The healthcare sector is currently facing major challenges including ever increasing cost pressures, an ageing population and a steadily growing demand for improving outcomes. In this environment, payers for and providers of healthcare solutions and services have identified advanced technology as one of the key tools for addressing some of those challenges and we are now seeing how advanced software, wireless networks,cloud-based solutions and smartphone sensors are rewriting the rules of engagement between payers, providers and patients and thereby changing the face of healthcare as we know it.

Opportunities and challenges for Private Equity The growth in the market (global sales in healthcare technologies are expected to reach $228 billion in 2015, a major increase from the $164 billion figure in 2010) has been fuelled, amongst others, by the considerable demand and the major innovation in this field as well as the surge in start-up and investment activity. The value of disclosed M&A deals in the global HealthTech market has nearly doubled in the last two years from $7.5 billion in Q4 of 2012 to close to $14 billion in Q4 of 2014.

As new technologies create assets of interest to investors and potentially offer greater upside returns, private equity’s interest in earlier- stage growth deals in the HealthTech industry has grown in particular. Examples include the acquisition by Welsh, Carson, Anderson & Stowe of GetWellNetwork, which develops interactive software to help hospitals get patients more involved in their care process, Bridgepoint’s acquisition of Phlexglobal, a specialist provider  of technology-enabled document management solutions to the global clinical research market and Bain Capital Ventures and Spectrum Equity’s taking of minority stakes in healthcare software provider MedHOK.

At the other end of the spectrum, some private equity firms follow a different approach in responding to the opportunities presented by the HealthTech market, by focusing on medium and long term investment in large assets, backed by established companies aiming to diversify into other products and services. Whilst such assets do not involve the risks associated with earlier-stage investments, they are arguably harder to secure and firms such as KKR investing $1.67 billion in Panasonic’s healthcare business will also likely find it harder to generate outsized returns due to the greater price of the assets in the first place.

Competition from various sources

Private equity firms eyeing up the HealthTech market are facing competition, not only from their peers. Actively involved in this market are also technology giants such as Apple, Google and IBM (focusing in particular on Digital Health), traditional drug manufacturers such as GSK, AstraZeneca and Merck who are looking to enhance their product offerings beyond the pill as well as strategic investors. It is this last group that is responsible for the majority of M&A activity in this space  with notable examples including the acquisition by Cerner of Siemens’ health IT business unit, Siemens Health Services, for $1.3 billion, BD’s acquisition of CareFusion for $11.8 billion, creating a global leader in medication management and patient safety solutions and the $13 billion acquisition of Biomet by Zimmer, creating the world’s biggest maker of hip and knee implants.

Deciding on approach

The surge in innovation in the HealthTech market undoubtedly represents a unique opportunity for various types of investors. With the split between private equity investors interested in large assets and those focused on earlier-stage technologies,  it remains to be seen which direction will ultimately provide the higher returns and how the earlier- stage ventures will perform in turning innovation into viable business models.