

Blue Ocean Strategy in Private Equity - Portfolio Structuring
The healthcare market holds substantial potential for private equity investments through blue ocean strategies and expanding market boundaries.
Objectives:
​
This article investigates the profitability of the healthcare market for private equity (PE) firms, offering a high-level business model description, analysis of global healthcare market trends, and outlining investment strategies. It explores successful blue ocean strategies worldwide and highlights local examples from Mubadala and the Abu Dhabi Investment Authority (ADIA).
​
Private Equity Firms in Healthcare
​
Private equity firms invest in privately listed companies at various growth stages, aiming to allocate funds and potentially delist the company from the stock market. Their ultimate goal is to resell equity with maximum EBITDA multiples, focusing on companies poised for capital gains. Typically, PE firms acquire more than 50% equity to maintain control over the company.
​
PE Structure
-
Limited Partnership: The General Manager collects a 2% management fee and 20% of profits, while limited partners receive the remaining profits. A hurdle rate applies as the minimum profit before fees are collected.
-
Close-End Funds: Investors contribute to a fund managed by hired managers, entitled to similar compensation as in a limited partnership.
PE investments usually target companies valued over USD 25M, distinguishing them from venture capital investments. Suitable companies should be reputable, have a strong customer base, and demonstrate scalability, especially in technology. Due diligence involves assessing processes, compliance, and best practices, with a focus on innovation and growth potential.
​
Value Creation and Strategic Objectives
PE firms create value by perceiving market boundaries unconventionally and embedding innovation in business operations. They aim to buy undervalued firms with growth potential, typically selling them within 5-7 years, although durations vary by firm strategy.
​
Exit Strategies
Successful exits in healthcare vary, with multiples ranging from 11.4x for healthcare providers to 21.3x for medical devices. Blue ocean strategies, developed by W. Chan Kim and Renée Mauborgne, emphasize exploring unconventional market strategies and reconstructing market boundaries.
​
Market Size and Boundaries
In 2019, PE firms invested USD 78.8B in 13 healthcare deals globally. Investments spanned private medicare, electronic medical records, biopharma innovations, and more. Healthcare IT and biopharma contributed significantly, with digital healthcare deals making up 17% of the total value.
The healthcare sector's attractiveness is due to its 7% global growth rate, potential for high-tech development, and high EBITDA multiples (11.4-21.3). Risks are mitigated through customer loyalty, long-term contracts, and chronic condition treatments.
​
Trend Analysis
​
Political
Global organizations and local healthcare ministries support digital transformations and technological advancements. However, the industry is highly regulated, with stringent processes for pharmaceuticals and medtech, impacting investment strategies.
Economic
The aging population makes healthcare investments a safe bet. The sector is resilient to macroeconomic trends, although the COVID-19 pandemic may influence future investment directions. PE firms often invest globally, driven by favorable tax regulations.
Social
Trends in social care and homecare drive investments in behavioral health and home care. Retail health and digital wearables are growing markets, along with increased demand for health and skin care products.
Technological
Investments in healthcare IT, digital health, and biopharma innovations are rising. Technological advancements in data analytics and AI are driving growth in health fitness and medtech.
Environmental
Environmental pollution is a significant health risk, driving demand for healthcare solutions addressing pollution-related diseases.
Legal
Regulatory bodies impose country-specific rules on healthcare, affecting investment trajectories. PE firms often avoid highly regulated businesses due to risks associated with compliance and reimbursements.
Industry Value Chain
Revenue generation in healthcare investments should be straightforward, focusing on streamlining processes like member recruitment, enrollment, and network management.
​
Blue Ocean: Investment Selection Criteria
Unconventional strategies, such as diversification, consortia, and technological advancements, are key to successful investments. Examples include JD Health's online pharmacy and JP Morgan Chase's investment in InstaMed.
Financial Implications and Exit Strategy
Post-5-7 years of restructuring, PE firms prioritize revenue growth. Healthcare public companies have shown significant growth, with average exit multiples around 14.9x.
Example Market: UAE
In 2018, the UAE healthcare market was valued at USD 151B, with significant growth in service providers and medical devices. Local PE firm Mubadala invested in private hospitals, health centers, and laboratories. However, unmet needs like MRI diagnostics and specialized clinics suggest potential for further investments.
Recommendations for Profitable Investment Strategies
To select a profitable healthcare portfolio, PE firms should understand sector trends, identify unmet market needs, and look beyond local markets. The ability to raise capital, select appropriate investments, and manage them towards an IPO is crucial for successful blue ocean strategies.
Considering global trends and the impact of COVID-19, healthcare investments in technological advancements, telehealth, laboratory tests, and pharmaceutical development are poised for long-term demand.
​
Sources:
-
“Private equity opportunities in healthcare tech”, McKinsey publication, May 2019.
-
“Blue Ocean Strategy” W. Chan Kim and Renée Mauborgne.
-
“Private Equity 4.0 Reinventing value creation”, Benoit Laleux, et al., Willey Finance Series, 2015.
-
“Global Healthcare Private Equity and Corporate M&A Report 2020” Bain and consultancy.
-
“Private market comes of age. McKinsey Global private market review”. McKinsey and Co.
-
“A healthier Abu Dhabi”. Nov 2018, www.doh.gove.ae.
-
“Air pollution”. World Health Organisation.
-
Mubadala.com