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Cameron Black: We primarily invest in healthcare private equity, including venture capital and middle market buyout funds.
It won’t likely come as a surprise that there was a significant amount of dispersion in returns and variability across healthcare sub-sectors in 2020.
As the seriousness of the pandemic began to emerge, it was interesting to see General Partners (GPs) taking divergent approaches to valuing their books. Some were very aggressive with big write-downs early on and others were more incremental in their approach to valuation.
Variability was also driven by sector-specific exposures. For example, telemedicine and behavioural health-related companies did well as they saw their revenues skyrocket.
On the other hand, healthcare staffing firms suffered because people simply weren’t going to their doctors or the hospital.
Managers who were most aggressive in writing down exposures have generally been busy writing them up in subsequent quarters.
But we did see a significant number of delayed or cancelled exits in late Q1 and Q2 of 2020 so it was easy to see where those GPs were coming from.
"There are more dollars in healthcare private equity and venture
capital than ever before."
For a few brief moments in 2020, there were some very attractive opportunities that a few far-sighted GPs who also had dry-powder were able to snap up. 2020 was a good year to be a clear-eyed investor with a newer vintage fund.
But at the end of the day, 2020 saw a continuation of long-term trends in healthcare private equity. Clearly not every company is a winner but there is plenty of real innovation in the space and it remains a great place to invest.
There are more dollars in healthcare private equity and venture capital than ever before. And now, with the worst of the virus behind us and with capital markets fuelled by unprecedented liquidity we have more and bigger exits than ever before.
There are still plenty of strategic acquirers out there but exit avenues such as direct listings and a never-ending supply of SPACs only help push valuations up.
Cameron: The amount of stimulus that was pumped into the economy and the amount of special programs that were created to prop up healthcare providers meant that there were a lot of dollars that were filling a lot of gaps.
So, while there were pockets of short-term opportunity for capital providers it didn’t last long. This wasn’t the case throughout the entire economy, and in fact, government support and its benefits were unevenly distributed.
In this crisis, it was the service economy that bore the brunt. This contrasts with 2008, where the whole economy looked like it was headed in a downward direction.
But no matter what is happening in the economy, the need for healthcare doesn’t go away. That is the main reason we see so many de novo GPs in the space and a larger number of established generalists launching healthcare specialty funds now.
"For the last several years, overall EBITDA multiples on
acquisitions have crept up."
I will note however, that we still favour the GPs with substantial tenure in healthcare investing. Not everyone who has been to the doctor is an expert in the healthcare economy.
And we do have significant concern about valuations here. Not just in healthcare but in private equity broadly. For the last several years, overall EBITDA multiples on acquisitions have crept up but debt financing multiples have generally stayed more steady.
That means the equity check is doing more of the lifting and is indicative that that future returns will likely be lower.
