Research by McKinsey & Company found that the U.S. health care sector has performed better than the overall market and the U.S. private equity industry.
The consulting company analyzed 140 private investments in the U.S. health care sector from 1995 to 2014. The research shows the returns in U.S. health care were “1.5 times higher than the broader public market and in five of eight subsectors outstripped the U.S. private equity industry.”
“An aging demographic has propelled the industry” states the report. “The scope for innovation and a steady supply of profitable businesses have made it a fertile market for private equity investors.”
The strong performance was reflected in the stellar returns. Investors made 2.3 times their money in health care versus 1.7 times for all U.S. private equity.
Among the subsectors payor (health insurance) and pharmaceutical services had even more superior returns.
A total of 29 deals in both sectors has achieved 39 percent median annual return.
The report highlights the strong performance of buyouts in pharmaceuticals. In particular, the recent rush for acquisitions has been mainly driven by narrowing opportunities for high-growth pharmaceutical products.
For example, Texas Pacific Group’s exit from Par Pharmaceutical Companies earned it a sevenfold return in three years.
Another key finding is that sales to strategic buyers produce higher returns than sales to other private equity funds. Strategic buyers are often willing to pay more because of the synergies they can produce.
Going forward, the deal trend is expected to continue as strong cash flows in the sector increase the possibility of mergers and acquisitions.
According to a research report published by the management consulting firm Bain & Company, the implementation of the Affordable Care Act has also prompted some of the investment activity. Health care will remain an important area of opportunity for investors according to Bain:
“Consistent with prior years, we expect investors will still need to work hard to win assets and generate superior returns due to high valuations that are almost certain to persist, a small pool of existing large-scale assets and heavy competition from strategic buyers.”
On the other hand, analyst Brad Sorenson from Charles Schwab raises concerns for the sector in his research report. Sorenson said potential pricing regulation and increased government involvement mean a more challenging environment for the U.S. health care sector.