Healthcare continues to be an attractive area for private equity investment as the landscape evolves. Similar to 2012, several factors constrained mega-deal activity in healthcare, led by stiff competition from strategic buyers and rich valuations. Despite some dampening in investment activity, these trends had the welcome consequence of creating a robust exit environment. The number of portfolio company exits hit a 10-year high in 2013, with the majority going to strategic players and several making sizable IPOs.
Looking ahead, we are optimistic that the pace of investment and exit activity will remain brisk. Private equity funds should continue to see attractive opportunities for investment in both earlier-stage and larger assets. That said, it is getting harder to win in healthcare private equity given the rising level of competition within the private equity sector and from strategic investors. It is an open question as to whether we will see a bifurcation in fund strategy, with some funds investing simply to stay in the game long term and willingly accepting lower returns in their target investment segments while others go “heavier” into healthcare and take on more regulatory, reimbursement or technology risks with the hope of higher returns. Regardless of their approach, being smart about their investment strategy, staying focused on their deal sweet spot and growing the value of their portfolio companies will give firms an edge.