Washington, D.C. — The investment prospects in healthcare are good, despite the turbulence and uncertainty that reigns in the current economic environment. That was the consensus among private equity panelists at “‘Systemic Headwinds’ Private Equity Investment Thesis: Is It Valid?” at this year's HCap Conference.

“There are many people out there who look at the for-profit healthcare system and say they don't believe that we can do well by doing right. We strongly disagree with that,” said Kevin O'Brien, Managing Director, CCMP Capital Advisors, LLC. “Healthcare today is in transition, and private capital tends to do well, from a return standpoint, when businesses are in transition and dealing with things like convergence and regulation uncertainty.”

These sentiments come with a word of caution, however. Panelists see opportunity in today's market, but there are obstacles as well. Ryan Glaws, a Principal at Excellere Partners, said his firm's approach begins with (investing in) healthcare companies that understand the complexity of the market and have already established strong working relationships with all of the parties it touches, including the patient, payer, manufacturer and distributor, among others.

“I think it's fair to say that the healthcare landscape can be riddled with land mines,” Glaws said. “If you can find a company that has a multi-faceted value proposition, that gives you, as an investor, a high degree of comfort in terms of putting money to work.”

One point panelists visited at length was the value of building local, like-minded companies. As Jeremy Silverman, Managing Director of Healthcare at the Frontenac Company pointed out, this is especially important since the very nature of healthcare is, and will continue to be, built around a given community.

“The service radius within the world of healthcare providers is relatively small. It's a city. It's a Metropolitan Statistical Area. . . . And we tend to look at businesses that we are considering investing in based on how well they are doing within their given markets,” Silverman said. “Having a bunch of pins on a map across a broad area, but not being a major factor in any market, isn't helpful. It doesn't give you bargaining power with payors. It doesn't give you access to referral sources. It doesn't give you branding. It doesn't give you anything. So that local footprint—with a reputation for quality and outcomes—is incredibly important.”

Despite the so-called ‘headwinds’ that might otherwise detract from healthcare investment, there was a healthy discussion during the session about specific segments and service lines that make for attractive investments. O’Brien said home health’s low cost setting, for example, makes it “very exciting” and will give it “gravitation pull” over time. Similarly, Glaws acknowledged that hospitals would continue to operate under pressure given the industry's state of reform, but he, like O'Brien, affirmed that reform will also bring about opportunity.

“Hospitals will continue to look for ways to outsource non-core services,” Glaws said. “Whether that's things like hospitalists, anesthesia, ER, or any item that is non-core to their key profit centers—which are really the ORs, we think that there are opportunities there to put a model in place.”

When it comes to the outlook for the healthcare sector in general, O'Brien, Glaws and Silverman all agreed that investment opportunities are not going away anytime soon. To the contrary, they agreed with session moderator Jason Ficken, Managing Partner at Quadriga Partners, that there are indeed some “inherent tailwinds” within the sector that are generating opportunities where they may not have existed before. It's part of what Silverman calls “the great dichotomy” in healthcare.

“There are businesses that are part of the problem and businesses that are part of the solution,” Silverman said. “Our investment strategy is very much focused around identifying those businesses that are part of the long-term solution, and therefore eschewing those businesses that are part of the cost problem, the waste problem and other problems.”