US-based Private Equity Investors and the Healthcare Industry - April 2014

by Karun Ahluwalia

  • 29 Apr 2014
  • PE

According to Preqin’s Investor Intelligence online service, there are currently 1,029 active US-based institutional investors targeting or investing in the healthcare industry; these LPs allocate an aggregate of $1.13tn to the private equity asset class. An arena of great innovation and research-led development, the healthcare sector has typically held some status as a popular target for private equity investors seeking to capitalize on the wealth of opportunity to be found in the industry. 

A geographic breakdown of Preqin’s data reveals that an overwhelming 96% of US-based private equity LPs is attracted to investment opportunities in the healthcare sector within North America. This suggests a high level of confidence in the state of their domestic healthcare industry, despite Obama’s reforms initially being met with some uncertainty as to the consequences on the wider economy. In fact, the passing of the Affordable Care Act has been pinpointed as a primary reason for the rise in US healthcare industry stocks, and has also led to speculation that profits and stock prices of many healthcare firms will rise as a large percentage of the US population is expected to enter the health insurance market. Europe is another region that has received significant enthusiasm from US investors, with 70% of US-based LPs tracked by Preqin displaying an interest. A notable proportion of 56% of US-based private equity investors target healthcare opportunities in Asia. 

Foundations represent 22% of US-based LPs which have a preference for, or have previously invested in, funds with exposure to the healthcare industry. As such, they account for the largest proportion of investors that have an interest in healthcare. Private sector pension funds, comprising 20% of US-based LPs with an appetite for the healthcare industry, represent the second highest proportion, followed by public pension funds, which account for 16%. 

Buyout and venture capital funds rank equally (77% each) as the fund types that attract the most interest from US-based institutional investors with an appetite for the healthcare industry. This is followed by growth funds (57%), funds of funds (50%) and distressed debt vehicles (49%). When looking to make new fund commitments, only 32% of investors based in the US that are interested in the healthcare industry will consider committing to vehicles raised by first-time fund managers, including spin-off teams. 

San Francisco-based private equity fund of funds manager Darwin Ventures plans to commit to both buyout and venture capital funds in 2014. The firm will specifically look to target the pharmaceutical industry in North America. Another US-based LP actively targeting the healthcare industry is Amin G. Carter Foundation, which considers a range of private equity fund types and investment opportunities globally.   

There is no doubt that the healthcare industry will continue to be a strong sector in the global economy over the coming years as it is a mainstay of innovation, research and development, creating great potential for viable investment opportunities. It is difficult to definitely determine however, how changes to institutional healthcare systems, such as the Affordable Care Act in the US, will affect the mood and confidence of private equity investors going forward.  

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