HGP Annual Health IT Private Equity Investment Survey Findings
May 16, 2016This spring, HGP surveyed approximately 400 private equity funds across all stages and received 94 responses. Responses concentrated toward Venture Capital and Growth Equity investors, who respectively invest in early and earlier stage companies. The distribution of responses across the stages of investing is consistent with the distribution of investment activity across the company lifecycle. While the survey likely has selection bias from those who responded, we believe that the data set is broad enough to be meaningful and deliver insights, particularly in mapping out the priorities and criteria of active health IT investors. We’ve summarized a subset of the findings in this post. The full survey is published in our mid-year 2016 HGP HIT Market Review, and feel free to contact us for the full download.
We asked investors, “How important are the following characteristics when assessing an investment?” and received the following distribution of responses:
Growth equity and buyout investors generally share the same criteria with the exception of profitability, where growth equity investors are much more forgiving. On the other hand, venture investors put a strong emphasis on management and market, with the idea that financial performance will follow sound execution. Buyout investors in particular focus on solid financial performance and augment execution by bringing in their own teams.
We did not ask what investors avoid. We would guess that most investors avoid companies with large losses with a challenging line of sight to profitability. Second to operating losses would be a low gross margin that makes scalability a challenge. Significant losses even with impressive revenue growth may cause a significant drag on valuation or simply make a company un-fundable or unable to sell.
Among our 19, questions, we also asked “Do you think Health IT is in a bubble?” and received a high variance of responses across each investor category:
Growth Equity and Buyout Investors do not have any conviction that the health IT market is in a bubble. Results were split relatively evenly between Yes and No with the majority reporting Maybe. However, 41% of Venture Capital respondents believe health IT is in a bubble, compared to 11% and 16% for Growth Equity and Buyout, respectively. Bubble sentiment indicates that valuation expectations are significantly misaligned from company and market fundamentals, and prices need to drop in order for the market to correct. Given the VC response in our survey, bubble characteristics are most evident at the early stage.
Although the methodology is not perfect, HGP took a deeper dive and measured the volume of investments versus liquidity events (M&A and buyout) since 2010. An increasing surplus of investment versus M&A volume signals a growing backlog of companies that will ultimately seek a liquidity event. As the supply of liquidity seekers increases, so must the number of exits (aka, acquisition demand) in order to achieve market equilibrium. Buyout investors continue to signal high demand for health IT, as do corporate entities. According to our HIT Corporate Survey in December 2015, approximately 90% of strategic entities that operate in or adjacent to Health IT are actively seeking acquisitions (please feel free to contact us for a copy of this report).
Theoretically, M&A should generally track with investment activity, and any significant imbalance may lead to supply and demand falling out of equilibrium which may result in valuations rising or falling. From 2010 to 2013, M&A exceeded investment by approximately 300 transactions. Since then, investments have outpaced M&A by nearly the same margin. Based on these trends and in order to remain at equilibrium, one would expect M&A volume to accelerate or investment activity to decline in the upcoming years.
We’re happy to share the full survey upon request. Feel free to contact us for that information.