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Two Active Healthcare Sectors for Private Equity Investors to Target, and One to Avoid

Healthcare in 2018 was an exciting place to be. Private equity investors will be pleased to see that 2019 is shaping up to be just as busy as last year. An informed investor will find opportunities throughout the industry - especially in two particularly active sectors. Activity makes a sector crowded, and investors will have to compete against one another. But, more importantly, activity makes a sector actionable. If investors have capital to deploy - and they do - focusing on targeted, active segments of the healthcare market will serve them well.

Where should investors focus their efforts?

It’s difficult to discuss “Healthcare” as one category. The market is unwieldy and segmented. Making an investor’s job more difficult are the many regulations unique to each segment. So, it benefits the investor to narrow their focus onto one or two specific segments - preferably the ones that present the most opportunities. In 2019, smart investors are looking to invest in post-acute services (minus long-term care) along with healthcare IT and software.

Post-Acute Services (minus long-term care)

While investors should approach long-term care with caution (we’ll discuss why in a moment) the other traditional segments that make up post-acute services (PA) sector present some real opportunities. This sector is a large, fragmented grouping of offerings including behavioral services, rehabilitation, physician practices management, homecare, and dental practice management. The individual markets that comprise PAS are all reasonably stable. And, because they’re so fragmented, they are reliable targets for investors that come prepared with creative strategies and strong leadership to capitalize on their investments. While it is crowded, the fragmented nature of post-acute services ensures that there are a lot of ways to invest in some portion of the PA sector.

Healthcare IT, and Software

Technology, disruption, and digital efficiency changes are popular targets for private equity investors - for good reasons. There are some big name disruptors circling healthcare, and they’re pushing the industry to embrace change or risk extinction. We’ve already discussed healthcare’s shift towards becoming a more consumer-focused industry. New technology, specifically tech that improves consumer experience, can be very successful investment targets. The first quarter of 2019 has seen a lot of activity in this sector. Organizations that improve medical device connectivity, create innovative healthcare software solutions, and streamline the organization of human capital made up a few particularly high-profile acquisitions.

What sector should investors approach with caution?

Unless you love distressed sectors and have a strong stomach for risk, stay away from long-term care. While it’s generally included in post-acute services, long-term care doesn’t share the same benefits of the other markets that fall under the PAS umbrella. Reimbursement change is coming and continuing. While it’s been looming in the future since last year, October - and implemented changes - is approaching quickly. The reimbursement changes coming in October bring volatility with them, and investors that try to work through the shift shoulder significant risk. At this point, it's impossible to tell if the reimbursement changes will end up being good or bad for a particular company until you dig in. We do know that they represent real structural changes, and navigating the changes won’t be easy. Are there deals to be found? Sure. Is it worth the risk? Not for most investors.

Active sectors are crowded, fast-moving, and full of opportunities. The private equity experts at Bancroft Group can connect you with healthcare executives, consultants, and industry insiders to support your healthcare investment strategy and execution Get in touch to discuss how our network and solutions can support you.

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