by Brian DeChesare

The Full Guide to Healthcare Private Equity, from Careers to Contradictions

Healthcare Private Equity

When you hear the words “healthcare private equity,” two thoughts probably come to mind:

  1. Wait a minute, isn’t healthcare a risky/growth-oriented sector? Why do PE firms operate there? Don’t they need companies with stable cash flows?
  2. In most of the world, healthcare is either government-run or a mixed public/private sector. Are there many private healthcare companies for PE firms to acquire?

The short answer to #1 is that healthcare private equity firms operate in specific verticals with stable-ish cash flows, such as healthcare services, nursing facilities, medical devices, equipment, and healthcare IT.

They do not invest in risky biotech startups attempting to cure cancer (at least not within their traditional PE portfolios).

On #2, the government controls healthcare in many countries, but not everything in healthcare – there are still private healthcare firms even in Canada and the U.K.

For example, Medicare in Canada does not always cover services like prescription drugs, eye care, and dentistry, so there is room for the private sector.

That said, there is far more healthcare PE activity in the U.S. since it has some of the biggest healthcare companies and less government control.

Before delving into these nuances, we should take a step back and define the sector:

Definitions: What is a Healthcare Private Equity Firm?

Healthcare Private Equity Definition: A healthcare private equity firm raises capital from outside investors (Limited Partners), acquires companies in the healthcare services, devices, and healthcare IT segments, and aims to grow these firms and sell their stakes within 3 – 7 years to realize a return on their investments.

This definition excludes life sciences and biopharmaceutical companies because they differ greatly from service and device companies.

These firms lie in the territory of life science venture capital firms that invest in high-risk, early-stage companies.

Some PE firms also invest in this vertical, typically via separate groups (see below).

If you compare healthcare to technology private equity, one of the biggest differences is that different verticals in healthcare are more like completely different industries.

Pharmacies are closer to retail companies; nursing facilities are like REITs or real estate; small physicians’ practices are like consulting firms; and HCIT companies could be more like software or IT services firms.

For more on this, please see our healthcare investment banking article.

Why is Private Equity Interested in a “Boring” Sector Like Healthcare Services?

This chart of PE deal activity from 2001 to 2022 in the Bain Capital Healthcare Private Equity report sums up the market quite well:

Healthcare Private Equity Deal Activity

In short, healthcare had never been a huge sector for private equity, but activity ramped up in the late 2010s into the early 2020s, and it’s now one of the top industries by dollar volume (right after tech).

It appeals to private equity firms for a few reasons:

  1. Stable/Predictable Cash Flows in Certain Sectors – While these companies do not necessarily have “annual recurring revenue” like a SaaS company, they often have government contracts or subsidies – which are highly likely to be renewed. For example, in the U.S., Medicare and Medicaid are the primary payers for nearly 80% of the residents in nursing homes.
  2. Mispriced Companies and Assets – Some mature healthcare firms trade at low valuation multiples, often because the market misunderstands their contracts, revenue, or track record. PE firms view these companies as especially appealing since low multiples mean they can use higher debt percentages to fund the acquisitions.
  3. Fragmented Markets with Many Add-On Acquisition Opportunities – Private equity firms have been snapping up specialist physician practices in the U.S. to consolidate their market power in specific regions. Critics would say they’re cutting corners, raising prices, and worsening patient care (see below).

Doctors often sell their practices to PE firms because it seems like a better alternative than being acquired by a huge hospital chain.

In both cases, the acquirer is likely to do something bad, but at least with the PE firm, there’s less bureaucracy.

A “typical” healthcare PE deal might resemble Cinven’s acquisition of SYNLAB, a medical diagnostic and testing provider in Germany:

Healthcare Private Equity - Deal Multiples

This deal was done at a low 5.3x EBITDA multiple, mostly because the company went public during the COVID testing craze but fell off a cliff after the world moved on.

At the time of the deal, it was expected to grow sales at 3-5%:

Healthcare Private Equity Deal - Revenue Growth

Remember that PE deals do not require “growth.”

