The Shift Towards Specialisation: A New Trend in Healthcare Investment

The line between specialist and generalist funds in the healthcare sector is blurring, with specialist funds taking on bigger deals and generalists acquiring more technical knowledge within their health investment teams. 

We have recently reviewed a recent article from Real Deals, The Independent Voice of European Private Equity, which outlines key trends in the healthcare investment sector.

The nature of healthcare funds is changing 

In Europe, healthcare exposure is majorly through generalist funds, but specialists have consistently offered higher returns. This is due to their in-depth understanding of a complex market.

If the US market serves as a reference, healthcare specialisation is expected to increase in Europe. Specialist General Partners (GPs) are focusing more on niche sub-sectors, leveraging their expertise to identify and capitalise on unique investment opportunities. Their knowledge about regulatory frameworks and compliance issues further helps mitigate risks of regulatory setbacks and legal challenges. This rising trend towards specialisation also impacts recruitment, with top-level talent becoming increasingly hard to find, particularly in Europe.

Specialist funds are retaining the top talent 

Specialist funds with a strong reputation in their sector have the competitive advantage of attracting top-tier talent, thus lowering execution risk and driving commercial success. Professionals like Paul Tomasic and Alan McKay emphasize the need for a deeper level of sophistication and understanding in complex sectors such as healthcare. These sectors favour specialists who can swiftly adapt to latest developments, over generalists who may require additional time and resources. 

The healthcare sector is evolving 

In 2023, the biotechnology and pharmaceutical sectors excelled with biotech and pharma deals making up the largest portion of healthcare buyouts in Europe. Therapies like glucagon-like peptide-1 (GLP-1) receptor agonists, including weight-loss treatments such as Ozempic, are revolutionizing the investment scene. Investors are now exploring related medical, pharma, and healthcare tech areas due to impressive clinical advances in the GLP-1 market.

Rapid innovations are also observed in medical devices and technologies, particularly within diagnostics, dental, hospital supplies, and patient mobility sectors. Further, AI's rise has significantly propelled healthcare services, life sciences and research, and healthcare IT and digital health. These developments in healthcare present both challenges and opportunities for businesses.

What does this mean for generalist healthcare funds?

Despite facing challenges in healthcare, generalist healthcare GPs are leveraging their ability to diversify in sectors, thereby landing significant deals. They utilise more financial engineering and have dedicated healthcare teams, which large funds support. Big firms like the London-based GP can mimic the success of specialists through deploying additional resources. They depend heavily on their network to source deals and staff their boards.

These boards comprise of CTOs, CCOs, experts in people management and sustainability who learn from a vast database spread across various geographies and sectors. The changing dynamic in the investment landscape emphasises the importance of specialised teams, leading to a hybrid model covering various geographies and sectors. This shift has resulted in tangible results, including originating off-market deals and having deep discussions with entrepreneurs, critical within high-stakes auction situations.

Wider portfolio expertise

Private equity firms like Inflexion and Riverside have been making successful investment decisions in the healthcare sector by drawing on their experiences and relationships from other business sectors. 

They have managed to increase returns with a more holistic approach, balancing sector-focused strategies with a broader view of market trends. However, it’s been noted that generalist firms are naturally better suited to sectors like business services rather than specialist sectors. Nonetheless, healthcare remains an attractive and stable sector for PE and institutional investors, offering numerous opportunities for investment.

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