Corporate healthcare M&A is healthier than ever - But what about private equity?

Corporate healthcare M&A is healthier than ever - activity in the healthcare sector reached record levels in 2015, with total transaction value exceeding $540 billion for the year. 

Corporate healthcare M&A is healthier than ever - But what about private equity?

In contrast, total transaction value of private equity healthcare deals in the US decreased by nearly 40% in 2015, falling to just $9.4 billion. Industry reports suggest that the decline in activity has been rooted in a surge of competition from corporate buyers, resulting in higher pricing multiples and a shortage of attractive assets. 

What’s driving the frenzy in corporate healthcare M&A activity? And where has private equity found success in this competitive environment? 

Financial Pressures Drive Corporate Activity 

Industry experts point to financial pressure as the largest driver of the recent surge in corporate healthcare transactions. Facing the impact of healthcare reform, including the push to transition the system from a fee-for-service model to value-based care, organizations across a number of healthcare sub sectors are struggling to increase profit margins. 

For many companies, acquisitions represent an opportunity to increase profitability through economies of scale. The recent merger announcements of Aetna/Humana, Anthem/Cigna and Centene/HealthNet indicate that even the largest healthcare players are vigorously pursuing efficiencies through expansion. The consolidation of insurers has produced additional pressure on hospitals and provider groups to follow suit, as managers seek growth to maintain bargaining power vis-a-vis payers. Accordingly, the past year has seen strategic buyers across the board scrambling for acquisition opportunities. 

Impact on Private Equity 

With corporate transactions at record levels, many PE firms have been forced out of the buyer’s seat. Despite valuations remaining high throughout 2015, competition rose starkly not only against corporate purchasers but also among PE firms, with most large assets drawing multiple bids prior to sale. In some sub sectors, the impact of 2015’s widespread strategic consolidation was crushing. Notably, private equity purchases of insurance payers fell more than 96% from 2014, totaling approximately $200 million last year. Physician provider buyouts, which have been a favorite of private equity buyers for years, saw very little PE activity in 2015, with corporate buyers instead succeeding in a much larger number of deals. Nonetheless, some sponsors closed attractive deals by shifting target focus, capitalizing on corporate divestitures, and taking advantage of the favorable exit environment. 

Shifting Targets for New Opportunities 

Many PE firms found success in 2015’s fierce market by re-prioritizing the focus of activity. A number of firms succeeded in acquiring attractive targets by shifting away from traditional favorites and identifying new opportunities. For example, while physician provider transactions were dominated by corporate buyers, many PE firms boosted activity in dental, veterinary and other so-called “healthcare-light” sub sectors, often seeking to expand and consolidate existing platforms in fragmented markets. Other successful private equity deals reflected a shift away from traditional physician assets to more specialized practices (such as dermatology) where the pressure for consolidation has not been as intense. 

Opportunities in Corporate Divestitures 

Competitive pressure on corporate players has also encouraged divestitures, as companies seek to realize efficiency by de-prioritizing ancillary businesses and concentrating on the most profitable elements of their core strategy. Life sciences and pharmaceuticals saw an increase in PE investment last year, from $5.7 billion in 2014 to $8.5 billion in 2015. One key trend was an increase in so-called “portfolio deals” in which an organization sells off its specialized assets to a buyer more capable of managing and maximizing profit. Similarly, hospital acquisitions remained strong for private equity as pressure increased on not-for-profits to divest hospitals due to shrinking margins and rising competition. 

Exit Opportunities 

As buyers sought consolidation and corporate M&A activity surged, 2015 proved an extremely strong year for PE exits. Corporate activity continued to drive up valuations and create a profitable exit environment. While IPO activity fell, healthcare asset sales by PE firms to corporate buyers rose nearly 25% in 2015’s competitive environment. With the lagging IPO market, it would not be surprising if PE firms continue to dispose of their healthcare assets through exits to strategic buyers throughout the remainder of 2016. 


Looking forward, corporate healthcare M&A can be expected to continue its successful run.  Those private equity firms that best identify new opportunities within the space are likely to have a leg up on their peers.  

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