In today’s healthcare landscape, private equity is stepping up as a significant force for positive change. The medical technology used during your last appointment, the clinical trials for medications you rely on, or the platform for your virtual consultation may have been funded by private equity.

For decades, private investment has bridged gaps in the healthcare system, particularly when public funding falls short. In 2023, healthcare held its own in a tepid overall deal market, accounting for 15% of the total deal count. Far from the profit-driven stereotypes, a growing trend towards impact investing (or investing with the intention to generate and measure positive real-world outcomes for people and the planet beyond returns) is reshaping how private equity firms operate in healthcare.

Private equity firms often take a majority stake in the businesses they invest in, giving them strong levers to influence the investment during the ownership period. They can choose to focus solely on growth and profits or to also lean in and grow impactful products and services as part of the core profit-generating business case. When healthcare investors prioritize measurable impact, we get clearer insights into how capital generates positive outcomes.

Since 2006, private equity has invested nearly $1 trillion in U.S. healthcare, accounting for 12.7% of all healthcare investments. These funds have supported research into diseases like Alzheimer’s and Parkinson’s, expanded and renovated facilities, modernized medical records and healthcare data, and made other essential investments. Specialized private equity players with extensive healthcare portfolios bring invaluable knowledge and expertise to each new investment. This sector-specific insight creates cross-pollination among portfolio companies, enhancing efficiencies and innovations across the board.

A significant shift we are now seeing in impact investing is moving from a focus on direct delivery to patients to critical investment opportunities further up the value chain, focusing on businesses involved in research, clinical trials, and med-tech. These areas are crucial for developing new, efficient healthcare management solutions. In the past decade, private equity firms have backed 924 U.S. medical device and supply companies, investing over $280 billion. Traditional impact investors often focus on direct patient outcomes, but this approach misses the bigger picture. By investing in upstream sectors, private equity can drive innovations that ultimately lead to better patient care for all – which, in the long term, can grow the realized returns for investors.

Many traditional impact investors struggle to label these investments as impactful because the metrics that they want to see are around patients reached and their lives improved. However, when investing further upstream from direct patient care, providing evidence of these outcomes all the way down the line to the end products proves a challenge. Take, for example, investing in software firms that enhance the efficiency of clinical trials, ensuring safety and speed.

Rather than tracking the end results like drug delivery, it makes sense to focus on outcomes like improved efficiency (e.g., the number of trials derisked verified by patient surveys). At the same time, rigorous due diligence and impact management processes (based on industry standards such as the Impact Principles) can assess the criticality and materiality of each input to the end product, ensuring that investors can underwrite credible impact cases for investments across the value chain.

Capital, especially impact capital, needs to flow through all parts of the healthcare system, not just the most obvious. If we’re not considering investments in attenuated parts of the system, we’re not investing holistically or smartly. There’s a growing demand from asset owners – such as institutional investors, pension funds, and family offices – for impact-driven products with rigorous impact management and measurement frameworks capable of delivering impact performance across the value chain.

This top-down demand is pushing general partners and asset managers to develop more products that meet these expectations, supporting the case for broadening the traditional definition of impact in healthcare. An impact-focused private equity firm invests through the lens of addressing gaps and unmet needs in the broader healthcare market and seeking answers to questions such as: Is the investment improving the quality of care? Is it driving research to meet an unmet need? Is it innovating and improving on something that already exists for greater efficiency?

This comprehensive screen seeks to ensure each investment is material, critical, and measurable, setting a standard for performance in impact measurement and management. The potential to bring more private capital into an impact framework gives us the chance to potentially bring faster, smarter, and more significant improvements to future healthcare systems. By focusing resources systemically – in all of the critical parts of the healthcare value chain, private equity can be part of driving real, material improvements in ultimate delivery to patients. This is the future of impact investing in healthcare – broadening the scope of what it means to create positive change.