Healthcare Services Private Equity Industry Update

In April, we published our 2024 Global Healthcare & Medical Industry Report, which covered the surging value of the healthcare market and the positive expectations regarding M&A activity and deal value for this year. As we move further into the year, we are seeing more positive private equity trends and investment strategies for the healthcare services industry, as dealmaking is now beginning to pick up momentum following a bit of a decline in Q2 of 2024. Investment pipelines are starting to build up at the same time that seller expectations are being tempered.

According to recent reporting from Pitchbook, investors are saying that they are feeling the heat to return capital and deploy it in the healthcare services space, which is new for a sector that has been somewhat lacking in exit strategies for over a year. Deal activity is expected to be gradually accelerated through the second half of 2024. This pickup in transactions will likely be driven by various factors, including:

• Moderate valuation resets
• Lower cost of capital
• A positive June Consumer Price Index

The increased deal activity will likely still focus on high-quality assets through 2024 and is expected to be seen chiefly within pharmaceutical services, healthcare IT, physician practice management groups (PPMs), and non-PPM healthcare services.

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Political headwinds in the United States leading to the November election are not expected to impact private equity healthcare deal activity. The main driving factors that will shape private equity healthcare services over the next year will be:

• Highly anticipated interest rate cuts
• Continued relief on pricing for financing
• Seller inclination to concede on valuations
• Overall pent-up demand for market movement on both the buy and sell sides
• The sector’s general shift away from provider assets

The Evolving Role of Generative Artificial Intelligence (AI)

In the healthcare sector, generative AI technology has the potential to completely change how healthcare is administered, which is also changing how private equity firms are looking at investment opportunities in the sector.

Dealmakers remain interested in AI-powered and AI-enabled assets due to the significant potential upside that the technology can offer when it comes to existing and future healthcare investments regarding improved efficiencies, lower costs, enhanced quality of care, and better patient satisfaction. AI impacts every aspect of the healthcare industry, but it is incredibly transformative in streamlining patient consultations, transcribing records, suggesting diagnoses and treatments, and improving patient engagement through personalized messaging.

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AI is also being used in the life sciences space to aid in new drug discovery to speed up and improve pipelines, dramatically reducing the timelines for target identification to lead identification, getting new medications to patients more quickly, and lowering the costs associated with the processes.

Other ways that AI is driving dealmaking include opportunities regarding the automation of claims management for insurers, the creation of AI-powered remote-monitoring devices and surgical robots, and clinical and revenue documentation for providers.

And it’s not just all about AI-specific companies. Buyout investors are also getting in on the various opportunities to use AI in more developed healthcare assets, partnering with tech companies to integrate AI capabilities across existing portfolios and into investment targets. The technology is being adopted widely across all types of digital and more traditional healthcare companies.

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The health-tech market is forecast to reach $852.2 billion by 2027 at a compound annual growth rate (CAGR) of around 18%. Such rapid growth makes it the fastest-growing sub-segment of the broader healthcare industry, drawing severe interest from limited partners who see the potential of this space and are highly supportive of investing in AI-driven healthcare companies at all stages.

AI offers incredible potential to optimize efficiencies across many healthcare sectors and improve accuracy and patient outcomes. This presents many profitable investment opportunities and makes AI-enabled healthcare assets a massive enticement for PE managers and investors.

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