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Private Equity Quarterly Q3 2021: PE Powers Digital Healthcare Revolution

Digital Revolution Healthcare

How Private Equity Powers the Digital Revolution in Healthcare

To some, healthcare seems like the last frontier for adopting digital tools, big data analysis and optimized processes. How many of us visit healthcare providers who still write notes on paper charts enclosed in a manila folder? However, the pandemic may have created a severe shock that’s shaken up this $4 trillion industry, pushing a demand for digital healthcare solutions.

Digital health, or healthtech, is a wide-ranging sector that includes telemedicine, data analytics, clinical decision support, mobile health, artificial intelligence (AI) for drug discovery and remote patient monitoring. This article looks at the confluence of factors creating the push toward greater healthcare digitalization and larger investments by private equity funds. By actively investing in digital health, private equity is helping identify and scale companies powering this innovation revolution, which promises to benefit all of us.

Private equity investing in healthcare reaches an all-time high

Private equity investment in healthcare has grown significantly in the past decade from just under 9% of private equity’s total deal value in 2009 to over 14% today, according to PitchBook. In just the first three quarters of 2021, healthcare deal activity reached an all-time high of $11 billion (see Figure 1). A growing number of healthcare-related startups incubating in the venture ecosystem generate a pipeline of capital-hungry companies and demonstrate the opportunity to invest in innovative healthcare. For example, out of the over 800 private companies that have reached “unicorn” status (i.e., valued at over $1 billion), 57 are healthcare focused.


Figure 1: Private equity investment in healthcare deals

Healthtech is one of the fastest growing verticals in healthcare 

Source: PitchBook Database

Healthtech is one of the fastest-growing verticals within healthcare. The demand for digital tools continues to climb. In fact, CB Insights found that 60% of healthcare organizations are adding new digital projects, while 42% are accelerating some or all of their digital transformation plans. According to PitchBook, private equity investment in healthtech companies during the first three quarters of 2021 rose to $4.5 billion over 47 deals, up from $1.75 billion over 38 deals for all of last year. In addition, large tech companies are getting into the healthcare field and may shape the future of healthcare digitalization. Amazon, Facebook, Microsoft, Google and Apple collectively spent $3.7 billion in healthcare-related investments in 2020 and an additional $3.1 billion in Q2 2021.

A confluence of factors drives the healthtech opportunity

Several fundamental trends provide strong tailwinds to private equity’s ability to help finance, disrupt and build the healthcare digital revolution. We believe the following six factors will continue to play a predominant role:

Technological change is spurring innovation. Technological advances — including AI, machine learning, cloud computing, collaboration tools and mobility — are driving digitalization and disrupting existing models of care and drug development. Smart devices now track health and provide cheaper connectivity with healthcare providers, and AI, using “big data,” is improving the delivery, payment and consumption of healthcare services. These technologies have also been applied to facilitating clinical trials.

Digital healthcare innovation has been accelerated by COVID-19-driven behavior changes. Working from home and social distancing proved old models of care, such as doctor office visits and certain kinds of in-patient hospital care, to be impractical, costly and often ineffective. These behavioral changes meant more reliance on virtual visits. They also accelerated emerging delivery models such as hospital-at-home and specialty-at-home models, which leverage technology to enable remote monitoring and testing. These delivery models can enhance operational efficacy, improve disease screening and offer remote patient support at a lower cost, having a positive effect on health outcomes. With these changes, the telehealth and telemedicine market is estimated to grow at a compound annual growth rate (CAGR) of 37.7% and reach a value of over $190 billion by 2025, according to MarketsandMarkets research.


Dramatic advances in digital technology as well as changes in patient behavior during the pandemic have laid bare the healthcare system’s enormous inefficiencies and inequities. The pandemic has underscored the significant opportunity for private equity to power healthcare’s digitalization revolution.

As one of the least digitalized sectors, healthcare shows great promise for digital growth. With highly complex delivery and payment models, the U.S. healthcare system is often plagued by significant failures originating from taxing its legacy technology. It’s one of the least digitalized sectors, according to UBS, due to its numerous bureaucratic and administrative obstacles. As healthcare is the last frontier of digitalization, newer healthtech companies and incumbent tech giants, such as Google and Amazon, have set their sights on exploring opportunities to innovate this industry.

Demographic, equity and economic trends point to growing demand and accessibility of healthcare. The pandemic put a spotlight on the acute demand for digital services to provide more accessible and equitable care. For instance, the elderly population continues to grow, and people over 65 on average spend three times more on healthcare per person than working-age individuals. Spending by this demographic is projected to more than double by 2050 as the U.S. population ages. While the Affordable Care Act provided more affordable health insurance coverage to more Americans, a significant segment of the population still cannot afford healthcare services, providing a need to bridge the equity gap. As the industry finds ways to care for the underserved population, demand for health services will grow.