This deal works because SYNLAB can afford to take on a huge amount of Debt and can likely repay it quickly – since its EBITDA was depressed at the time of this acquisition.

Also, there are plenty of bolt-on acquisition opportunities in the sector, and if Cinven can grow it modestly and increase its margins a bit, the math works even with a lower exit multiple.

The Top Healthcare Private Equity Firms

If you want a good list of healthcare PE firms, check out the Healthcare Private Equity Association (HCPEA) “member firm” page here.

To be more specific, I would divide the sector into these four categories:

  1. Mega-Funds and Large PE Firms – None of these firms specializes in healthcare, but they all have sector teams.
  2. Upper-Middle-Market and Middle-Market Firms with Healthcare Teams – It’s the same idea, but they’re smaller and do smaller deals. Some of these firms might also fall in the “growth equity” category.
  3. Healthcare-Only Middle-Market Firms – They tend to specialize in specific verticals, and many are in the “lower-middle-market” category.
  4. Life Science and Biotech Teams – These are more on the venture capital side, but some large PE firms have internal teams that also do this.

Mega-Funds and Large Private Equity Firms in Healthcare

This list includes names like Apax, Bain Capital, Blackstone, Carlyle, EQT, Hellman & Friedman, Leonard Green, KKR, Thoma Bravo (for healthcare IT), TPG, and Warburg Pincus:

Healthcare Private Equity - Mega-Funds

You might have noticed that Apollo is not on this list, even though they are considered a private equity mega-fund – because they’re less active in healthcare than the other firms.

Middle-Market (Upper/Lower) Firms with a Healthcare Presence

Starting with “larger firms” here, names include Audax, Court Square, Friedman Fleischer & Lowe (FFL), General Atlantic, Genstar, GTCR, Harvest, Kohlberg, Madison Dearborn, Nautic, New Mountain Capital, Nordic, Oak Hill, Summit Partners, TA Associates, Thomas H. Lee (THL), and Welsh Carson:

Healthcare Private Equity - Middle-Market Funds

Smaller firms here with some healthcare focus include Arsenal, Gryphon, Vestar, and Vistria.

Dedicated Healthcare Private Equity Firms

Many of these firms are smaller or newer; names include Altaris, Avista, Chicago Pacific Founders, Consonance Capital, Cressey, Frazier, Gurnet Point, Linden, Patient Square, QHP (FKA NovaQuest), Varsity, and Water Street:

Healthcare Private Equity - Dedicated Funds

On the European side, you can add names like Apposite, Archimed, Astorg, G Square, GHO, and MVM Partners.

Life Science and Biotech Teams

Some PE mega-funds have specific teams that do VC-style investments; examples include Blackstone Life Sciences and Bain Capital Life Sciences.

Other firms that use a similar approach include Frazier, Hildred, Longitude Capital, QHP (FKA NovaQuest), RoundTable, and Vivo.

Some biotech hedge funds also do private placements for life sciences companies, which is effectively the same as VC or growth investing.

Examples include Baker Brothers, EcoR1, Perceptive, and Redmile.

Careers in Healthcare Private Equity

Careers in healthcare private equity have more to do with your firm’s size, strategy, and vertical focus within healthcare than anything else.

For example, if you’re at a firm that’s rolling up local pharmacies, it will be more like retail private equity, while healthcare properties or nursing facilities might be closer to real estate private equity.

Conversely, a smaller firm focused on life sciences or growth investing will be more like a VC role.

Your compensation depends mostly on your firm’s size and performance; healthcare PE pays, on average, about the same as any other PE firm or group.

In terms of mobility, you could easily join a healthcare investment banking team, move to a portfolio company in a corporate development role, or potentially even move into venture capital if you’ve had some life sciences exposure.

However, your chances of moving into early-stage VC are low unless you also have a serious science background, such as an M.D. or Ph.D. in biology.

You could also move into generalist PE firms or groups in other sectors, depending on your deal experience.

Can You Recruit into Healthcare Private Equity and Win Jobs?

