Despite geopolitical uncertainty and subdued M&A markets, healthcare remains one of the most attractive sectors for private equity investment, according to Rothschild & Co’s healthcare team, which opened the Investors in Healthcare conference with an assessment of the market.
While conflict in the Middle East and ongoing macroeconomic uncertainty slowed deal processes during the second quarter, transactions have largely been delayed rather than abandoned, the speakers argued, with activity already beginning to recover.
“The macro environment is impacted by uncertainty,” they said. “But deal processes didn’t fall over completely, they just started going pretty slowly.”
Shifting flows
One consequence of recent geopolitical uncertainty has been a shift in international capital flows.
Rothschild & Co said European healthcare is attracting a growing share of investment from US and international private equity firms as investors seek stable opportunities outside their home markets. At the same time, subdued activity in sectors such as software has prompted many global buyout funds to rebalance portfolios, creating additional interest in healthcare assets.
MFN reshaping strategies
Another emerging theme was the impact of the US administration’s most-favoured nation (MFN) pricing policy, which seeks to link US drug prices more closely to those paid in other developed markets.
According to Rothschild & Co, the policy is already influencing strategic decisions across the pharmaceutical industry. Some US and European biotechnology companies are reassessing, or even shelving, plans to launch products in Europe because lower European prices could ultimately affect US revenues under MFN provisions.
The result is a more complex M&A environment. Buyers are conducting much deeper due diligence on pricing, reimbursement and supply chains, while deal structures have become more complicated as parties seek to allocate pricing risk.
Despite those challenges, Rothschild & Co said pharmaceutical M&A remains active, driven by large companies replenishing pipelines ahead of patent expiries and continuing demand for innovative therapies, particularly in rare diseases, where pricing tends to be more consistent across markets.
AI valuation gap
Artificial intelligence (AI) has become the defining factor in investment decisions, creating a widening divide between businesses seen as beneficiaries of AI and those perceived to be vulnerable to technological disruption.
Companies viewed as AI winners continue to command premium valuations, while businesses facing AI-related obsolescence risk are finding it increasingly difficult to attract buyers or secure leverage.
The same distinction is now evident in debt markets, where lenders remain supportive of resilient healthcare assets but are more cautious towards businesses with uncertain AI strategies.
Publicly undervalued
Although healthcare M&A has remained broadly stable as a proportion of overall deal activity, Rothschild & Co argued that the sector is underappreciated by public markets.
The team pointed to persistent underperformance of listed healthcare stocks despite continued strong demand for high-quality private assets and successful transactions in selected areas of the market.
This disconnect means that well-positioned healthcare businesses continue to attract strong valuations, even while broader market multiples have come under pressure.
Portfolio rebalancing
One of the conference’s themes was a growing reallocation of private equity capital.
Over the past decade, buyout funds increased their exposure to software and technology businesses. However, lower software valuations, coupled with limited exit opportunities, are now prompting firms to rebalance portfolios.
Rothschild & Co believes healthcare stands to be one of the principal beneficiaries.
The speakers cited recent investments by technology-focused private equity firms into healthcare as evidence that capital is already rotating back into the sector.
Strong fundamentals
Healthcare’s long-term investment case remains supported by ageing populations, increasing demand for healthcare services and continued pressure on public healthcare systems.
The speakers highlighted preventive healthcare, outpatient services and consumer health as areas likely to benefit from structural growth, while pharmaceutical services are seeing renewed consolidation as platform investors seek scale and AI capabilities.
In healthcare services, growing demand for private provision and larger platform businesses could also create more IPO opportunities over the coming years.
Supportive credit markets
Contrary to suggestions that private credit has become more constrained, Rothschild & Co said financing remains widely available for quality healthcare assets.
Abundant liquidity has created a constructive lending environment, allowing sponsors to secure attractive financing packages for well-positioned businesses.
However, lenders are becoming increasingly selective, with AI resilience now a critical consideration alongside traditional credit metrics.
Outlook
While geopolitical uncertainty and changing drug-pricing policies continue to complicate transactions, Rothschild & Co argues that healthcare’s structural growth drivers remain intact. Ageing populations, resilient demand, supportive credit markets and a rotation of private equity capital back towards the sector leave healthcare well placed for a recovery in M&A activity over the coming year.
