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Private equity investment in health tech is filling public health’s capacity shortfall

By Mike Preston, partner at Cleary Gottlieb



Healthtech investment is on the rise, spurred by the potential for greater efficiency and accuracy in the delivery of healthcare services, but also by the impact of the pandemic on public willingness to use tech-enabled solutions.

Digital healthcare tools became a necessity during the early stages of COVID-19, with lockdowns preventing face-to-face consultations, and now these solutions have become part of day-to-day life for many people using the health system.

This rise of digital technology in the healthcare system has, not surprisingly, garnered interest from investors.

Telehealth, healthtech, and data and analytics companies that enable quicker, more efficient virtual delivery of patient care via automation and digital solutions have all been in focus.

Indeed, investment in digital health technology hit an all-time high of $57.2bn globally in 2021, as demand for digital patient solutions and delivery models was peaking.

In Europe, London has been the leading hub for healthtech investment over the last five years, with investment in the UK rising by nine times in the same period.

But is deal activity by private equity firms likely to remain robust, particularly as the impact of COVID-19 on ordinary life has so sharply receded?

Healthcare Goes Digital

Digital transformation of the healthcare delivery model accelerated during the pandemic, and despite the waning impact of the pandemic this trend is expected to continue as the partnership between digital innovation and healthcare delivery has produced exciting innovation in service delivery.

While it was social distancing that forced many healthcare providers to use virtual care technology for outpatient appointments, the same technology is now playing a key role in meeting a capacity shortfall in the public health system, by enabling a more efficient allocation of resources that is not tied to the physical location of healthcare providers or recipients.

These capacity issues do not look cyclical: new data from NHS England on waiting times for A&E and other hospital treatments suggests the service is in crisis all year round, while ambulance response times rose to nearly an hour in England last month.

To try to combat these challenges and address capacity issues, both the NHS and private healthcare organisations that provide overflow support for the NHS are transitioning to IT systems powered by cloud and data and analytics tools, often including deep-learning capabilities to enable real-time, smart digital health systems.

This expansion into the provision of more digital solutions for healthcare requires providers to invest in digital platforms and technical infrastructure, for which capital is required.

There is a clear opportunity for investors to align with the needs of these providers by deploying capital where it can benefit both the healthcare ecosystem and the investor, in particular by focusing on the innovative healthtech sector that is increasingly congregating in silicone hubs such as Cambridge and Oxford.

The ongoing digitalisation of healthcare services through the intersection of analytics, smart health devices, healthcare practice management software and consumer-centric delivery models has every chance to be one of the most significant growth stories of the next decade.

ESG and Impact Linked Investments

Brought on by the pandemic in part, companies are becoming increasingly aware of the importance of safeguarding their business by supporting the health and wellbeing of employees.

Studies have shown that – perhaps obviously – a healthier workforce is a more productive workforce.

For example, an extensive study by Oxford University’s Saïd Business school at BT contact centres found that workers were 13 per cent more productive when happy, making more calls per hour and converting more calls to sales.

Moreover, the pandemic has sharply highlighted the importance of mental health and the human consequences that a lack of attention to this issue can lead to, such as burn out, breakdowns and resignations.

Just as employers have increasingly begun to expound the importance of the role of mental health in employee welfare (and ultimately productivity), investors are also recognising how important it is that the companies they invest in have appropriate employee welfare regimes in place.

This has become a growing consideration for ESG investing, according to a paper from the Harvard Law School Forum on Corporate Governance.

In response to this trend, we are already seeing increasing interest amongst the private equity community in e-health and wellness apps that support better employee welfare.

For example, mental health apps like Mind and Calm have been able to attract extremely high levels of investment with the latter valued at $2bn-plus in 2020.

Challenges in the Sector

The growth of private equity investment in the healthtech sector is not without its challenges. There are several issues that could derail the higher levels of investment in the sector that we have seen since the pandemic.

One such challenge is cybersecurity.

Digital health and wellness companies process sensitive personal data that often flows through apps, providing opportunities for abuse by cybercriminals.

Indeed, in 2021 the U.S. Department of Justice targeted telemedicine fraud in excess of $1.5bn.

In the medical sphere the focus for intellectual property-related litigation is also moving, transitioning from more traditional patent disputes in respect of physical devices and equipment towards litigation in respect of medical technology and programs.

This includes apps which require specific IP or software through which to operate, which in turn often build on past innovations, potentially treading into grey areas in the field of intellectual property.

As a result, litigation related to AI and digital health is likely to emerge with more widespread use of these technologies, while new regulations that contain requirements specific to AI and digital health are already on the horizon in Europe, the U.S. and China.

While investment in digital health technology is clearly rising, and is very likely to continue to do so, investors looking to the space for opportunities will need to heed the challenges that modern technology is inherently connected to.

In doing so, investors can find a number of interesting and fast developing investment opportunities which could provide significant returns in the future.

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