Distinguishing unwise decision-making from lacking capacity
Dec 12 2023
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I was delighted to chair a panel discussion at last week’s HealthInvestor Summit on the role of private equity and other forms of capital in UK health and social care. It was an interesting and thought-provoking session covering the different aspects of the investment market.
For me, six key themes stood out both from the panel discussion and other sessions throughout the day which I wanted to share here.
1. Brexit and political uncertainty are holding back deals
Despite all of us wanting and hoping for an end to the political turmoil around Brexit, sadly the uncertainty is likely to continue for some time. This means vendors’, buyers’ and investors’ current approach of holding back decisions to put assets on the market, make purchases or back deals may continue for a while yet. This is down to a number of factors, but continuing political uncertainty is the dominant reason. Private equity assets are continuing to be held longer than the market norm of 3 to 5 years. At the same time, the exchange rate risk caused by the constant fluctuation of the pound is holding back decisions on overseas capital.
2. Pent up activity is building and we can expect a rush of deals when uncertainty ends
With many deals and decisions currently on hold, we can expect to see significant activity when we do get more certainty. What’s more, there are current in-cycle private equity assets due for maturity that are creating additional pent up activity – which will add to deal flow when uncertainty ends. Nevertheless, regardless of what happens politically, we will continue to see some deals in the market as decisions can only be held off for so long before other drivers force decisions through. Meanwhile, current deal activity is polarised, with considerable activity at the lower end of the domestic market, but much less at the very top end.
Sectors of the market where the panel felt we may see increased future activity and interest are: dermatology, women’s health, fertility care, clinical genetic diagnosis, and anything relating to digital innovation (health and social care is lagging years behind sectors like financial services/fintech and needs to catch up).
3. Lending criteria are likely to get tougher
There was an expectation raised in Knight Frank’s keynote presentation that we are likely to see tougher lending criteria from high street clearing banks. This may create opportunities for challenger banks who have sufficient flex in their lending criteria to allow them to support deals falling outside those accepted by the high street banks.
4. Infrastructure funds will continue their interest in health assets but with a narrow focus
As I wrote in my earlier piece, it is not only PE funds that want to invest in health and social care: institutional funds, REITs and other forms of ‘long-hold’ investors have also been drawn to the sector for its characteristic ‘defensive’ qualities. This interest will continue, but is likely to remain relatively narrow - focused on state funded well-managed, top end assets in mental health, learning disabilities and supported living. These longer term funds are not interested in turnarounds and are unlikely to compete in many areas traditionally dominated by private equity.
5. Regulation will continue to raise the bar but there are areas that will prove challenging
The general view that was confirmed in my colleague Carlton Sadler’s presentation, is that most investors see CQC as a positive influencer, driving consistency of expectations around what is required and therefore giving investors’ confidence in how to manage their investments. Regulation raises barriers to entry and provides a test of the quality of investment assets – both seen as a positive. There are some clear issues in certain areas however, e.g. the 6 bed limit in relation to learning disabilities where investors see CQC seeking to shape the market in its approach on ‘registering the right support’. This approach is currently limited to new registrations or where operators are seeking to extend their current registration. Investors would have major concerns if it was extended to how CQC inspect current services that are registered for more than 6 beds. Another trend is that CQC is increasingly moving more quickly towards enforcement, something which will be a concern to many investors. The regulator’s registering the right support policy in mental health and LD services is a continuing point of contention in relation to the development of new services. There has also been increased activity in the market oversight regime, with a number of operators coming under scrutiny.
6. Perceptions of private investment in the sector
Finally, a theme coming through a number of the investment sessions throughout the day was the continuing negative perceptions of private investment in the sector. There was agreement that much more still needs to be done to tackle this. Some recent headlines, including for example a story last week “Care home operators accused of extracting 'disguised' profits” make tackling that perception difficult. Healthcare assets continue to be attractive to investors for many reasons including, for some, the very healthy returns that have been evident in certain areas. It is unquestionably a challenging debate. Opportunities for private investment in many instances come on the back of a lack of state provision or a need to drive increased quality of facilities and the provision that is available. Healthcare is also a heavily regulated sector where the risks are high when it goes wrong – it’s not for the faint hearted. The debate will continue, with the investment community feeling acutely aware of the political risk of failing to make the positive case for the role that private investment has played and will continue to play in improving the health and wellbeing of our communities. It’s interesting that one impact of infrastructure funds moving into areas of healthcare is the perception that they are a more ethical investor, with a longer-term patient capital approach than private equity. Might we therefore see a move towards “infra-like” funds who structure their investment metrics towards longer maturity terms? Some may already be going down this route.