Private perspectives on healthcare opportunities

The Covid-19 shock is creating disruptions and driving structural change in many sectors, and nowhere more than in global healthcare. It’s the kind of setting where private capital, with its ability to tailor investments, accept illiquidity and anticipate long term change, can be especially effective. Yet deciding where to participate within this vast and multifaceted industry—which geography, which subsector, which part of the capital stack—requires bottom-up domain expertise. Here we draw on our recent webcast Private capital’s role in post-Covid healthcare to offer two distinct perspectives on opportunities in the industry, one from a European middle-market debt investor, the other from a U.S. private equity investor

A European private debt view

We expect greater demand for outsourced service providers as a result of the pandemic. The focus on treating Covid-19 patients along with social distancing is leading to postponement of everyday medical procedures, creating a backlog of demand. For the UK’s National Health Service, the consulting firm Oliver Wyman estimates the backlog at an additional 1.6 million patients per month. This may drive demand for outsourced service providers in areas such as ambulatory surgery, diagnostics, radiotherapy and ophthalmology. We also have a positive outlook for home healthcare and outpatient critical-care services. 

These companies are extremely attractive from a debt perspective because (a) they provide essential services and (b) sponsors will pay high multiples for them, quite often in the mid-teens, so the loan-to-value for the debt is typically below 40%, and the cash-flow conversion is high because these are businesses that generally operate on an asset-light basis.

In Germany, at companies managing diagnostic imaging and radiotherapy centers, we have seen lower throughput procedures (such as CT and MRI scans) continued throughout the crisis. However higher-throughput procedures such as mammography have seen a slowdown due to constraints in managing social distancing. We expect to see increased demand for those procedures coming out of lockdown.

The ongoing consolidation trend in healthcare services across Europe is likely to accelerate, with smaller players struggling to absorb the additional costs related to Covid-19. Sectors ripe for consolidation include dental practices in France, Germany and the Nordics, adult specialist care in the UK, home healthcare providers, and contract manufacturing organizations. We also expect a wave of restructuring activity in the UK care home sector, where, sadly, there have been many deaths from Covid-19. These facilities are experiencing lower occupancy rates because of challenges in recruiting new patients during the lockdown. They also face up to 20% higher costs due to PPE, testing and higher staff costs, according to the UK Homecare Association.

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The ongoing consolidation trend in healthcare services across Europe is likely to accelerate.

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A U.S. private equity view

The healthcare payer space—insurers, pharmacy benefit managers and companies that serve them—was an area with a lot of activity even before Covid-19, and we expect that to continue. I’ll give a few examples of companies doing interesting things: 

The first company provides analytics-driven healthcare services to optimize reimbursement payments, reduce costs, and ensure regulatory compliance for various stakeholders in the healthcare industry. It benefits from the growing demand for payment integrity solutions, tied to rising healthcare spend and increasingly complex compliance requirements.

The second is a technology and services platform that allows primary care physicians to provide higher quality, value-based care to their patients using Medicare Advantage plans, which are offered for retirees by private insurers partnering with the government. This company benefits from the growth in Medicare Advantage and the shift to value-based care. Use of Medicare Advantage is expected to increase significantly. It’s currently around 35%, but likely to reach 70% penetration over the next 20 years, according to L.E.K. Consulting. 

The third company is a direct-to-consumer health insurance brokerage focused on selling Medicare Advantage policies on behalf of health plans. It’s achieved high growth, benefiting from the growth of Medicare Advantage, and from the rise of digital and telesales brokerages. 

These three private companies are classic examples of businesses where private equity can play to its strengths, enabling managers to make changes and build value over four to five years without the pressure of quarterly reports in public markets. 

In the MedTech space, Covid-19 is presenting opportunities within digital health, as it’s accelerated the shift to a broader virtual care delivery model. 

Digital health is a wide-ranging area that includes categories such as telemedicine, data analytics, clinical decision support, mobile health and remote patient monitoring. These companies often have strong growth potential because they solve pain points in the healthcare system by increasing convenience for physicians and patients or providing cost savings for payers. Private equity, including venture capital, is the best way to access these companies because you can invest at an earlier stage than in public markets, when these companies have higher growth profiles. 

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Digital health companies often have strong growth potential because they solve pain points in the healthcare system.

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One area with great promise is remote patient monitoring, which is getting a significant boost from Covid-19. Patients with chronic health conditions such as diabetes and high blood pressure are the most at risk of complications or death from the virus. Remote monitoring of these conditions can be used to reduce emergency doctor visits and hospital admissions, so it’s a win/win for patients and payers. We think acceptance of remote patient monitoring will continue to grow.

Stephan Caron
Head of European Middle Market Debt
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Andrew Farris
Director, Portfolio Management
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