Advantage: size and expertise.
That looks to be one of the big COVID-19 takeaways when it comes to investing in healthcare. The upheavals of the pandemic have accelerated industry changes already underway and made business models more fluid – and thus likely more risky. That, experts say, increasingly favors savvy veterans rather than upstarts looking to rock the boat.
In a new report on healthcare investing – subtitled “A watershed moment for healthcare services” – a team from accounting and advisory firm CohnReznick said the COVID pandemic showed how resilient the healthcare sector can be – something that has drawn even more investor interest and pushed up valuations of high-performing organizations. But the pandemic also has added urgency to many healthcare players’ efforts to make structural changes to their business and clinical models.
The CohnReznick Healthcare Investment Report, produced in collaboration with PitchBook, shows that private-equity deal volume in the healthcare services sector rose about 10% last year to nearly 700 while the transactions’ combined value was $68.8 billion, down slightly from the previous two years. Activity hasn’t slowed in 2021 and COVID, the report notes, has pushed up the valuations of high-quality providers – including smaller organizations – because the stresses of the pandemic exposed some ventures’ weaknesses and essentially sidelined them from the M&A market. Chuck Byrge, president and CEO of investment bank Harpeth Capital, said it’s “a phenomenal time to be selling a good business” because both PE players and strategic buyers are looking to make moves.
One of the biggest care provision developments of the pandemic was the massive ramp-up of telehealth services. COVID took a trend that was already underway and strapped to a tank of rocket fuel. With the dust settling somewhat, everyone from providers to payers and investors are catching their breath these days, said Caroline Znaniec, managing director of CohnReznick’s healthcare industry practice and a co-author of the firm’s report.
“Now they get to strategize because there’s less of an immediate need,” Znaniec said. “And the patient population now knows these new ways can be trusted, leveraged and effective. So the question becomes how we go forward from here.”
As it relates specifically to telehealth, that means taking into account some of the regulatory risks likely to be address in the near future. The pandemic showed telehealth can work at scale but stakeholders are now needing to address some structural things that were glossed over in the heat of the moment, Znaniec said. Those include credentialing and licensing for interstate primary care, making sure technology platforms such as Zoom or FaceTime have the needed security features and keeping a more vigilant eye on possible fraud.
More broadly, Znaniec and report co-author Claudine Cohen said, questions such as those favor investors familiar with the intricacies of healthcare over newer entrants who might be coming at opportunities from a more purely tech- or consumer-focused vantage point. Cohen, managing principal of CohnReznick’s transactions and turnaround team, said the same goes for the greater attention being paid to the blurring of lines between inpatient, outpatient, telehealth and home care settings.
“Investors who are deep in health care already were moving there pre-COVID. They will do well,” Cohen said. “This is going to take a lot of money and time investment and the smaller players might be left behind.
Byrge, whose firm is based in Nashville, also sees that dynamic playing out and said investing activity remains “aggressive and frothy.” In a market that still has massive amount of money chasing deals but relatively few high-quality platform or tuck-in purchase opportunities, the abilities to quickly recognize opportunities and then deliver value (and follow-up funding) to portfolio companies are at a premium more than ever.
“Things are going at warp speed,” Byrge said. “Companies are popping up all over the place. The quicker you get going and put a stake in the ground, the better. Buyers who have been following health care for a long time can quickly see what the opportunity is.”
One thing Byrge is tracking as 2021 nears a close: With so many investors and entrepreneurs looking to close their deals before year’s end for tax or capital gains reasons, he’s seeing a shortage of some service providers involved in due diligence work. That may delay some deals into early 2022 but it won’t be a reflection of any sort of slowdown in the overall market.
For more info on the CohnReznick report and an Oct. 14 webinar Cohen and Znaniec will host, click here.
