by Marc Raybin
June 3, 2015

PE Wending Its Way Through the ACA

Five years into the historic legislation, the asset class is focusing on new subsectors within healthcare.

Private equity investors are five years into the Affordable Care Act (ACA) and are still not sure if the massive healthcare overhaul has had a positive or negative impact on investments in the sector, but there is some agreement that the legislation has shifted priorities when it comes to dealmaking.

Ben Daverman, GTCR

“There are implications for how we think about future [healthcare] investments,” says Ben Daverman, principal at GTCR.

While GTCR did not have a lobbying effort on Capitol Hill five years ago when elected officials were creating the legislation, the firm did spend significant time talking with constituents and understanding the new laws. Considering that GTCR has put more than $10B to work in 200-plus deals in the last 30 years, with a third of that focused on healthcare, understanding the ACA was vital.

In that time, Daverman and GTCR identified three areas within healthcare that have been significantly impacted by the ACA. Not surprisingly, the firm has turned its attention to those subsectors within the space. For instance, the emergence of new payment models in healthcare motivated GTCR to invest in XIFIN, a cloud-based software and services system used by diagnostic providers. The platform enables connectivity between patients and payers, and other concerned parties.

Overall healthcare deals by subsector. Source: PitchBook

The other two subsectors GTCR has looked at are the digitization of healthcare and the question of how to monetize the increased patient volumes that have finally started to materialize.

“There is a need for connections across disparate locations,” Daverman says, in reference to the digitization of medical records. “[That information] needs to be analyzed to be useful and actionable.”

Todd Davis, a founding managing director of HealthCare Royalty Partners, echoes Daverman’s point about how technology has been impacted by ACA. He argues that the increased reliance on technology has contributed to a higher level of medical innovation rather than continued production of the same products.

“[There is a] focus on curing severe disease states rather than making the eighth statin,” Davis explains.

Todd Davis, HealthCare Royalty Partners

Davis says that—not surprisingly—the ACA has had a net-neutral to a net-positive impact on his firm’s business, which is focused on investing in patent royalties of approved healthcare products; innovation is the lifeblood of the subsector. Managers from HealthCare Royalty Partners are turning their attention to vaccines and other orphan indications that work to extend the lives of patients, as well as other unmet medical needs.

Davis credits the ACA, along with other macro trends within the sector—namely a bullish biotech market that has been roaring for years—for having a positive impact on fundraising for HealthCare Royalty Partners. The firm most recently closed a $1.5B fund in October 2014.

Echoing Daverman’s observation that more consumers have begun to flood the system, Davis points out that there is no language within the ACA that addresses price controls. Costs continue to rise, and pressures grow on the system.

“It is a factor of how much of GDP healthcare can consume,” Davis says.

Still, private equity investors can count on one thing about the ACA: “It is not going away,” says Davis.

Five years into the historic legislation, the asset class is focusing on new subsectors within healthcare, say experts from GTCR and Healthcare Royalty Partners.

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