Larger deals are expected to be seen in the healthcare sector across the UK and EU, creating more opportunities for specialised direct lenders in 2025.
According to Graham Phillips, private equity partner at Clifford Chance, levels of private equity investment in the healthcare sector continue to be strong, despite wider macro-economic headwinds. In fact, despite increasing regulatory scrutiny, a recent report from the Private Equity Stakeholder Project has found that private equity activity in the sector remained high through 2024, identifying 1,049 private equity-backed deals in the US.
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Although higher interest rates have created a gap between seller and buyer expectations, halting some sales processes, this is expected to change.
“As inflationary pressure subsides and borrowing costs fall, this valuation gap should narrow and be the catalyst for increased deal volumes, with many sponsors ready to deploy their significant amount of dry powder on healthcare investments that can deliver the level of returns they require,” Phillips said.
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In Phillips’ view, businesses that can be scaled-up quickly, whether organically or through bolt-on acquisitions, are likely to be particularly attractive.
“The sources of these future acquisition opportunities is also likely to be varied, including the sale of non-core assets by large pharma companies, sponsor-to-sponsor trades if projected growth for the target business in the next chapter of its evolution is in-line with an incoming sponsor’s return requirements, as well as takeovers of public listed companies if the private equity investor can meet the valuation of the target set by its board and shareholders,” he added.
According to investment consultancy bfinance, private debt investors are seeing higher returns in healthcare lending, with fund IRR targets suggesting a premium of more than 300bps compared with traditional direct lending strategies. The research showed that the median net IRR target for healthcare direct lending strategies is nearly 15 per cent, versus 11 per cent for generalist US direct lending strategies.
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“Companies in this universe are often poorly served by the banking sector,” bfinance noted. “They are also overlooked by mainstream direct lenders due to distinctive characteristics… And, while some firms can generate cash via pharmaceutical and biotech royalties, this is not an option for all. Even for those who can pursue this route, the investment appeal of royalties has been somewhat dampened when compared with credit in a climate of higher interest rates. Specialist lenders – featuring expertise from the related spheres of healthcare venture and healthcare banking – can inject themselves into a financing gap.”
