Why AI and biotech are driving private equity deals in the healthcare sector

The sector is not immune to financing challenges, but the outlook for private equity healthcare investment is remarkably resilient, says Mike Preston, at law firm Cleary Gottlieb.

2022 was the second-highest year on record for private equity deals in the healthcare space in terms of disclosed deal value, and all despite rising interest rates, high inflation, global labour shortages, geopolitical conflict, and the lingering impact of the pandemic. The sector is not immune to financing challenges, but the outlook for healthcare investment is remarkably resilient.

As the pandemic catalysed a digitisation of the healthcare process, what role have AI and technological maturities in the biotech sector played in shaping the outlook for healthcare? And where do the challenges and opportunities in the sector lie for private equity investors? 

Changing approaches

Globally, much of the healthcare sector is under increasing pressure, facing challenges such as aging populations and higher prevalence of chronic illnesses, with restricted public resources. As providers look to cut costs amidst supply chain pressures and recessionary fears, there is a growing need to keep people out of hospital. 

This is prompting a shift away from the reactive ‘sick care’ model to a more pre-emptive approach which prioritises prevention, self-management, population health and early diagnosis. At the same time, public expectations of healthcare have also altered as a result of the pandemic, as repeated lockdowns saw diagnostic services move online. The launch of Covid reporting apps and a growing demand for online mental health and wellbeing resources also contributed to this. 

These two major shifts mean there are growing opportunities for private investors to invest in developing technologies which solve the real challenges confronting the healthcare sector. 

Opportunities for technological development

A move to a more pre-emptive and personalised approach to healthcare will rely on data-collection and analytics, alongside digital methods for access and delivery. This is becoming an increasingly plausible model, thanks in particular to technological maturities in the AI and biotech sectors. 

Other examples of such developments include AI-driven drug discovery, 3D medicine printing for tailored medication, or using AI for population-scale health predictions and prevention strategies. These developments will allow healthcare providers to diagnose and treat patients more quickly and with more targeted approaches, improving patient outcomes and reducing long-term costs. 

Likewise, the need to optimise operations has driven particular investor interest in buyouts for business with data-driven approaches, such as centralised monitoring, Risk-Based Quality Management (RBQM), and data consolidation. Of course, all of this requires significant investment, making it a major opportunity for investors. 

Future outlook

The healthcare sector has not been immune to macroeconomic headwinds and geopolitical turmoil, which has slowed down private equity activity globally. Bain’s Global Healthcare Private Equity and M&A Report shows that buyout volumes fell by more than 35% in the latter half of 2022, when compared to Q1 and Q2. 

Nursing homes, home healthcare and behavioural healthcare are also sectors which have been particularly vulnerable to challenges in the debt market and labour and supply shortages. This is because they do not deliver the same transformative potential for investors that life sciences do. 

Despite economic challenges and the retreat of the debt markets, demand from healthcare providers for innovative solutions and a proven track record of returns means healthcare is likely to remain a priority for private equity firms. Given ample reserves of dry powder are available to private equity firms, sponsors are in a position to move quickly, even if closing deals requires the asset class to become more creative in their fundraising strategies. 

Investment in transformative biotech will also likely remain a key priority, as funds look beyond their typically large leverage deals, and turn towards venture deals to keep them occupied and active. Private equity firms will also likely continue to see the healthcare sector as a key opportunity for investment, as refinancing challenges could prompt an increase in distressed deals. 

Ultimately, technological developments in the healthcare sector have garnered sustained interest from private equity investors, even in the face of economic challenges, as health systems continue to adopt AI and digital technologies to better meet consumers’ health and wellbeing needs. Health-tech companies that offer tangible, transformative and forward-looking solutions to the challenges facing healthcare providers will fare best and prove most attractive for private investors. 

*Mike Preston is a partner at global law firm Cleary Gottlieb.

© 2023 funds europe

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