The Integration of AI in the healthcare sector: A Private Equity Perspective for the Lower Middle Market

By: Ankit Shrivastava, Managing Partner, Enventure

The integration of artificial intelligence (AI) and healthcare is changing the drug discovery, clinical decision making, patient monitoring and operational performance. It has gone from using predictive analytics and machine learning models to generative AI for faster and more precise and cost-effective solutions.

The funding of venture capital in AI healthcare grew from $13.6B in 2020 to $21.9B in 2021 then returned to $10.5B in 2024, which shows that investors are now looking for strategic and impactful investments. As the early-stage investors turn their attention to clinical evidence and commercialization, private equity (PE) investors especially from the lower middle market (LMM) can now contribute to growth, expand the proven AI enterprises and produce value.

We at Enventure are dedicated to lower middle market healthcare private equity and we are interested in the high potential AI healthcare companies that need growth capital, operational support, or strategic alliances to realize their full potential.

Why AI Healthcare is Suitable for Lower Middle Market Private Equity

Although big healthcare deals are more usual, the lower middle market has untapped opportunities for AI healthcare investments.

• VCs are now funding later stage AI healthcare companies and $5.16 billion out of the total $10.5 billion raised in 2024 is going to PE. This shows that there are a number of viable businesses that are ready for scale up for PE investment.
• Sector breakdown (Q3 2024): The industries that followed were biotech ($1.77B), health care ($1.33 billion) and medical devices ($620.7 million) which provide LMM investors such as Enventure with many options for adding value.
• Stable deal counts despite funding fluctuations: Although total VC funding is down from its peak in 2021, the deal count has been fairly constant – shifting towards the larger, more strategic investments that are well aligned with the PE value-based approach. 
• The exit trends show a growing maturity of the market: The exit values of AI healthcare reached the maximum of $24.3 billion in 2021 and then declined to $8.2 billion in 2024 which points to the need for operational improvements, strategic roll ups and commercialization opportunities that Enventure boasts of.

Where AI is Creating Value: Key Sectors for Lower Middle-Market Private Equity

1. AI Enabled Drug Discovery and Biopharma Services

• It is changing the ways of conventional pharma research and development, drug discovery, clinical trials and drug response.
• Large late-stage funding rounds have been raised by companies like insitro, Valo and Generate: Biomedicines showing that AI can enhance drug development and decrease costs
• PE investors are attracted to pharma services and AI enabled CROs, which provide LMM investors with an opportunity to consolidate and scale AI powered platforms 

Enventure’s Focus: We look for AI enabled pharma service companies that can use partnership strategies, improve operations, and build their sales teams.

2. Medtech: AI as a Market Differentiator

• RPMS, diagnostics and surgical robotics are changing the patient care and improving the patient outcomes and decreasing the costs.
• Medtech AI adoption is rising due to more defined regulatory frameworks, which makes the sector ready for PE backed rollups and value creation strategies .
• It is therefore important to mention the emergence of Regulatory Automation Management Systems (RAMS) as enablers of FDA compliance costs in the AI enabled healthcare firms

Enventure’s Focus: Lower middle market medtech companies that are integrating AI and are in the diagnostic, imaging and surgical space are an attractive acquisition opportunity.

3. Healthcare Services and Digital Health: Powered by AI

• Healthcare IT and value-based care is ready to be transformed by AI, which improves operational performance, decreases clerical work and enhances patient interaction.
• The PE backed consolidation in digital health like Transcarent’s $621 million acquisition of Accolade is expected to continue.
• The categories that are drawing investors' attention include behavioral health, home healthcare and AI enabled clinical documentation by Innovaccer

Enventure’s Focus: We pursue companies that are in the healthcare services sector and are poised for market consolidation, revenue cycle management, and operational enhancement.

Enventure’s Approach: Creating Value in AI Healthcare in the Lower Middle Market

1. Optimizing the Scalene of Proven AI Solutions

We invest in healthcare companies that are enabled by AI and have a product with proven concepts but limited marketing and distribution capabilities, and we help them enhance their operational efficiency and profitability.

2. Strategic M&A & Rollups

We are aware that AI healthcare is still a fragmented market especially in the medtech, biopharma services and healthcare IT. We focus on combining related businesses in order to enhance performance, realize costs and grow.

3. Operational Optimization & Value Creation

There is more to PE than just the capital. Enventure has a track record in value creation, which assists portfolio companies in the refinement of their regulatory strategies, enhancement of their go to market strategies and optimization of their revenue models with a view of sustainable growth.

4. Understanding the Exit Strategy

The exit strategy for AI healthcare is changing from the speculative IPOs to the strategic exits through M&A, secondary buyout, and private equity special purpose acquisition companies (SPAC) induced industry consolidations. This is because Enventure’s approach results in portfolio companies being positioned and operated in the most effective manner in order to realize their full valuation potential.

The Future of AI in Healthcare: Enventure’s Vision for the Lower Middle Market

At Enventure, we opine that the healthcare is changing with the help of AI, but the complete impact can only be seen with the right capital, growth, and discipline. So, while early-stage investors are more concerned with clinical evidence, the lower middle market private equity can take AI enabled healthcare companies to the next level.

The healthcare PE strategy that we are implementing is in response to this shift and it is through the investment in AI healthcare companies that are proven, viable and ready for the next level of growth. Enventure has the knowledge on how to implement various operational improvements, form strategic partnerships, and ensure correct market positioning of the portfolio companies as we develop the future of healthcare.

AI is the future of healthcare, and Enventure is here to shape it.

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Data Sources: Pitchbook