The effects of the covid-19 pandemic have been credited with driving change across several key verticals for private equity, but perhaps none more so than healthcare.

A natural area for attention – and therefore investment – during the worst of the pandemic, GPs have been dogged in their search for value-creation opportunities within the sector. A report from Bain & Company found that total disclosed deal value more than doubled to hit $151 billion globally in 2021, more than double the amount in the previous year, with the number of healthcare-related deals increasing by 36 percent.

With such intense attention being paid to the industry, private equity firms are experiencing fierce competition for assets – even with unmet medical needs providing opportunities. It is within this nexus between supply and demand that investors look to take advantage of a market ripe for development.

By investing in companies dedicated to technological advancement within the healthcare ecosystem, GPs are looking to meet patient demand and improve health outcomes while maximising returns. However, many market onlookers warn that a discerning eye will still be necessary to make a successful investment – there is no low-hanging fruit in such a highly regulated sector.

Here are three trends that highlight how the digitalisation of the healthcare sector will drive advancement and how private equity is getting behind the tech revolution.

Beating the digital drum

While investor interest in the healthcare sector is not necessarily a new phenomenon, the urgency with which the sector required innovation heightened during covid-19. The move to remote interactions was exacerbated by existing delays in digitalisation, according to Steven Dyson, a partner in the healthcare team at Apax. “The healthcare sector is often one of the laggards when it comes to the adoption of new technologies, both because it is highly regulated and because of the risk profile associated with new technologies in patient care. But over the last few years, the sector has picked up the pace of adoption and that new momentum shows no signs of slowing.”

Scientific developments have also helped to boost investment in the sector, with many taking advantage of closer attention being paid to biotech and pharmaceutical advancements, including the likes of the mRNA vaccines that helped to slow the spread of covid.

As the science behind the medicine develops, so too does the need to find new avenues for such changes to be distributed to the patient base. As Paul Moskowitz, a principal in the healthcare private equity team at Bain Capital, says: “The needs of healthcare are so specific that they have required the development of new tools to address the needs of participants across the value chain.”

Getting on board with wellbeing

Awareness of mental health issues grew significantly during the covid-19 lockdowns. Research firm CB Insights found that mental health tech start-ups received a mammoth $5.5 billion in funding in 2021, up 139 percent year-on-year, while Talkspace – one of the most prominent online therapy apps – became the first of its kind to hold an IPO, reaching a valuation of $1.4 billion in June 2021 via a SPAC.

Even as the global markets recover from the pandemic and as people get back to the workplace, fresh emphasis is being placed on the importance of mental health and wellbeing.

Lisa Suennen, a long-time venture investor in healthcare, says companies aiming to develop mental health and wellness solutions have been “enabled by digital capabilities and telemedicine; by there being lots of capital out there; and by a willingness to admit that people might need help”.

While questions remain as to the long-term viability of such digital solutions, Nicole Martinez-Martin, an assistant professor at Stanford University’s Center for Biomedical Ethics, argues that there is still a place for virtual mental health solutions even after the lifting of covid-19 restrictions.

There is still “certainly a place for telehealth”, she says, noting that “a number of mental health providers reported fewer missed sessions. Without those barriers of having to take time off work or get parking, more people actually did show up for care.”

Keeping up with the competition

Amid such a frenetic dealmaking and fundraising environment – $15.9 billion worth of healthcare-focused capital was raised by the private equity industry in 2021, according to Private Equity International data – some market onlookers are sceptical as to how much longer the healthcare sector can keep up such momentum.

How the private equity industry will adjust its expectations on healthcare returns remains to be seen, but for now the market seems set on making the most of opportunities within the sector. According to Bain & Company, there were 30 healthcare buyouts worth more than $1 billion in 2021, while the availability of dry powder within the sector may encourage divestment. However, Eric Liu, co-head of the global healthcare sector team at EQT, warns that there are not enough assets to go around.

“The healthcare sector has become much more competitive in recent years, with a lot of new entrants. The real economy is not able to create scaled healthcare assets at the same pace at which investors can raise capital, which has led to a supply/demand imbalance that has sustained private equity asset valuations for assets perceived to be high quality, despite the declines in public equity markets.”

Jan Pomoell, co-head of the health team at Triton Partners, adds that regulation within the sector can create an additional layer of complexity. “As an industry that is already heavily regulated, uncertainty around future regulation is always a concern. While a number of these regulations are necessary to ensure a safe environment for patients, many regulatory bodies fail to provide incentives that nurture innovation and encourage efficiency.”