If you’re interested in investing in private equity, you’re not alone. Private equity is booming and it’s basically in every industry from housing and technology to retail and even the media. Healthcare private equity is also experiencing a rise in popularity.
Investors are buying into healthcare services with the goal of adding value to the industry. This value often includes streamlining business operations and improving healthcare facilities’ ability to fund innovations. If you’re considering investing in healthcare private equity, you should be aware of a few things before breaking out your checkbook.
What is Private Equity
Okay, so what exactly is private equity? As the name implies, private equity refers to investing in a company that’s not publicly traded. This means it’s not listed on the stock exchange.
Instead, a private equity firm collects money from an individual investor or a group to acquire a stake in a healthcare company. Like with publicly traded stocks, the goal of the investment is to make a profit. Where do the investment funds come from? This can vary from pensions, wealth funds, and endowments, for example.
Private equity can use a variety of investment strategies. A venture capital (VC) firm invests in companies at the early stage. This type of private equity firm looks for companies displaying a high growth potential. Traditional private equity firms use investors’ money to acquire a stake in a mature company. These companies are usually underperforming, and the firm uses leveraged buyouts to purchase the stake.
You can also invest in a growth equity firm. This type of private equity focuses on stagnating mature companies looking for capital to continue growing. This type of private equity investment is typically smaller than what’s used in venture capital and traditional private equity firms.
So, to put it into a simple explanation. If you want to invest in a company just starting, go with a venture capital firm. If you’re more comfortable investing in a mature company, then a traditional or growth equity firm is probably the way to go.
Just remember, a venture capital firm can take more risks than a traditional private equity firm, and this is because the company is already underperforming and not seeking capital to continue its growth. Still feeling a little confused? An experienced investment firm can help steer you in the right direction.
Why Private Equity Firms are Investing in Healthcare
When you think of investing, your local hospital rarely comes to mind. However, other investors are happily keeping an eye on the industry.
Healthcare is an industry that’s growing and will continue to advance. This means there are some great investment opportunities you may not want to miss. In other words, while other industries can slow down and even experience a decline, this rarely happens in healthcare. People will always require healthcare services regardless of the economic climate.
Private equity firms also view waste in a negative light. They’re not necessarily concerned with the type of waste affecting the environment—you know, things like unrecyclable products ending up in landfills. Investors are talking about the type of waste that negatively affects a company’s bottom line. These inefficiencies can include anything from practices that waste valuable resources to simply overscheduling nursing shifts.
Private equity firms look at these inefficiencies as enticing challenges, and their goal is to implement efficient programs that eliminate costs associated with waste. The more costs they can eliminate, the higher the return on the investment. Since waste is typically high in healthcare, the yield on the initial investment can be substantial.
Another reason private equity firms are taking a keen interest in the healthcare industry is the ability to consolidate market power. The healthcare industry is extremely spread out. For example, you can have several hospitals in one city with neither being managed by the same firm or individual.
While this can be beneficial for patients in terms of cost, you can have a price war between competing healthcare providers in an attempt to draw patients in. Once again, private equity firms see this as waste. By consolidating the various aspects of the healthcare industry through investments, they can eliminate this type of waste.
Are You Thinking of Investing in the Healthcare Industry
Given the current market dynamics and the promising opportunities within the healthcare sector, pooling your funds into a private equity firm presents a strategic move for investors seeking growth and diversification. The choice between a venture capital or traditional equity firm hinges on your investment goals and risk appetite.
Consulting with a wealth manager today can provide you with tailored insights and strategies, enabling you to navigate the complexities of private equity in healthcare more effectively and align your investments with your long-term financial aspirations.