To gain insights on the current climate for private equity deals, PE Hub and PE Hub Europe reporters have been asking a wide range of sources to share their outlooks for 2023. Our series continues now with this healthcare focused edition, featuring Andre Puong, partner at Cathay Capital Private Equity.
He has been with the firm since 2008, starting as in investment director. He was then promoted to his current title in 2015.
What were the highlights of your dealmaking in 2022?
For our North American team focused on private equity / late-stage investments, 2022 was a year of navigating uncertainty (from the war in Ukraine to the effects of monetary policy and inflation) while leveraging our flexible capital deployment mandate.
In 2022, we actively pursued investments. But in the second half, we shifted our focus to minority investments, driven by the conditions in the debt financing market and leveraging our multi-strategy platform as we currently deploy funds from two strategies of buyout and growth investments.
We focus primarily on two verticals, healthcare and consumer. We have deep experience and see strong, persistent opportunities in both sectors. Last year and going into this year, our deal pipeline remained strong as we stayed close to family-owned businesses that were thinking of selling themselves at the start of 2022. But, as price expectations were reset over the year, we welcomed the opportunity to have a minority and active partners with the resources to help them in a challenging economic environment.
What was the biggest challenge to completing deals in 2022?
Uncertainty. In particular, the mixed signals between economic slowdown, inflation, job market robustness, and resilience from various parts of the US economy.
One response to the difficulty of underwriting this uncertainty would have been to stay on the sidelines. Thanks to our flexibility to do non-control transactions and be less impacted by debt financing markets, our priority was to fine-tune some of our investment themes and find the companies and management teams who show the ability to do well under this uncertainty.
Early in the year, we invested in a consumer healthcare company called CPAP.com. The business operates an ecommerce platform that sells products to patients suffering from sleep apnea. As we learned more about the sleep health and wellness space, we are looking to be more active across product categories or business models.
How do you expect the first six months of PE dealmaking in 2023 to compare with the last six months of 2022?
Overall, we expect some improvement in M&A conditions, but this is not to say that deal activity in the market will return to where it was.
With recent signs of easing inflation, there will likely be increasing clarity about the effects of last year’s monetary policy actions and where the US economy is heading. Even if debt financing markets remain choppy, better, albeit imperfect, clarity will help businesses adjust and better plan. This will, in turn, allow investors, especially for firms like us with a minority investment pocket, to be ready to partner with these companies.
What will be the most important trends affecting your dealmaking in 2023?
Healthcare is ripe for disruption, specifically addressing inefficiencies in the system. Digitalization of healthcare has accelerated during and after the height of the covid-19 pandemic and continues to create disruptive and resilient companies and dealmaking opportunities. They can take the form of new delivery modes for healthcare services or products – such as the aforementioned CPAP.com – or new business models, including tech-based ones, to further the benefits of value-based care or serve patients in a more holistic manner. Our Cathay Health strategy sits at the apex of some of these trends, and we share knowledge frequently to be in front of trends.
Another significant trend will be the cooling of the labor market and how it will affect companies’ ability to staff, improve their organization and address talent management. This impacts how we, as investors, evaluate companies and their organizational capabilities. But an easing job market will ultimately affect the relationship between professional and personal lives, workplace vs. home and remote work, and how goods and services are consumed and delivered. These changes will create dealmaking opportunities as some companies will be better positioned than others in capturing these shifts in the workforce and the workplace.
What’s keeping you up at night?
ChatGPT. It does literally keep me up at night playing with this and other “tools” created by OpenAI. Beyond that, I believe this revolutionary technology will, thanks to its investment by and partnership with Microsoft, impact businesses and our daily lives very soon, and profoundly so. Companies that can harness the tools coming out of such a gigantic leap in AI could gain a significant competitive edge or disrupt their industry.
What are you looking forward to most in 2023?
We look forward to doing great deals in the healthcare and consumer sectors, and continuing to support our management teams in navigating things like digitalization and this evolving environment.