Healthy outlook: PE bullish on healthtech sector

Increasing need for digitisation and cost efficiency is propelling growth in health tech: IK’s Anders Petersson.

The covid pandemic has driven innovation in the global health sector, creating a shift in patient preference towards healthtech-enabled services. But covid has not been the only tailwind driving private equity-backed investments in the sector in 2023. We recently rounded up 10 healthtech deals, as PE signals robust appetite for sector.

PE Hub Europe spoke to senior figures across the private equity industry to find out their outlook for the sector, where valuations are going and which sub-sectors to look out for.

In rude health

The increasing need for digitisation and cost efficiency is propelling growth, according to Anders Petersson, managing partner, healthcare sector lead at London-based private equity firm IK Partners.

In addition, Petersson said that “the aging population and rising healthcare demand are compelling growth drivers, making the healthcare sector attractive to us”.

Jean-David Herld, senior associate at Paris-based sustainable growth investor Revaia, said that there is ample opportunity to participate in the healthtech category. “Covid-19 has accelerated the adoption of digital health technologies, with telemedicine, remote monitoring, and other digital health solutions experiencing increased demand as healthcare providers and patients seek to reduce in-person interactions.”

Herld added that a growing emphasis on data and analytics is expected to drive innovation and facilitate the creation of more personalised and precise treatments.

Gareth Down, European head of healthcare investment banking at investment bank William Blair, outlined some secular trends driving this requirement. “In Europe, we’re seeing demographic changes towards an aging population, consumerisation of healthcare, challenges for healthcare workers on the ground and worker shortages.

“The proliferation of data-led solutions, technology and AI is addressing many of these challenges that seem here to stay.”

Herld agreed: “This presents significant opportunities for healthtech companies that specialise in analytics and artificial intelligence.”

One prominent factor driving healthtech growth, according to Amit Karna, partner at Paris-based private equity firm Keensight Capital, is that specialised companies are beginning to overcome hurdles such as heightened regulatory requirements across the value chain. These hurdles had made the healthcare industry slower to adopt new technology.

Another major factor is that technological advancements have led to healthtech products and services achieving demonstrable value that has enabled steady growth for B2B companies, Karna noted.

There is plenty of private equity money to chase that growth, said William Blair’s Down. “High-levels of dry powder for both private equity funds and strategic acquirers mean there is a lot of capital to be put to work, with investors remaining confident in the healthtech sectors, given the supportive trends at play.”

Overall, Herld said the healthtech sector presents a promising outlook for innovation and growth, despite the challenges associated with securing partnerships and funding in the current climate.

Down felt that though the early-stage growth investment arena has slowed slightly, mainly due to valuation headwinds over the last two or three quarters, there is still significant activity across the lower and middle market. “Our expectation is that this continues to pick up through the end of this year, with the second half of 2023 expected to be a busy period for dealmaking.”

Pharma software in demand

The emergence of new technologies such as AI and machine learning is transforming the pharma software sector and revolutionising drug development and discovery, the interviewees said.

The pharma software market interests Down because the total addressable market for these products is global. “We are seeing a lot of demand around hybrid clinical trial services, real-world data solutions and commercialisation services,” he noted.

Further, the increasing emphasis on patient-centric care is creating fresh opportunities for pharma software companies to develop novel solutions that enhance patient outcomes and overall experience, according to Herld.

“The pharma software sector is attracting significant investment from both traditional healthtech investors and technology-focused investors, which is driving growth and innovation in the industry,” he added.

The European market is still maturing compared to the US, said Down, and there is still a runway in Europe for companies to scale rapidly to take advantage. “In terms of pharma software, we see a huge opportunity for the established European companies to lead the way here and expect substantial dealmaking to persist in this area,” Down said.

Other sub-sectors were tipped to be attractive. “We are currently observing tailwind trends in medtech and outsourced medical device services,” said IK’s Petersson. “Other tailwinds observed include different digitisation and hospital outsourcing services.”

“We think provider software, including hospital primary care and social care software, is at an inflexion point,” Down said.

Valuations to stay resilient

When asked about valuations, Petersson said that if there is growth, then valuations should remain high and stable. “The healthcare sector is attractive and fairly recession-proof,” he added.

The healthtech sector, in the past year, has seen substantial developments, indicating a market rebalancing, according to Herld.

The healthtech sector remains resilient and continues to be a hub for innovation even though investments and valuations have lowered from the 2021 boom, he explained.

“Overall, investments have shifted to earlier stages where valuations are not as inflated,” said Herld. “Additionally, there have been no healthtech IPOs from venture-backed companies in the US and EU this year, but there has been an increase in M&A activity.”

In conclusion, Karna said given the strong underlying growth in healthtech, the long-term dealmaking pace is likely to remain high.