It’s the Demographics, Stupid

This fall, the GOP won back the U.S. House of Representatives, snagged several Senate seats and assumed control of more state legislatures than at any time since 1928. Now, judges in red states are calling the constitutionality of ObamaCare into question and Republican lawmakers are pledging to take down the landmark healthcare bill, either piecemeal or all at once.

In response, and, perhaps, in unison, private equity professionals assessed the situation, carefully considered all outcomes… and collectively yawned. Financial sponsors aren’t going to back out of the healthcare sector just because a partisan brawl has erupted around President Obama’s signature campaign pledge.

“Who knows whether it is going to be repealed or not,” said Neal Morrison, partner with North Carolina PE firm Pamlico Capital. Morrison said Pamlico’s strategy will be unfazed by the lingering uncertainty that hangs over the Affordable Care Act (ObamaCare’s formal title)—and the PE firm will be likely to continue striking deals in the space.

In fact, LBO shops’ interest in the space merely coincided with the timing of Democrats’ ambitious push to extend coverage to all Americans. It was no coincidence, however, that PE pros are eyeing healthcare opportunities as a greater percentage of the U.S. population ages and becomes increasingly dependent on care centers, drugs, treatments and screenings.

According to the U.S. Department of Health and Human Services, the percentage of Americans 60 and older will double from 2000 and 2030—the most likely group to have the greatest healthcare needs. Future investors in the space will still be catering to a broader client base than exists today. Between 2030 and 2040, U.S. residents 60 and older will make up a quarter of the country’s population for the first time.

“Private equity activity in healthcare is extremely robust,” said Houlihan Lokey Managing Director Mark Francis, who works on deals in the space. “It’s the most activity we’ve seen in the last three or four years.”

Francis said he increasingly sees dedicated private equity funds that specialize in healthcare most frequently hanging around the final rounds of auctions. This ought to be chalked up to their increasing proliferation, and experts believe there will be more dedicated PE funds launched for healthcare transactions in 2011. This past year, Linden LLC wrapped an outsized $375 million fund in June; EDG Partners is shopping a $150 million fund; Beecken Petty O’Keefe & Co. completed a $400 million vehicle and Cressey & Co. is looking to raise $500 million.

RoundTable Healthcare Partners closed two funds this year; its third equity fund totaled $600 million and its second captive subordinated debt fund reeled in an additional $200 million, according to the PE firm’s website. The LBO shop hasn’t been dilly-dallying; RoundTable has made investments in several companies in 2010 and launched an ophthalmology platform earlier this year.

Specialists like Linden and Cressey are more likely to pursue investments with dependencies on federal reimbursement, Francis said, while one-off healthcare buyers and PE funds without dedicated practices tend to pursue opportunistic buys where efficient strategies can be implemented, including tech-enabled businesses and outsourced services.

Bigger buyout shops with healthcare practices, like Welsh Carson Anderson & Stowe, will continue to be active as well, Francis said. Last month, Welsh Carson provided behavioral and psychiatric care center Springstone Inc. with a $100 million injection and a few new executives to foster the company’s development.

With an increasingly crowded field of private bidders, deal professionals anticipate continued auction fervor, even as sabers are rattled around the Beltway by the incoming class of GOP legislators.

“There’s so much private equity money around, multiples have been driven up,” said Gerald Adolph, senior partner with Booz Allen Hamilton.

Jonathan Marino is the editor of The opinions expressed here are entirely his own.