Private credit has evolved from a niche source of capital for a select few US healthcare borrowers into a first port of call for sponsors and companies across all segments of the market.
Private credit’s expanding footprint in healthcare has coincided with the growth of overall US private credit assets under management, and resilient private equity (PE) deal activity in the industry.
Preqin estimates that current US private credit assets are approximately US$1.5 trillion. Globally, the asset class has grown more than tenfold since 2007. Meanwhile, buyouts in the US pharma, medical and biotech sector have expanded over the past three years. US buyout deal value in this sector totaled US$78.9 billion in 2025, easily surpassing the full-year figures for 2022, 2023 and 2024. In fact, that total is the second highest recorded in the past 15 years, barely trailing 2021’s US$79.6 billion, when pandemic-related factors spurred a wave of M&A activity in the industry.
The growing pool of capital that private credit can deploy, coupled with the strength of healthcare M&A, has made the sector an obvious expansion target for private credit lenders.
Historically, private credit deployment in healthcare was focused on a small number of areas. For instance, private credit players typically follow PE sponsors into physician practice and nursing consolidation deals.
Over time, private credit’s reach has expanded into other segments of the healthcare space. Managers today are delivering financing packages for a variety of deal strategies and subsectors. These range from the provision of annual recurring revenue loans and fast-growing health tech start-ups to the underwriting of senior loans for buyouts targeting more traditional veterinary, dental, dermatology and wellness assets.
Life sciences financing opportunities have been another fertile channel for private credit deployment. Contract manufacturing organizations and other associated regulatory services companies are attracting consistent lender interest. Royalty-financing deals (where a business can borrow in exchange for a percentage of future revenues on certain products) for capital-intensive biotechnology companies are also on private credit’s radar. Companies in these subsectors cannot always attract the attention of traditional lenders, leaving a gap that private credit players are happy to fill.
Implementing operational efficiencies through consolidation continues to deliver steady deal flow, as does consolidation among specialist healthcare technology and services businesses that support frontline healthcare companies. PE players are capitalizing on opportunities to vertically integrate healthcare supply chains by assembling complementary companies into single entities, and private credit lenders have been ready to help finance these strategies.
Attractive returns with lower risk
Healthcare has not only offered private credit players a consistent flow of financing opportunities, but lending in the sector has also generated some of the asset class’s best risk-adjusted returns.
According to investment consultancy bfinance, specialist private credit healthcare funds have posted median net internal rates of return of 15%, compared to 11% for generalist US direct lending funds. Moreover, healthcare specialists have been able to deliver this premium with lower median fund-level leverage (0.3x for healthcare direct lending funds compared to 1x for generalists).
Historically, default rates in the healthcare industry have been low. Investment manager Man Group puts the default rate for US healthcare at 2.5% for the period between 1995 and Q4 2022, with only computers and electronics recording a lower rate.
Private credit players have taken note of the attractive returns and lower risk profile of lending to healthcare companies. Specialist boutique lenders operating in the space are growing in number, while larger generalist managers are adding dedicated healthcare lending funds to their franchises.
A complex backdrop
This attractive risk-reward profile does come with significant technical, structuring and regulatory complexity. Sustained success in the sector demands significant investment by private credit teams in specialized healthcare talent.
Besides hiring healthcare financing and M&A experts, new players entering the sector have also brought medical doctors onto their teams to deepen their in-house healthcare expertise. The complexity involved in underwriting healthcare debt has made this investment in talent essential for risk management.
For example, the financing of roll-ups in the physician sector highlights the structuring complexities involved in underwriting healthcare deals.
When consolidating physician practices, PE firms must structure their investments to comply with rules that do not allow buyout firms to own practices directly. Instead, PE firms invest through “corporate practice of medicine structures,” with capital flowing through a structure that sits above the practice management company.
These structures are effective for buyout firms but introduce complexities for lenders. For instance, documentation will vary by deal, depending on the bargaining power of the sponsor and practice group, and the underwriting process will differ from typical senior loan deals.
Lenders must review each scenario to understand how management agreements work, establish what collateral they have recourse to and how doctors will be incentivized in downside scenarios. Change-of-control provisions and notice approvals (contractual clauses that oblige borrowers to secure clearance from lenders before undertaking certain actions) will also be different in corporate practice of medicine structures.
Healthcare regulation can also raise hurdles for private credit players. For example, Medicare and Medicaid programs have seen cuts and changes to reimbursement rates. This has impacted healthcare companies that serve patients funded through these programs, in some cases requiring restructuring or precipitating bankruptcies.
Although providing private credit in these conditions is similar, in some respects, to lending against receivables in other sectors, healthcare industry expertise is a necessity. Lenders must build a full picture of how a seemingly robust borrower could be affected by regulatory shifts.
Meanwhile, the PE sponsors that private credit players support must also stay versed in developments at the Department of Justice around holding PE owners responsible when healthcare portfolio companies are found liable for breaching the False Claims Act, which imposes liability on people and companies who defraud governmental programs. This has not yet been tested but is something that private credit providers must factor into their downside risk assessments.
Navigating headwinds to find value
For all these regulatory and technical headwinds, the healthcare sector nonetheless presents a compelling opportunity for private credit players in the US.
As the asset class has broadened its healthcare reach, lenders have secured good returns for relatively low risk, proving the industry’s investment case.
Private credit also has a crucial role to play in financing the healthcare industry’s adoption of artificial intelligence. Advances in this technology could generate long-term cost savings but will involve significant upfront capital expenditure as healthcare businesses upgrade their technology stacks and data analytics tools.
As private credit lenders review these opportunities, underwriting discipline is essential. Healthcare is a highly regulated industry, and the value of detailed due diligence cannot be overestimated.