The COVID-19 health-care crisis and the recession are highlighting how debt, a necessary ingredient for a buyout, can negatively affect patient care, affordability and investor returns.
To be sure, private equity firms are as interested in the sector as ever. Despite transaction volumes slowing to a trickle in the spring as a result of the pandemic and consequent recession, $19.3 billion was invested in 231 health-care transactions worldwide year-to-date as of June 4, according to data from London-based alternative investments research firm Preqin. By comparison, $62.3 billion was invested in 724 deals in all of 2019.
Health care has also outperformed other private equity sectors over the majority of time periods and also had the lowest likelihood of losing capital, said Morgan Holzaepfel, Boston-based partner who leads the health-care primary investment team at Adams Street Partners LLC, an alternative investments firm.
An Adams Street Partners analysis shows that private equity investments in health-care companies made between 2013 and 2016 earned multiples on invested cash flows of 2.62 times compared with 2.25 times for all other private equity-backed companies as of Dec. 31. (Adams Street analyzed 11,614 portfolio companies in funds in which it had invested.)
Over the last two or three years, Adams Street has seen manager interest in health-care companies increase, and it will continue to be an attractive place to invest capital, Ms. Holzaepfel said. However, in the short term a number of sectors in that industry are feeling the pain of the pandemic and recession.
"Within sectors we've seen a divergence of performance," Ms. Holzaepfel said.