Healthcare Private Equity Firms Forced to Think Outside the Box

Inflation and uncertainty are pushing PE firms to do all-equity and club deals and other creative strategies.

(Getty Images)

(Getty Images)

Private equity firms in the healthcare sector are rethinking their deals and financing strategies.

According to a new report from Bain & Company, these firms have become more focused on public-to-private and carve-out transactions over the past year. Public-to-private and carve-outs went from 12 percent of all healthcare deals in 2021 to 46 percent in 2022, according to the report. PE firms buying private companies directly shrank from about 50 percent of all deals in 2021 to less than 10 percent in 2022.

“Off-peak public market valuations present opportunities for take-private deals,” the report said. “As public markets fluctuate in response to uncertainty, many companies may be unable to realize the valuations that characterized 2021, creating opportunities to take companies private at favorable multiples.”

According to the report, carve-out deals, when companies sell a subsidiary to a PE firm, have also gained popularity over the last year as companies search for liquidity during a market downturn.

“This is a very unique time for both financial investors [and] corporate entities to [consider] carve-outs,” said Nirad Jain, partner and co-leader of global healthcare private equity at Bain. Public companies usually have little incentive to sell their subsidiaries during a bull market, he explained, but during a market downturn, they need to double down on their core strategies and sell the non-core part of their businesses.

In terms of financing strategies, PE firms in healthcare have begun to gravitate toward all-equity deals and club deals, in which they pool their assets with other PE firms to acquire a company. They’ve also shown more interest in using debt-financing from private credit firms to complete large buyouts. Carlyle, for example, is in talks to acquire the healthcare technology company Cotiviti for $15 billion, a figure that may include a $5.5 billion loan from private lenders such as Apollo, Blackstone, and Ares.


“Private credit has been around for a while,“ Jain said, “but we’ve seen a much greater frequency of transactions that are looking for over $1 billion of private credit [funding].“

Despite the sharp market downturn in 2022, mergers and acquisitions remained robust in healthcare. The value of global deals in the sector reached $89 billion last year, the second-highest annual figure on record. According to Bain, the resilience in dealmaking can largely be attributed to sponsors in healthcare becoming more specialized and innovative.

“Constraints on capital and inflationary pressures are causing PE sponsors to be more creative in how they get deals done,” the report said. Bain believes that the trend will continue in 2023 as credit continues to tighten, threatening valuations in both public and private markets.

“Some funds will look for ways to engineer the leverage they need for large deals, [while] others will pivot toward smaller deals, where securing financing or writing larger equity checks may be more plausible,” the report said. “Still, other funds are likely to build public-to-private pipelines to take advantage of depressed valuations. Sponsors with strong corporate relationships and exceptional operational due-diligence capabilities may consider carve-outs.”