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The Role Investors Play in Healthcare Innovation

Authored by Cameron Meyer

Art by Michelle Choi

The healthcare market is attractive to many investors due to its volatility, potential for immense upside, and its tangible impact on society. Both private equity and hedge funds have had significant influence on the development of different industries through their allocation of capital. As these investors have historically been heavily engaged with the healthcare industry, I will explore their impact on the healthcare space from the standpoint of driving innovation through managing healthcare corporations.

Investors in the healthcare space include private equity firms, hedge funds, and venture capital firms. Private equity firms such as Warburg Pincus, Blackstone, and Bain Capital, and hedge funds such as Deerfield Management, Perceptive Advisors, and Pershing Square Management are prominent examples. While venture capital firms are also highly involved in healthcare investment, their capital commitments are to generally smaller companies and a more volatile sub-vertical of healthcare than the investments made by private equity and hedge funds. With an intensified investor appetite for healthcare companies, 2022 marked the second highest year on record for deal value for healthcare private equity [1]. On the other hand, healthcare hedge funds declined an average of 22.1%, a sharp contrast to the success in healthcare private equity investment [2]. To understand how each has impacted the healthcare space, we will consider cases that align with the general deal experience that each investor type is involved in.

Private equity has generally had a strong and positive impact on private businesses. It has a long track record of creating value for corporations and investors by improving operations, optimizing production, promoting innovation, and providing access to capital to support infrastructure improvements [3]. Studies have demonstrated that when PE firms acquire hospitals, their financial performance improves, their focus shifts from outpatient to inpatient care, and they increasingly adopt technological intensive service lines such as cardiac catheterization, advanced imaging, and robotic surgery [3]. Private equity’s efforts in private healthcare are similar. In 2007, private equity fund Warburg Pincus invested in Bausch & Lomb, a developer, manufacturer, and marketer of ophthalmic products. After taking the company private, Warburg Pincus rearranged the management team and board of directors, guided management in developing expansion opportunities such as the acquisition of Eyeonics and the formation of the Technolas Perfect Vision joint venture. Warburg Pincus sold the company in 2013 [4]. Warburg Pincus’ carried this success into the acquisition of JHP Pharmaceuticals in 2012 in which they assisted the company in commercializing 9 new drugs and opening new research facilities to focus on future product expansion [4]. Warburg Pincus’ success in the healthcare private equity market is just one of the many examples of PE transformation of portfolio companies. This industrial development serves as a hallmark of how PE firms provide  capital for development and expertise for growth.

On the public side, activist hedge funds operate by purchasing large volumes of stock in a corporation and driving change through their voting rights on the Board [5]. Despite short term challenges in the equity markets, healthcare hedge funds have performed well over the long-term. Rising global awareness on pandemic preparedness, aging demographics across developed countries and the healthcare sector's independence from global macro conditions have enabled hedge funds to capitalize on the status quo [2]. Deerfield Management, a healthcare-focused New York City hedge fund, runs $14B and has made significant contributions to healthcare research. Deerfield is just one of many healthcare focused hedge funds that operates beyond solely buying equities and is actively engaged in building new drugs, healthcare services, and devices with their portfolio companies and partners [6]. With an experienced team of over 58 MDs, PhDs, and JDs, Deerfield has played a pivotal role in further developing its 150 portfolio companies. Deerfield Discovery and Development (3DC) is their in-house suite of biopharma experts with skill sets across the drug development spectrum that works with portfolio companies to expand into new territory. In addition, Deerfield’s CURE is an innovation ecosystem for start-ups and entrepreneurs providing opportunities for networking, expertise development, and access to talent and innovation. Deerfield also partners with universities and institutions to build out healthcare solutions. In June of 2023, Deerfield partnered with NYU Langone Health to launch a research and development collaboration designed to accelerate the commercialization of biomedical discoveries. Deerfield has agreed to commit up to $130mm for this effort.

Historically, both private equity and hedge funds have made immense contributions to healthcare advancement in the avenues of new drugs, innovative devices, and optimized services. Through managerial guidance, product development, and optimizing operations, these investors have transformed the healthcare industry and will continue to influence healthcare trends and focus in the future.

Works Cited

  1. Jain, N., Murphy, K., Klingan, F.-R., Podpolny, D., Boulton, A., & Kapur, V. (2023, September 18). Healthcare Private Equity Market 2022: The Year in Review. Bain. 

  2. Knab, M. (2023, October 6). Healthcare hedge funds decline 22.1 YTD but are well-placed to capitalize on current trends and grow returns - opalesque. Opalesque. 

  3. Marcelo, C. (2023, March 20). Research: What happens when private equity firms buy hospitals?. Harvard Business Review. 

  4. Healthcare Sector Case Studies. Warburg Pincus. (2020, September 15). 

  5. Activist Hedge Funds: Full Guide. Mergers & Inquisitions. (2023, September 13).

  6. Explore The Deerfield Network. Deerfield. (n.d.). 

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