Private equity firms without a special focus on the healthcare market can still find plenty of opportunities to invest in the healthcare technology space.

Healthcare technology (known variously as Connected Health, Health Tech and mHealth) is changing the face of the healthcare industry as we know it; be it in the form of precision diagnostics, big data analytics or remote monitoring devices. With public service cost pressures, an ageing population and a steadily growing need for improving outcomes driving growth, there are significant opportunities in the Connected Health arena for investors across the spectrum.

The Connected Health industry is growing at an exponential rate, with global sales expected to reach US$228bn in 2016 – a major increase from the US$164bn figure recorded in 2010. This is fuelled partly by the considerable demand and major innovation in this field, as well as the surge in start-up and investment activity.

The sheer number of entrepreneurial Connected Health companies is amazing. The critical question for these companies is how to evolve their business models in an industry that is going through radical change. The answer often lies in taking extreme risks, frequent pivoting and ever changing strategies that allow them to adapt to fast changing conditions. This type of elasticity does not suit the temperament of all investors, but it can make for some very high rewards.

The value of disclosed M&A deals in the global Connected Health market nearly doubled in the two years from 2012 to 2014, rising from US$7.5 billion to US$14 billion. Perhaps unsurprisingly given such rapid growth, it is not only private equity houses with a traditional healthcare or technology focus seeking targets in this field.

As new technologies potentially offer significant upside returns, private equity's interest in the Connected Health industry has grown. A mixed approach has emerged, with smaller funds taking risks on early stage Health Tech companies – Welsh, Carson, Anderson & Stowe acquiring GetWellNetwork in the US, for example – while, at the other end of the spectrum, larger private equity firms tend to follow a different strategy, focusing on medium and long-term investment in large assets, backed by established companies aiming to diversify into other products and services. While such assets do not involve the risks associated with earlier-stage investments, they are arguably harder to secure. Firms such as KKR, which invested US$1.67bn in Panasonic's healthcare business, may find it harder to generate outsized returns due to the greater price of assets in the first place. The challenge for private equity funds is picking the right opportunity to suit their appetite.

In line with this new focus, private equity funds have increasingly been recruiting those with a healthcare background, better enabling them to identify the wealth of opportunity in the healthcare sector. The greater experience and specialism offered by private equity funds – particularly when combined with technology expertise – undoubtedly increases returns for their investors and in turn boosts the attractiveness of the Connected Health market.

Need for speed

Private equity firms eyeing up the Connected Health market face competition, and not only from their peers. There seems to be a general sense of urgency among many established healthcare and some non-healthcare companies that they must acquire assets so as to be able to offer big platform plays for the future. Even established institutions in healthcare, such as insurers, are now threatened by new entrants including providers themselves; while consumers are more empowered and large technology companies including Apple, Google and IBM are developing revolutionary ideas. Competition is clearly fierce.

While the large corporates active in this space offer experience of the regulatory landscape, established distribution channels and pre-existing facilities, private equity funds also have a substantial amount to offer Connected Health  companies seeking investment, including readily available funds and sector expertise through their external advisory networks.

With funds typically investing for three to five years before exiting, private equity has vast experience in increasing value in assets over a shorter period of time. Private equity houses can work effectively to move a company through its lifecycle, positioning it as an attractive investment for trade buyers. Private equity is also able to offer Connected Health management teams the ability to retain a higher degree of control, while also benefitting from the specialist Connected Health expertise gained by fund managers from previous investments.

Deciding on approach

The surge in innovation in the Connected Health market undoubtedly represents a unique opportunity for various types of investors. With the split between 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. It is fair to say, however, the opportunities for investors in the sector are numerous – for both agnostic firms and those traditionally focused on healthcare.

This article was first published in Unquote", a leading publication for the private equity industry.