Why IRRs for healthcare deals are better than the rest

If you’re not investing in healthcare, you’re missing out on the best returns in the private equity business.

The median IRR for healthcare deals done from 2010 to 2021 is 27.3 percent, according to a new report from DealEdge, a private equity benchmarking service from Bain & Company and Cepres. To put that into perspective, the median IRR for all PE deals done in that same period is 21.9 percent.

The IRRs are for partly and fully realized outcomes of more than 33,000 private equity deals done worldwide. DealEdge obtained the data from both GPs and LPs involved in the deals.

After healthcare, the deal category with the next-highest IRR was technology (24.3 percent), followed by media and telecom (23.8 percent), business services (22.4 percent), financial services (21.2 percent), industrials (20.5 percent), consumer (18.5 percent) and energy and natural resources (16.4 percent).

Significantly, healthcare outperformance has only improved with time. For the period 2000 to 2009, the median IRR for healthcare deals was 17.9 percent, compared to a median IRR of 15.8 percent for all PE deals during that same period, DealEdge reported.

The strong performance is a bit surprising given that more investors have jumped into healthcare deals, driving up multiples. However, the increased competition has not curbed investor appetites.

This year saw the largest healthcare deal on record – and one of the largest LBOs in history: Blackstone, Carlyle and Hellman & Friedman teamed up with GIC to buy a majority stake in healthcare products distributor Medline for an enterprise value of $34 billion.

Big healthcare deals continued late into the year. On Nov. 22, Bain Capital and Hellman & Friedman announced that they would buy Athenahealth, which offers enterprise software to healthcare providers, for $17 billion.

“We continue to be quite bullish about the healthcare sector, with opportunities to improve access, quality and cost of care. It’s an immutable trend,” said Nirad Jain, co-head of Bain & Company’s Global Healthcare Private Equity practice.

The covid pandemic is just one of several factors that make healthcare attractive to private equity. For example, it isn’t as vulnerable to recession as other sectors tied to consumer spending. “If you look at deal performance spanning a recession – the last one in 2008-2009 – healthcare, and in particular North American healthcare deals, outperformed all non-healthcare deals in aggregate,” Jain said.

Following the last recession, “there was high interest from private equity to overweight into healthcare from 2010 to 2021,” he added. With many experts saying the economy is overdue for another recession, dealmakers will likely continue to be overweight healthcare because they want to ensure their portfolios are “battle hardened,” Jain said.

Healthcare consumption is also expected to grow due to demographic changes, such as aging Baby Boomers, who will require more care as they grow old.

Then there is increased demand for access to care in the developing world. “Outside of the US, particularly in developing and emerging markets, healthcare spending is increasing at a rate that is differentially higher than other sectors,” Jain notes.