A Bass Berry & Sims-hosted panel looks back at 2020 and forward to 2021.
With American hospitals once again at the breaking point amidst the largest surge in Covid-19 cases yet, private equity players in the healthcare space are looking for resilience and continuity in 2021.
That’s according to industry observers at a recent webinar hosted by Bass Berry & Sims that delved into areas of interest in healthcare for private equity firms as a preview to next month’s virtual J.P. Morgan Healthcare Conference. More specifically, these sponsors are focused on digital technologies, home healthcare, and value-based care.
While all of them were growing in importance before the pandemic, the crisis lent a significant tailwind to these segments.
Expect to see dealmaking in this area especially since transactions came roaring back by summer after grounding to a halt in March. The IPO market is robust — and this is another trend that looks likely to persist, or even accelerate, in the new year.
“The public markets have obviously operated in somewhat of a detached fashion from the rest of the world this year,” said Claire Rychlewski, deputy editor of Mergermarket and one of the participants in the webinar. “Healthcare stocks have performed well for the most part. … We’re going to continue to see robust IPO market activity in healthcare across the board. … Private equity is joining in on this frenzy.”
Where activity is growing
Still, that frenzy’s impact is unlikely to benefit all subsectors of healthcare.
Investors should steer clear of sectors that showed weakness during the pandemic — hospitals, nursing homes, companies focused on elective procedures, dental, and those reliant on volume and fee-for-service, as well as those that have struggled to integrate new technologies, according to the panel.
On the other hand, those that have stepped up and had their models borne out have seen their valuations hold, and even increase, a trend the blank-check company boom has only accelerated.
“This has been a year for SPACs,” or special purchase acquisition companies, Rychlewski said. “That’s definitely been an area where sponsors are flocking.”
She added that Covid-19 has highlighted the resilience of some of these businesses, indicating some of the best areas for long-term investment in healthcare.
Assets with a clear technology component are trading at what Rychlewski called “Covid-proof premiums.”
That is a phenomenon that Ryan Thomas, co-chair of Bass Berry’s healthcare private equity team, is seeing in companies where the pandemic has had a lingering positive impact.
“I’m seeing several deals priced pretty much solely on 2021 pipeline, which you never would have seen before. It’s pretty crazy,” Thomas said. “They’re paying super-high multiples on 2021, and I’m seeing that fairly regularly right now, which is interesting. No one would have predicted that at the beginning of Covid.”
As with so much else in 2020 — be it work, dating, shopping, or socializing — swathes of healthcare went virtual, online, and remote.
Telehealth has been a major trend in the healthcare space for years, but Covid-19 — and the relaxation in regulations it spurred — sent it to the next level, exposing many patients to technologies and opportunities they might have previously resisted.
At the previous height of the pandemic in the spring, as many as seven in 10 ambulatory visits were virtual. While that number has come down to roughly a quarter, it remains an enormous opportunity for private equity players.
Bringing as many medical services into the home as possible is not only important in keeping patients — especially those whose underlying conditions make them particularly vulnerable to Covid-19 — out of overstretched hospitals and other brick-and-mortar clinical facilities. It also plays into another key trend driving private equity investment in healthcare: the push toward value-based care.
High-cost specialties targeting distinct populations — women, LGBTQ people, those with autism, and kidney patients among them — are a major area of focus, and thus a major opportunity for private equity, as are the expansion of home-based primary care and asynchronous medicine, which can help resolve scheduling issues.
“There’s really broad consensus among private equity investors that value-based care is a trend that’s here to stay,” said PE Hub editor Sarah Pringle, a participant in the webinar. “I don’t think anyone’s going to bet against it.”
Andy Mychkovsky, the healthcare startup consultant behind the Healthcare Pizza blog, agreed. The interest in value-based care is especially true as it relates to particularly costly specialties.
“Pick an area that costs a lot of money per capita for an individual who doesn’t have good access, and that’s where a lot of investment will go,” Mychkovsky said.
Buoyed by the pandemic, some of those specialties have seen their transition to remote practice fast-tracked.
“We’ve seen companies particularly in the behavioral health space … who have implemented a telehealth component, or were in the process of implementing a telehealth component pre-Covid that they actually accelerated and rolled out that has allowed those companies to not only survive but thrive,” said Angela Humphreys, co-chair of healthcare private equity at Bass Berry.
The outlook under Biden
There is, of course, a significant break from the past in the offing: The inauguration of President-elect Joe Biden, who played a key role in the passage of the Affordable Care Act in 2010, is bound to change healthcare policy in 2021 and beyond. Even here, however, the continuities are likely to be as or more significant than the changes.
The likelihood of a divided government should the Senate stay within Republication hands has calmed many of private equity players’ biggest fears, such as a huge hike in the capital gains tax rate.
It is also likely to rein in many other ambitions. For instance, Health and Human Services Secretary-designate Xavier Becerra pushed for a law in California giving the state’s attorney general — currently Becerra himself — an effective veto over private-equity acquisitions of healthcare companies. However, the proposal failed to clear even the Democratic supermajorities in the California legislature and seems unlikely to get much traction nationally.
What’s more, in spite of their many differences, President Donald Trump and President-elect Biden have more in common than one might expect when it comes to healthcare, including a commitment to value-based care and a focus on disability. In fact, the expansion of telemedicine may be one of the few areas of bipartisan agreement on Capitol Hill.
Indeed, the panelists agreed that the difference between the Trump and Biden administrations on healthcare may be more of emphasis than of wholesale change.
Biden’s team is likely to focus more on social determinants such as delivering nutritional meals and transportation services, creating new areas of opportunity for investors. In addition to those areas, investors have their eye on payer services and population health data technologies.
Biden is also likely to pick up the baton on one part of the ACA that the Trump administration enthusiastically embraced: the Center for Medicaid and Medicare Innovation. One area where the Biden administration is likely to be much more active than team Trump is on the issue of healthcare antitrust. Even here, however, panelists expect that it’s not likely to be as negative for private equity as it might have been.
“We’re expecting more action on antitrust enforcement in general. I’m not saying particularly in private equity,” said Shira Stein, a reporter at Bloomberg Law covering the federal response to Covid-19. “I don’t think they’re there yet or making those kinds of granular level decisions. Right now, they’re really focused on getting Covid under control.”
In the meantime, private equity is gearing up for a frenetic new year.
“Bankers I’ve talked to lately tell me they’ve literally never been busier gearing up for 2021,” Pringle, the editor of PE Hub, said. “If anything, we’re going to see managers increase their allocation to healthcare.”
The adoption of technology is making healthcare more attractive to these investors.
“The healthcare industry has really accelerated in terms of technology, improving efficiency and operating models. … Businesses being forced into tech adoption and that kind of disruption will create all time optimism on the other end of this,” she said.
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