By the McDermott Will & Emery team
The volume of private equity exit activity has taken a tumble since the heady days of 2021, with sponsors choosing to hold onto assets longer in the face of tight M&A markets.
For the last few years, a material difference between the price sellers want for their assets and the price that buyers are willing to pay has been an impediment to deal activity, along with the higher cost of financing.
In 2024, we started to see signs of that valuation gap diminishing for healthcare and life sciences assets, with private equity firms once again looking to exits as a means to realise gains on their investments.
In September 2024, McDermott Will & Emery hosted our annual Healthcare Private Equity (HPE) Europe conference in London and gathered a panel of experts to discuss some of the strategic considerations associated with navigating a successful exit.
In a poll of the audience at the event, which included hundreds of healthcare professionals, investors and industry changemakers, 65 per cent of those present felt that high valuation expectations would be the biggest challenge for exits in 2025, followed by capital market uncertainty.
Ellie West, partner with McDermott Will & Emery in London, said: “The exit environment remains challenging for financial sponsors, with high valuation expectations expected to continue impacting dealflow in 2025.
“Some exits have stalled as a result of lack of buyers, and capital markets uncertainty hinders the ability of sellers to run dual-track processes.”
Timing a sale
The buyer universe is an important consideration when sellers consider bringing assets to market and, with so many private equity firms looking to exit, the lack of buyers is compounding a tough environment.
Valuations are lower in Europe than the US but still present a meaningful hurdle, but capital market uncertainty is perhaps the biggest difficulty for sellers that would like the option of an IPO as an alternative to a sale.
Kate Bingham is managing partner of venture capital firm SV Health Investors and has navigated many successful exits during her career as a high-profile life sciences investor.
She says the biggest mistake made by sellers is going to market in the absence of competitive pressure on the buy-side.
“My main advice is don’t just go out and try to get sold,” said Bingham.
“Make sure you have multiple different bidders interested so that you have options, ideally through a dual-track process.
“Sellers need to have a credible alternative if they are to achieve a successful deal.”
Running a dual-track process that simultaneously explores a capital markets offering as an alternative to a sale requires double the effort from a seller.
While putting a strain on resources, stretching management teams and requiring both processes to operate carefully in lockstep, such processes do tend to deliver the most successful outcomes.
Holger Ebersberger, partner with McDermott in Munich, said: “Successful exits are best achieved when sellers are not under pressure for a sale, when the buyer universe is strong and there are multiple bidders interested, and when the asset and the marketing story are in optimum shape.
“The number one advice to sellers is to ensure they build options.”
Dealmakers navigating dual-track processes are advised to be clear internally about the likelihood of one event happening over the alternative and to maintain discipline in order to maximise the gains associated with a stalking horse.
With so much pent up demand on the sell-side, the expectation is that this year will see a meaningful uptick in exit activity.
More than half (55 per cent) of the audience at HPE Europe identified the bioscience vertical as the healthcare segment likely to see the most exits over the next 24 months, followed by healthcare services (23 per cent) and tools and diagnostics (18 per cent).
The pharmaceutical industry is facing a patent cliff that could put over $300 billion in sales at risk between now and 2030, elevating pressure on big pharma to identify new revenue sources.
As a result, the flexibility and scope of smaller biotech companies is expected to be a driver of deal activity for some time.
Many biotech companies are also in structural need of capital after a tough environment over the past few years, which will further fuel sales.
Those looking to exit in 2025 should give careful consideration to timing, said Bingham.
“The most common mistake is a board making a bad call on the best time to sell. Know your business – are you ready as a business to do it and can you articulate the track record and the value proposition for the next investor?
“It is really important to build momentum around revenues and targets ahead of time.”
Investment committees continue to hold a high bar, deal timelines are elongated and buyers are doing extensive due diligence, which heightens the pressure on sellers to respond to questions on threats like supply chain disruption and AI risks.
As a result, sellers need to think carefully about preparations.
West said: “Sellers need to think about who they want to sell to, because the story can be very different if you are targeting strategics versus private equity versus both.
“Does the market know you and your story, because right now everyone is looking for organic growth and you need to tell that to the market to increase buyer appetite and build competitive tension.”
We expect some of the constraints on exits to ease next year, but these processes still require thoughtful and strategic planning.
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