Introduction
The healthcare private equity industry is booming, with investment into the sector reaching record highs in recent years. However, the competition for attractive deals is also intensifying. With more private equity firms chasing fewer quality targets, it has become increasingly difficult to stand out from the crowd and succeed in this competitive landscape.
In this post, I will explore five key strategies that healthcare private equity firms can employ to outcompete their rivals and gain an edge in the hunt for lucrative investment opportunities. These include developing deep sector expertise, focusing on niche subsectors, creating strategic value post-acquisition, fostering strong relationships, and leveraging data and technology.
Strategy #1: Develop Deep Healthcare Sector Expertise
One of the biggest advantages a private equity firm can have over competitors is the depth of knowledge within the healthcare industry. Developing true subject matter expertise takes time and continuous learning, but it can pay huge dividends when evaluating opportunities and creating value at portfolio companies.
There are a few ways firms can cultivate expertise:
Hire healthcare professionals. Bringing on operating partners, clinicians, researchers, and healthcare executives with decades of frontline experience is invaluable. Their insights can help identify growth opportunities others may miss.
Conduct thorough sector analysis. Conduct ongoing competitive analyses, monitor regulatory changes, study demographic trends, and understand reimbursement dynamics – leave no stone unturned in your research of the broader landscape and its subsectors.
Host industry events. Convene thought leaders, innovators, and influencers through roundtables, webinars, and conferences to keep abreast of emerging ideas and stay plugged into healthcare’s innovation ecosystem.
Foster a deep bench of expertise in-house. Rather than parachuting in outsiders for each deal, develop proprietary sector knowledge across your investment team through hands-on work. Rotate professionals through relevant operational roles.
Partner with domain experts. Collaborate formally with well-respected healthcare academics and research centers to stay on the cutting edge. Consider co-investments where you can leverage their networks and diligence capabilities.
Firms that take expertise development seriously will have a far richer understanding of strategic opportunities, operational challenges, regulatory risks, and innovative solutions than generalized private equity players. This level of specialized knowledge translates directly into deal sourcing, underwriting, and value creation advantages.
Strategy #2: Focus on Attractive Healthcare Subsectors
Rather than trying to compete across the sprawling healthcare universe, high-performing firms zero in on two or three specialty subsectors where they can gain true market dominance. Focus allows for deeper expertise, dedicated resources, tailored value-creation plans, and synergies across portfolio companies.
Some subsectors currently attracting large pools of private capital include:
Senior Housing & Post-Acute Care Facilities
Healthcare Technology & Services
Specialty Pharmacies & Distribution
Outpatient Services (Lab Testing, Imaging, Surgery Centers)
Behavioral Health Providers
Veterinary Services
Within their chosen domains, top firms:
Tailor investment theses to subsector realities e.g. reimbursement, labor, regulations
Build exclusive networks of owners and managers to generate dedicated deal flow
Provide “one-stop shop” facilities for add-on acquisitions by portfolio companies
Leverage cross-company improvements e.g. group purchasing, clinical best practices
Conduct primary market research to stay ahead of trends
By staking their claim in just 2-3 carefully selected segments, elite private equity shops enjoy first-mover advantages, synergies across holdings, and unparalleled deal qualification expertise versus generalists spread too thin. Subsector focus leads directly to investment performance over the long run.
Strategy #3: Create Strategic Value through Active Ownership
Once a target company is acquired, value creation is where private equity leaders truly excel versus competitors. The highest-performing firms approach ownership not just as passive financial sponsorship, but as strategic partners to help portfolio companies reach their full operational and growth potential.
Some powerful value-creation levers include:
Support add-on acquisitions. Hunt for complimentary businesses to consolidate markets and achieve economies of scale.
Drive organic growth. Institute marketing, sales excellence, clinical programs, and service line expansion to increase same-store volumes and market share gains.
Optimize operations. Benchmark processes, centralize functions, streamline workflows, and monitor KPIs to identify cost-saving opportunities and margin enhancement projects.
Pursue strategic partnerships. Forge alliances that extend geographic reach, product/service lines, and open new referral channels.
Bolster management teams. Augment existing leadership with talented operating executives, and recruit industry all-stars as new CEOs or division leaders when needed.
Address technological adaptation. Implement systems upgrades, telehealth programs, and data analytics to improve care quality, and patient/provider experience and drive efficiencies.
Top private equity firms view themselves not just as passive investors but as hands-on change agents working closely alongside management every step of the way. This engaged, value-add approach separates the great from the good when it comes to dealing with performance down the road.
Strategy #4: Foster Strategic Industry Relationships
An oft-overlooked key to success in healthcare private equity is the importance of developing deep, strategic relationships across the industry ecosystem. Elite players understand the power of their Rolodex and leverage it to generate investment opportunities as well as create value at portfolio companies.
Some relationship-building best practices include:
Nurture seller/owner connections. Stay top of mind for entrepreneurs and family office owners looking to monetize or pass the torch.
Partner with leading executives. Bring in former hospital CEOs, and health system CFOs as operating partners; they know who may soon depart or sell their organizations.
Foster consultant alliances. Reward referrals from bankers, and brokers who understand your specialty focus and vet you as a preferred partner.
Maintain healthcare provider ties. Seek input from physician practice groups and IDNs on market needs that may spawn new business concepts or partners.
Build referrals from lenders. Thank commercial/investment banks whose debt facilities help finance and support your deals.
Create legal/accounting advisor networks. Rely on skilled attorneys, auditors, and valuators who promote you to prospective targets.
With healthcare services so interdependent, well-connected private equity players can source proprietary transactions as well as cross-sell portfolio company services to their industry contacts. The result is deal flow advantages that streamline diligence and close rates over less networked competitors.
Strategy #5: Leverage Data & Technology
Today’s healthcare buyers must thoughtfully harness data and digital tools to outshine peers. Trailblazing private equity funds analyzing provider organizations as tech-enabled platforms can gain major insights driving smarter acquisitions and higher value creation. Cutting-edge players:
Mine clinical databases to map physician networks, procedure volumes, and outcomes measures as guides into new regional markets.
Use EMR data to pinpoint service line opportunities, and staffing inefficiencies missed by existing management.
Deploy digital marketing tools to amplify portfolio company brand awareness and conversions.
Pilot telehealth programs to test geographical expansion or new care models.
Institute analytics dashboards flagging revenue cycle performance, and staff productivity for rapid improvement projects.
Standardize on interoperable systems enabling data-sharing across add-on acquisitions.
Bring in expertise from digital health startups innovating care delivery through AI, blockchain, and predictive analytics.
Staying ahead of the digital healthcare curve confers numerous competitive advantages – from generating differentiated diligence insights to streamlining portfolio operations to pursuing new high-growth business lines on the cutting edge of innovation. Technology must become a core competency of future-thinking investors.
Taking the Lead
The bar is rising in healthcare private equity as more capital chases fewer high-quality opportunities. However, those firms aggressively differentiating themselves through operational excellence, strategic focus, deep partnering, and technological disruption can stay a step ahead of the competition. Developing specialized sector expertise, cultivating industry relationships, and taking an active hands-on approach to value creation are must-haves for sustained leadership. With dedicated effort across these five dimensions, savvy buyers can continue exploiting a lucrative deal landscape and gaining market share from less adaptable rivals.