Private investors pay special attention to specialized healthcare

Health care private equity deals in 2022 fall short of last year’s results, but investors still want specialized assistance.

More than 740 deals were closed in the healthcare industry in the first half of the year, down 20% from the same period in 2021, but up 16% from 2019, according to a report by Oliver Wyman. Private equity deals continue to play an important role in healthcare, even as inflation and higher costs are changing the tide.

Investor interest in the practice of doctors began many years ago, starting in areas such as emergency care, dermatology and anesthesia. The recessionary resilience of healthcare is attractive to investors. According to the Centers for Medicare and Medicaid Services, there is money to be made in such a large part of the economy—about 20% of the US gross domestic product.

Investors today are increasingly interested in “-logies,” higher-level services including cardiology, neurology and radiology, said Ashraf Shehata, partner and head of the US national health and life sciences sector at consulting firm KPMG. Orthopedics is another area that is attracting attention.

Physician practice has historically been fragmented and often inefficient, creating additional opportunities for private equity firms to intervene.

“Any opportunity to include or have a value-based component around these practices is very attractive to private equity firms,” ​​said Angela Humphreys, co-chair of the Nashville, Tenn.-based healthcare private equity group, Bass, Berry & Sims. “They are able to deliver efficiencies that certainly help with the bottom line, but also improve patient care.”

In late 2021, private equity firm Welsh, Carson, Anderson & Stowe acquired Resurgens Orthopedics, Georgia’s largest orthopedic group serving approximately 800,000 patients, to create a new physician-owned company. Silver Oak Services Partners invested in the Integrated Oncology Network in 2018, followed by additional cancer-related acquisitions and a new urology services platform in 2021. Financial terms of the deal were not disclosed.

Shehata also noted renewed interest in home healthcare services such as physical therapy or skilled nursing.

However, some private investors have recently come under fire for taking cost-cutting measures that critics say end up compromising patient care. Englewood Cliffs, New Jersey-based investment firm Portopiccolo Group, which began investing in nursing facilities years ago, has been accused of mishandling COVID-19 at some of its more than 100 facilities. Employees and family members allege that the company was not following protocols and not receiving materials needed to contain the pandemic, while hiring too few workers.

Common thread passing through a wide spectrum Investor interest in specialized care is the health care organization’s own desire to operate more efficiently. This is especially important in the current environment as service providers grapple with high labor costs, rising prices and the number of patients who have yet to return to pre-pandemic levels.

Chet Hosh, a partner at law firm Burr & Forman, said he understands the emphasis on private equity investments in healthcare, but he believes the deals could improve patient care. Firms are not as constrained by quarterly earnings and can make necessary investments in infrastructure and technology, he said.

“It is believed – and I don’t think it is fair – but the perception is that private capital will always sacrifice patient care for profit,” Hosh said. “I think both of these things are serviceable and I think they’re improving in private equity anyway because they can work in the long run.”

Massachusetts-based Webster Equity Partners’ investment is focusing on health care specialties that haven’t attracted much investor interest, avoiding the herd mentality often found in the private equity space, said David Malm, the firm’s managing partner. Webster’s portfolio includes investments in specialist retinal care and oncology-focused plastic surgery.

With approximately $7 billion in assets under management, Webster is also in the early stages of establishing a new line of business in cardiology as more cardiology procedures move from acute care hospitals to outpatient surgery centers or doctors’ offices. In 2021, Webster helped launch a new network of healthcare providers, Cardiovas Associates of America.

Malm said his team is working with an investment horizon of five to 10 years and possibly longer with additional funds. Webster first provides operational resources to new portfolio companies to help improve their clinical and operational processes, and then moves to participation at the strategy level.

“Healthcare is not a generalist game,” Malm said. “I think one of the reasons health care prices remain high even in challenging times is because you have a lot of one-stop firms doing a lot of other things. … They see healthcare as “a great place to get access”, so they will do a 30 second roundup of dermatology. It will end badly.”

Private equity firms investing in health care typically expect a return on investment in three to five years, Hosh said.

Competition for medical offices between firms is intense, and additional competition comes from infrastructure funds and sovereign wealth, Hosh said. Humphreys said she expected to see more transactions between players with private investments or sponsored transactions.

Some investors are taking a break amid the general uncertainty in the market. Buying now could mean buying an organization with unknown staffing costs, as healthcare organizations still rely heavily on contract workers to fill the gap. Regardless, cost-cutting opportunities will continue to drive transactions.

Hosh believes demand for healthcare deals will continue to outpace other areas of the market, especially given enhanced use of technology and artificial intelligence for patient care and smoother monetization.