As you’ve probably already guessed, there’s nothing “special” about private equity recruitment for healthcare firms or groups.

It’s still the same standard on-cycle or off-cycle process, and you might specify your group at the beginning or be placed after winning an offer, depending on the firm.

The two most common questions are:

  1. Do you need healthcare deal experience in investment banking to have a shot at healthcare private equity?
  2. Can you get in as an D. or Ph.D. based on your industry knowledge and scientific expertise?

The answer to question #1 is that healthcare deal experience helps and is strongly preferred, but it’s not “required” to get in.

Areas like healthcare services and medical devices are fairly generalist and follow standard accounting and valuation.

So, it’s not like real estate, oil & gas, or financial institutions, where you must learn a new set of jargon and accounting rules to have a good shot.

The answer to question #2 is “No, probably not” – if you have a pure medical or academic background, your chances of moving directly into healthcare PE are low.

These roles are for bankers and people with deal experience, such as corporate development professionals; firms care much more about your investment, financial modeling, and due diligence skills than your scientific knowledge.

If you have an M.D. or Ph.D., you should target life science VC roles, biotech equity research, or healthcare IB as a stepping stone.

In the recruiting process, you should expect the same private equity interview questions and LBO modeling tests, but often with a healthcare angle.

We don’t have a dedicated healthcare modeling course, but there are healthcare models and case studies throughout the others:

  • Core Financial Modeling: There’s an LBO case study based on NichiiGakkan, a nursing facility company in Japan (deal led by Bain Capital).
  • Interview Guide: There’s a DCF case study based on Attendo AB, a healthcare facility company in Sweden.
  • Advanced Financial Modeling: There’s a case study on Jazz Pharmaceuticals if you’re more interested in that vertical.
  • Venture Capital Modeling: There are examples of early-stage and pre-revenue biotech valuations here, including a Sum-of-the-Parts DCF for Ventyx.

The Outlook for Healthcare Private Equity and Possible Regulation and Crackdowns

Every sector has investment risks; for something like technology, most of these risks lie in the macro environment.

In other words, does paying 10x revenue for companies still make sense when interest rates are at 5%? What about when the IPO market is shut down and exits look uncertain?

For healthcare, most of the risks are regulatory.

Specifically, in the U.S., there have been dozens of stories about all the harm private equity does to the healthcare sector, such as this coverage from the NY Times.

Many people argue that PE firms buy up firms to maximize profits by raising prices and cutting costs and do not care about patient outcomes.

They make this argument in other industries as well, but it sounds much worse in healthcare because they argue that these issues are literally killing people.

This issue is now on regulators’ radar, and, like how they’ve cracked down on Big Tech acquisitions, they might also take a much stricter stance on healthcare.

Private equity has traditionally been lightly regulated because it’s limited to institutions and wealthy individuals, but that is starting to change because of its sheer size.

So, you are taking a risk if you join a group that focuses on roll-ups of doctors’ practices, pharmacies, or hospitals.

Areas like medical devices, diagnostics, or equipment are probably safer bets because these companies have a less direct relationship with patient outcomes.

Life science-oriented roles in VC and growth firms will also be fine because there’s always demand for new biotech and pharmaceutical products.

Final Thoughts on Healthcare Private Equity

Unlike tech, healthcare private equity has never been a hyped area; most people have neutral expectations.

That matches my verdict for the sector, which is also in “neutral” territory.

It’s nice because you can get in from various backgrounds and groups, you get a fair amount of mobility, and you can work in any vertical without becoming too specialized.

On the other hand, there’s also significant regulatory risk, at least in certain regions and for certain strategies, and I’m not sure the big increase in PE activity starting in the late 2010s is sustainable.

It’s not enough risk for me to recommend “avoiding” healthcare private equity, but it is enough to say that it’s middle-of-the-pack in terms of desirable PE sectors.

So, go for it if you have the interest and experience, and try to avoid those roll-ups of doctors’ practices and local pharmacies – or be ready to face the wrath of the regulators.

For Further Reading

I recommend these articles and publications if you want to learn more about the sector:

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

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