Private equity firms have poured into the healthcare industry over the years, so it should come as no surprise that these assets are attractive candidates for GP-led secondaries deals.
Continuation fund transactions centre on a sub-set of the traditional direct market, explains Darren Schluter, a managing director at PJT Partners. Picking out particular sectors, he says healthcare and tech-focused GP-led continuation funds have been popular in recent years, but market volatility has given rise to questions around the valuations of technology-focused assets, so there is more emphasis on profitable companies with a focus on multi-assets in that sector. Healthcare, however, has continued to be a key driver of GP-led secondaries demand on the buyside.
Approximately 20-30 percent of continuation fund opportunities have meaningful healthcare exposure, says Christiaan van der Kam, head of secondaries at Schroders Capital.
There have been a number of transactions that have closed in recent months. In May and June alone, Calera Capital closed on a continuation fund for healthcare laundry services company ImageFIRST in a deal backed by Goldman Sachs Asset Management, Blackstone Strategic Partners, Portfolio Advisors and TPG, Secondaries Investor reported. Charterhouse Capital Partners closed a single-asset continuation fund deal involving speciality pharmaceutical group SERB in a process backed by Goldman Sachs, CPP Investments and Hamilton Lane. GHO Capital Partners also tapped the secondaries market for contract development and manufacturing organisation Sterling Pharma Solutions in a deal led by AlpInvest Partners and Pantheon.
Buyers like opportunities with strong downside protection and meaningful upside potential, and healthcare assets fit into that dynamic well, van der Kam says. There will always be demand for healthcare, he adds. The sector is still fragmented, making it ripe for further consolidation, and it benefits from long-term tailwinds such as continued innovation through technology and software.
The ability to exit these businesses in a continuation fund’s shorter time frame compared with traditional blind pool funds is also playing into healthcare’s popularity in the secondaries space, market participants say.
“Having a broader and deep private equity market that’s actively investing in healthcare companies, you as a buyer can sit there and say, ‘Well, there’s a very healthy exit market for this business in the future, whether it’s an IPO, acquisition by a strategic, or acquisition by a larger private equity fund,’” says Matt Wesley, global head of private capital advisory at Jefferies.
These transactions are also able to command favourable pricing compared with other sectors, Wesley says. “Business services… and healthcare are probably the two areas that are getting the most demand from our buyers, and therefore most demand equals [the] best price [for] investors.”
Some areas of healthcare are seen as less attractive, however. Those businesses in areas where there are regulatory challenges or where margins are pressured given the cost of services may be of less interest, Schluter says.
For example, biotech/biopharma is an area that is high risk, high reward, where investment returns are far from consistent and deals can be write-offs or home runs, says Tom Jorgensen, managing director at impact manager North Sky Capital. “Without a clear path to liquidity and valuation trajectory, it is hard for secondary investors to underwrite and find common ground with sellers on pricing,” says Jorgensen.
Regardless, there is still demand from secondaries buyers for healthcare opportunities. 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.
Healthcare continues to be at the top or “at least second” from a sector perspective when it comes to GP-led continuation funds, Schluter says.
Recent examples of healthcare-focused continuation fund processes include assets from a range of subsectors, including pharmaceuticals, medical devices and healthcare services
Charterhouse’s pharma continuation fund deal
Charterhouse Capital Partners moved speciality pharmaceutical group SERB out of its 2016 Charterhouse Capital Partners X fund into a separate vehicle, sources told Secondaries Investor in June. The continuation fund was initially worth around €500 million, and its ultimate size was increased to around €700 million post-closing after SERB’s May agreement to acquire the US rights to Bentracimab, a blood-thinning reduction drug, Secondaries Investor understands. The deal attracted backing from Goldman Sachs Asset Management, CPP Investments and Hamilton Lane.
Coller closes first RMB-denominated GP-led
In April 2023, Coller Capital closed its first RMB-denominated GP-led transaction through its dedicated yuan-denominated fund, acting as sold lead on a multi-asset healthcare continuation fund. The approximately 315 million yuan ($46 million; €42 million) transaction involved moving six healthcare assets out of an existing vehicle managed by Legend Capital and into the continuation fund. The assets span digital health, medical services, medical devices and diagnostic technology.
BPOC moves five assets into a separate fund
Healthcare specialist BPOC moved five healthcare services businesses out of two 2013-vintage vehicles to provide more time and, in certain cases, additional capital for further growth. Apollo’s S3, Blackstone’s Strategic Partners and Rothschild’s Five Arrows unit co-led on the healthcare-focused multi-asset continuation fund transaction, Secondaries Investor reported in April 2023. JPMorgan, Newbury Partners, Committed Advisors and Kline Hill Partners also invested in the continuation vehicle deal, worth $425 million.