Private credit has taken notice and has stepped in. As you can see in the chart below, that led to a big 2023 for the sector, before a marked decline in deal count and loan volume in Q1 24. But both of those metrics rose again in the second quarter:

Source: 9fin

Debt-tech

The sudden pressure on healthcare systems during the Covid pandemic spurred a flurry of investments in medtech companies. Today, the European medtech market is estimated at around €160bn, making up 26% of the global market, according to trade association MedTech Europe.

The debt markets are playing a substantial role in the medtech financing environment: in the 12-month period between July 2022 and June 2023, total financing for medtech companies rose 9% to $32.8bn, primarily driven by a 71% jump in debt issuance, according to data from EY.

Total debt issuance during that period was $19bn, and the proceeds were largely directed towards repaying and refinancing existing debt, according to the report. This partly reflects the decline of equity financing options: the amount raised through venture capital and IPOs was down 21% and 99%, respectively, over the same period.

Revenue is looking promising for tech-enabled healthcare businesses in Europe and is projected to grow over 50% to $35bn in the next five years, according to Statista data:

Source: Statista

There is plenty of scope for that revenue growth to lead to profitability: the leading 25% of ‘value creators’ in medtech are expected to expand their earnings margins by at least 200bps over the next two years, according to data from McKinsey.

But revenue growth doesn’t automatically lead to profitability, and rising interest rates have made it harder to grow margins. These days, healthcare largely falls into two buckets in private credit: vanilla direct lending to cash-flowing businesses, and “esoteric specialty lending” to businesses that aren’t yet cashflow positive, according to Howard Rowe, head of healthcare investing at Hayfin Capital Management.

In the non-cashflowing category, the borrower’s product and its gross margin are the most important factors, said Rowe: “That's your collateral package to the extent that loan does not turn into a traditional right-way cashflow-paying loan,” said Rowe in an interview with 9fin.

Once companies get to profitability, the valuation multiples can be juicy. Biotronik recently launched a sale process for its stents and heart catheter business, targeting a multiple as high as 14x to 15x. The unit generates €70m-€80m of EBITDA.

Dedicated funds

When Rowe joined Hayfin from Goldman Sachs almost 15 years ago, there were “precisely zero” healthcare IT deals on the table, he says.

That’s changed: the asset management firm now has a dedicated healthcare fund comprising $430m in capital and $70m of co-investment, and three out of its 11 investments are geared towards tech-enabled businesses.

The credit profiles Hayfin is interested can vary from cash-flowing businesses through to cash-burning scale-ups. “We have a pretty broad credit palette,” said Rowe.

Ares, which recently raised a record-breaking $34bn for its latest direct lending strategy, also has a fund focusing solely on healthcare private credit in the US. The firm is a clear frontrunner in Europe for healthcare deals, according to 9fin’s H1 private credit league tables (see here).

Permira’s direct lending team, meanwhile, focuses mainly on healthcare, technology and business services.

“Artificial intelligence, robotics, machine learning — those are all really good examples that help to reduce time and associated costs and ultimately can drive and help drug discovery and development,” said Jens Bauer, co-head of direct lending at the firm.

Geography matters

Within Europe, certain regions — generally those with well established development hubs, often around major universities — are particularly dominant in healthcare.

As per the chart below, the UK and Ireland are leading the charge, with 35% of healthcare-related private credit deals this year, according to 9fin data:

Source: 9fin

German-speaking countries have also seen plenty of activity in the healthcare tech and life sciences space. Some examples from our coverage:

• In May, LGT Capital Partners partnered with Oldeburgische Landesbank to provide a unitranche backing the buyout of Austrian medtech company TT Medic Group.
• At the end of 2023, Arcmont swooped in to provide the debt financing backing sponsor EMZ Partners’ acquisition of German dental solutions business imes-icore, which provides computer-aided design systems to the medical industry.

Looking for more on private credit? Check out our interview with Michael Kirchner of GCM Grosvenor, where we discuss investing in private credit’s next generation.