Private equity’s upbeat healthcare prognosis

Financial sponsors are poised to set a new high in the number of healthcare IT deals, and have already invested a record amount of money. The increasing spend comes as most healthcare businesses overhaul their digital strategies, providing a temporary opening for private equity portfolio companies to land new healthcare clients.

According to 451 Research’s M&A KnowledgeBase, private equity firms have bought 77 healthcare IT companies, on pace to best 2017’s 82. In the process, they’ve spent $8.5bn in a category that has only stretched above $4bn in one other year. The striking surge in healthcare comes amid a steady cadence of increasing PE investments in vertically specific technologies, where PE acquisitions have grown every year since 2012.

Particularly in healthcare, much of the year’s surge comes from a single deal – Veritas Capital’s $4.3bn reach for Cotiviti in June. That deal valued the target, a patient-billing services provider, at 6.6x trailing revenue and a rich 20x trailing EBITDA. Those multiples are well above the broader healthcare tech market, where the median revenue multiple stands at 2.3x across all deals in the last 24 months. Still, Cotiviti isn’t alone in fetching a premium valuation from a PE firm. In April, Vista Equity Partners paid similar multiples in its purchase of healthcare BI specialist Allocate Software (M&A KnowledgeBase subscribers can see our estimate of that deal here.)

The dramatic rise in PE spend comes as healthcare companies reassess their digital investments. According to 451 Research’s Voice of the Enterprise Digital Pulse report earlier this month, nearly half (42%) of responding healthcare companies reported that they are planning and researching a digital transformation strategy. The abundance of healthcare customers in that pre-buying phase offers vendors a chance to develop new relationships that could pay out for years. However, as planning moves to execution, that opportunity will flatline.