Distinguishing unwise decision-making from lacking capacity
Dec 12 2023
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The end of the year is fast approaching - the time when we all start to take stock of the highs and lows of the year and prepare for the new year ahead. I and other colleagues from Bevan Brittan are chairing and presenting a number of the investment sessions at the HealthInvestor Summit on the 7th November.
Taken together then, this feels like an appropriate time to reflect on what we have been seeing and hearing from our clients and others in the healthcare investment market.
Continuing appeal of UK healthcare as an investment opportunity
There’s no doubt that healthcare remains an attractive sector to a range of investors. According to consultants Bain, healthcare assets globally attracted investors at record levels in 2018. In fact, healthcare has outperformed all sectors in the public markets based on Total Returns to Shareholders (TRS), according to a recent LaingBuisson report.
The sector offers solid returns with sound underlying drivers and no sign that this will change in the medium to long term. It also offers a wide choice of assets across broad submarkets including specialist care, dental, pharma, medtech, innovation technology and homecare, with a corresponding range of size of companies to invest in.
At the same time, there are opportunities through consolidation which we have seen increasing in recent years. With many investors’ metrics premised on medium to large sized operators, there is opportunity for those looking to consolidate at the smaller end, especially where there is no appetite from the banks to lend for single site operators.
This does, however, mean that there is also growing competition for the assets and operators with the best quality care provision. More capital, arguably, is chasing fewer assets. We have also seen that the sector is attractive not only to private equity firms but also to institutional money, REITs and other forms of ‘long-hold’ investors who are drawn to healthcare for its characteristic ‘defensive’ qualities. It has become a crowded market.
This trend sits alongside the continuing challenges arising from the political and economic uncertainty of our times which has perhaps held some investors back from committing to deals.
What are investors focusing on when assessing opportunities?
I believe that we have seen something of a shift in recent years in terms of investors’ focus. Previously, bricks and mortar were prime considerations – looking at the quality of a healthcare business’ real estate and physical assets and assessing how future-proofed they were.
Now, much more emphasis is placed on the quality of care that operators are delivering. This shift is driven by the recognition that an increased focus on quality will and does produce the best returns. It’s a win-win strategic approach that provides for sustainable, ongoing healthcare investment and supports the regulatory requirements of CQC.
Challenges in the market
Of course, while the healthcare investment market remains active, there are nevertheless a number of challenges that investors need to navigate their way through.
These have been dominated by the political landscape, with uncertainty over the outcome of Brexit holding some investors back and also now the possibility of a change in government given the General Election which has just been announced. Could we see a growth in renationalisation if the Opposition comes to power? Alongside this, we have seen a growth in negative perceptions of the role of private capital investment in healthcare – something that we need to change the narrative around, as my colleague Vincent Buscemi recently wrote a powerful piece about here.
There are other challenges too though, including the increased competition amongst different classes of investor and a shortage of quality assets. Many parts of the healthcare sector are operating in challenging circumstances with low margins, financial constraints in publicly funded services, and staff shortages (and Brexit uncertainty) too.
Nevertheless, while there are challenges – as there are in any sector - those organisations and investors that have anticipated and prepared for them can still find attractive opportunities to seize on.
What appeals to management teams?
It is also worth stepping back and considering: what are management teams looking for in an investor? For me, there are three key things:
Speed – often, a management team will be attracted to investors who are able to move quickly. Long and protracted due diligence processes can stifle enthusiasm.
Committed support – most businesses are looking for a relationship that will continue beyond the initial financial injection. Whether it’s over a 3-5 year PE cycle or is longer-term, they are looking for continued support that will enable both organic and acquisitive growth.
Sector knowledge – investors with dedicated sector teams and proven sector knowledge will naturally be more attractive to most businesses.
Overall, the healthcare investment market’s pulse has been healthy in 2019. However, it has nevertheless been tempered somewhat by investment decisions put on hold whilst investors wait for more political certainty that, as yet, never seems to come.
With an election now set and Brexit clarity (perhaps) due to follow, let’s hope that 2020 brings more certainty, opening up even more healthcare investment and sector growth.
I look forward to an interesting panel discussion with David Porter (Founding partner at Apposite), David Torbet (Partner at Bowmark Capital) and Garret Turley (Partner at August Equity) on the role of private equity and other forms of capital in UK health and social care and hearing from them on sector hotspots, emerging trends and investment strategies.
 Global Healthcare Private Equity and Corporate M&A Report 2019
 Private Equity in UK Healthcare