A healthy penchant for healthcare

GP-led deals involving healthcare assets can provide an intoxicating mix of strong downside protection and meaningful upside potential.

Secondaries Investor has been delving deep into the secondaries market’s fascination with healthcare assets – an area its primary counterparts have also been deploying strongly into in recent years.

While technology – another long-time sector darling for private markets – now has some valuation question marks around it following recent market turbulence, healthcare has stayed the course as an area where buyers are keen to deploy their cash.

The deals continue to flow: this week, Secondaries Investor reported Charterhouse Capital Partners had closed a single-asset continuation fund deal involving speciality pharmaceutical group SERB in a process backed by Goldman Sachs Asset Management, CPP Investments and Hamilton Lane. At the end of last month, it emerged GHO Capital Partners had completed a secondaries transaction for global contract development and manufacturing organisation Sterling Pharma Solutions, with a spokesperson for GHO confirming to Secondaries Investor that AlpInvest Partners and Pantheon were lead buyers on the single-asset continuation fund.

Secondaries Investor is also aware of another single-asset continuation fund process for a US-headquartered healthcare-related asset that is significant in deal size and expected to close this week.

Successes have been plentiful: investors netted a return of between 4.5 and 5x following the exit of ArchiMed’s Polyplus – a developer of technology used in gene and cell therapy – earlier this year, according to ArchiMed’s managing partner. That vehicle was set up to house some of ArchiMed’s stake in 2020.

Late last year, it emerged Nordic Capital scored a 19x MOIC following its exit of UK-headquartered diagnostics business The Binding Site. Although that 19x relates to Nordic’s original investment in 2011, the exit for investors in Nordic Capital’s 2018 multi-asset continuation fund process, where the asset was housed most recently, still delivered a “very strong outcome” for continuation fund investors, according to one of the investors in that vehicle.

Secondaries buyers and advisers we’ve been speaking to in recent weeks all say healthcare makes up a meaningful amount of potential GP-led opportunities in the market. Christiaan van der Kam, head of secondaries private equity at Schroders Capital, says approximately 20-30 percent of continuation fund opportunities have meaningful healthcare exposure.

These businesses have characteristics that can be bucketed into two categories: strong downside protection and meaningful upside potential. Beyond the fact that everyone needs healthcare, there are still roll-up opportunities and technological innovations that present themselves as value-add opportunities. There is also no shortage of exit opportunities currently – welcome news for buyers that are scoping for assets that can be sold off in a shorter time period than those held by traditional private equity funds.

Such is the desire for healthcare some buyers that have hit concentration limits in their current funds are still keeping close tabs on healthcare-related GP-led opportunities for when they turn on the investment periods for funds they are out raising.

While interest in other sectors has cooled, healthcare remains high on secondaries buyers’ shopping lists. For those that want a full run down of what’s driving buyers’ cash into these opportunities, stay tuned for affiliate title Private Equity International’s healthcare special report out in July.

Write to the author: madeleine.f@pei.group