Private equity activity has been impacted by a range of powerful macroeconomic forces over the past couple of years, headlined by stubbornly high inflation, elevated interest rates, and continued geopolitical uncertainties.
Even though the healthcare sector was not immune to the broader market malaise, it has begun to witness signs of recovery over the past 18 months.
The healthcare sector consists of a wide variety of businesses, from pharmaceutical and equipment manufacturers to medical insurance, care delivery providers and healthcare services and technology companies.
Given the ageing population in most developed nations and the rising prevalence of long-term complex conditions and chronic diseases, healthcare demand is poised to continue accelerating.
Taking the healthcare services and technology sector as an example, this space is set to continue expanding as it is driving innovation and creating novel treatment pipelines.
Factors such as these make the healthcare sector a fertile ground for private equity investments, offering the potential for stability and resilient growth.
Robust growth prospects
The broad sector’s robust growth characteristics are particularly evident in the US, where healthcare expenditure exceeds $4tn (£3tn) annually, which represents about 17 per cent of GDP, significantly higher than other comparable economies.
Healthcare also accounted for 40 per cent of the 3.3mn jobs added by private employers since the beginning of 2023.
Driven largely by private insurance, US healthcare is far more commercially focused relative to European systems. Coupled with shifting demographics and increasing healthcare needs in the US, the sector is poised for long-term recurring income streams.
Additionally, the industry’s fragmentation, characterised by many small to medium-sized providers across various sub-sectors, offers ample opportunities for consolidation.
In addition to innovative biotech and pharmaceutical companies, which are focusing on developing key treatments and therapies, there are various other well-established high-quality businesses in segments offering resilient growth prospects, such as clinical software solutions providers, medical device manufacturers and insurance providers.
Boosting healthcare exposure
Reflecting on these diverse opportunities, healthcare represents 9 per cent of the Neuberger Berman Private Equity portfolio, with a strong focus on investments within the US.
Since the end of last year, NBPE has deployed $38mn into two new healthcare positions that operate in distinct sectors.
Due to the complexity of healthcare, investing in this sector requires a unique set of skills.
NBPE’s co-investing model involves partnering with experienced private equity managers known for their investments in medical technology, and for partnering with healthcare companies to support better access to higher-quality and more affordable care.
One of the companies that NBPE deployed investment into has been a provider of self-funded healthcare solutions.
The company specifically targets small and medium-sized US employers, which typically provide self-insurance to full-time employees. However, this approach can be expensive, as the employer assumes the financial risk of providing healthcare benefits to its employees, rather than purchasing a traditional health insurance policy from an insurance company.
By enabling smaller employers to pool health insurance participants, this company creates an aggregated fund to negotiate better terms with stop-loss insurers for more effective self-insurance. This approach effectively reduces volatility and healthcare costs for thousands of employer groups.