A large number of companies provide a range of opportunities for private investment. Private equity can provide the necessary growth capital for lower and mid-market healthcare companies and also early- and late-stage venture startups. The fragmented nature of healthcare companies represents an enormous investment opportunity to consolidate and restructure a significant number of these private companies. UBS estimates that globally there are 146,000 privately held healthcare companies, compared to only 2,700 publicly traded healthcare companies.

There’s a vigorous exit market for healthcare companies. Critical to the dynamism of private equity healthcare investing is the ability to exit and return capital to fund investors. In the first quarter of 2021, 40 healthcare and life science IPOs raised a combined total of $11 billion. In addition to traditional IPOs, healthcare companies have shown an interest in going public using special purpose acquisition companies (SPACs). Given their high profile and growth trajectories, late-stage healthcare unicorns such as Butterfly Network, 23andMe and Hims have chosen to exit via SPACs.

Healthtech presents a massive opportunity

Digital health is a large segment that provides innovative solutions for disparate functions, such as patient care, record management and payments, and drug testing. We see a significant opportunity for private equity to spur digitalization of healthcare in the following three areas:

Accessible care

Increasing the accessibility of healthcare to all patients is one of the key goals of new virtual care models. Doctor on Demand, a San Francisco–based telemedicine company, offers on-demand and scheduled visits with licensed healthcare providers, whenever and wherever needed. In 2020, General Atlantic led a $75 million Series D round in this company to finance virtual care access for patients nationwide. In May 2021, Grand Rounds, a clinical navigation platform backed by The Carlyle Group, merged with Doctor on Demand. By combining navigation and virtual care delivery, the new integrated healthcare company is aiming to improve the coordination of care in the fragmented U.S. system (source: PitchBook).


Digital technology such as mobility, the internet and AI are increasingly being harnessed to help people measure and meet their wellness goals, including weight management, diabetes prevention, stress reduction, sleep disorders and hypertension. Founded in 2008, Noom, a New York–based digital weight loss and wellness platform, combines technology, a behavioral science–based program and health coaches to help a global user base track its health indicators and meet its health and wellness goals. In May 2021, Silver Lake led a $540 million Series F funding round to expand the company’s platform to reach more people in more places. Having joined the unicorn club in Q2 2021, Noom is seeking a $10 billion valuation for its anticipated IPO later this year (source: PitchBook).

Precision medicine

Precision medicine leverages technology and big data to customize medical decisions, treatments, practices and products to a subgroup of patients. The result is greater healthcare efficiency, expanded access and improved therapeutic benefits. Precision Medicine Group (PMG) is a leading next-generation provider of drug development and commercialization services whose specialized capabilities enable the development and delivery of more targeted treatments for patients. Backed by Berkshire Partners, TPG Growth and Blackstone Group, PMG plans to scale its global platform and technical capabilities to help accelerate the development, approval and commercial reach of new personalized life science treatments (source: PitchBook).

Eyeing the road ahead

Although the U.S. healthcare market is massive and growing rapidly, it’s failing consumers by many metrics, including quality of care, accessibility, cost, innovation and responsiveness. These gaps create large opportunities for digital health companies backed by private equity. The adoption of technology and digital capabilities is disrupting nearly every corner of the healthcare system and offering new approaches, business models and processes to achieve better outcomes. For example, many of us have permanently shifted to opting for virtual interactions with our healthcare providers for minor ailments whenever we can — an option that often wasn’t available before the pandemic. These improvements to accessibility and quality of care wouldn’t be possible without digital health companies.

However, digitalization also comes with risks and challenges. Despite the great promise and progress, several potential challenges lie on the digital road ahead, including data privacy and interoperability of new and existing systems. Moreover, innovation is complicated by the need to engage with healthcare payers, regulators and community providers. These barriers to entry will likely benefit digital health companies with a keen understanding of the healthcare ecosystem and how digitalization shifts health planning, delivery and patient care.

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The content of this publication is for information purposes only and should not be considered as legal, financial, accounting or tax advice, nor as an investment recommendation or an endorsement of any investment fund. First Republic Bank makes no representations, warranties or other guarantees of any kind as to the accuracy, completeness or timeliness of the information provided in this publication. You should consult with your own professional advisors to fully understand and evaluate the information provided in this publication before making any decision that could affect the legal or financial health of you or your business.

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