-over-year to $66 billion in 2020, from $79 billion in 2019. Deal value was up from 2018, however, when it was $64 billion.
Jain said that's partly because 2019's total was skewed by the blockbuster $10.1 billion Nestle Skin Health acquisition. Not only that, it's likely that—given the turmoil caused by COVID-19—owners of valuable assets chose to hold onto them rather than sell. And the rise of special purpose acquisition companies, or SPACs, likely pulled away some assets that would otherwise have been subject to private equity investment, he said.
In North America, healthcare private equity deal volume dropped to 142 deals in 2020, down from 159 in 2019. Disclosed deal values also dropped, to $34.7 billion, compared with $46.7 billion in 2019.
The average deal value in North America dropped by roughly half from $1 billion in 2019 to $500 million in 2020 largely because of a drop-off in very large deals. Healthcare providers were North America's most active sector, with 74 deals in 2020, compared with 96 in 2019. Provider deals as a share of total deals dipped to 52% in 2020 from 60% in 2019.
Bain expects healthcare's rebound from COVID to be stronger than other industries, with providers as an especially high-performing sector. That's due to several specific trends that Bain expects to grow even more: risk-bearing primary care providers, biopharma services, life science tools and diagnostics medtech, payer services that improve patient experience and reduce employer costs and healthcare IT that can demonstrate return on investment.
Bain's report said its experts are eying four big healthcare opportunities the pandemic's upheaval created.
Alternative sites of care. More patient flow can be shifted to alternative sites or services, especially post-acute and home health. Home health had been a growing area even before the pandemic because of favorable reimbursement policies and patients relying less on hospitals. Providers will have to blend home care offerings with other settings, so Bain expects more investment opportunities in home care practices that can integrate with traditional providers and use technology.
Telehealth. Regulatory groups and payers have supported the shift to using telehealth during the pandemic, although use will drop from its pandemic peak. Bain said existing models that offer the opportunities to visit any doctor were much less popular than those that enable visits with doctors patients already know.
Modernization of clinical trials. The pandemic will move trials away from models that depend on physical interactions. Vaccine development needs more consortium-oriented research and trial models for sharing data as part of innovative life-saving medications.
Healthcare provider consolidation. Large-scale groups will need to go beyond pulling managed care and revenue cycle management levers by harnessing the power of technology, ancillary services and more outpatient-focused models.
The provider space is particularly appetizing for private equity because there are many opportunities to create more access and efficiency in the market, Jain said. Some of those involve patients insured through Medicare Advantage or other commercial plans, he said.
After volumes rebound from their pandemic lows and the economy returns to normal in 2021, Jain said he predicts many healthcare provider businesses will come to the market in 2022 and investors will be interested.
Healthcare tends to be one of the best-performing sectors for private equity investors, Jain said. Not only that, investors feel good about putting their money there.
"If you can help facilitate access and quality and do so cost efficiently, you're helping the cause," Jain said. "If you can find businesses like that—and you often can in healthcare—it continues to be a place where a lot of investors want to be active."
For first time, Bain noted that the Asia-Pacific region beat out North America as the leader for healthcare private equity deal count, although North America retained the top spot for disclosed value. The Asia-Pacific region recorded a record high 156 deals in 2020, compared with 68 in 2019. Disclosed value reached a new peak of $16.9 billion, compared with $11 billion in 2019. Biopharma fueled much of the rise, and China accounted for more than 60% of deals in 2020, up from 41% in 2019.
SPACs rose to prominence in 2020 across private equity as an exit alternative to traditional initial public offering or sponsor-to-sponsor deals. Perks include low interest rates and easy access to financing.
Last year's noteworthy healthcare SPAC deals included Multiplan, a healthcare services and technology company, merging with Churchill Capital III in a deal valued at $9.7 billion. Cano Health, which provides value-based care to seniors, merged with Jaws Acquisition in a deal valued at $3 billion.