Features

Temperatures Rise in an Increasingly Active Healthcare Sector

November 25, 2020

Throughout much of this year, the private equity sector has encountered unprecedented challenges across all sectors, and with the potential for further upheaval, as well as continuing uncertainty, the deal landscape continues to be difficult to predict. In times of change there will inevitably be opportunities for portfolio businesses and private equity firms to further enhance their position or seek investments in core or complementary businesses to improve their market position. There have been many discussions and articles suggesting that overall deal volumes in Q4 this year will rebound significantly as many are under pressure to deploy capital, eager to take advantage of so called ‘COVID discounts’ or are motivated to diversify their portfolios.

We previously looked at the pent-up aggression dynamic, where trading volumes and activity that are tied into deployed capital can be deferred, but not indefinitely, with private equity dry powder at 46% higher today than it was in 2008 after the financial crisis.

One area that has shown significant, albeit not universal, resilience through the Covid-19 crisis has been the healthcare sector. Once the initial operational challenges were overcome, the sector has performed considerably well in the main, perhaps with the exception of the residential elderly care sector.

Exposure to the public purse and an emphasis from both Local and Central Governments to continue to pay to time, and sometimes in advance, for critical services has helped ensure that many healthcare businesses were protected from the short-term effects of the pandemic. Now the backlog of demand, particularly within NHS insourcing and outsourcing services, may suggest that there are potential opportunities for businesses to trade well over the next 12-18 months.

December is a ‘hot’ month

The data suggests that December is the busiest month for healthcare deals and exits. There will be plenty of investors and management teams hoping that it will be the case for 2020, as there may be a push to make up for lost time.

David Cole, CEO of Vanguard Healthcare Solutions, suggested: “A number of management teams will be cognisant of the probable changes to the Capital Gains Tax and will be focussed on a Q1 exit next year.”

Transaction propensity and the rise of social care

The ability to predict when a business is likely to transact is definitely more of a science than gut-feel, however the latter must still play an important part when considering the current deal landscape. Adviser-led processes across healthcare have accelerated considerably, however many will remain ‘glass half empty’ until deals are completed. Our research suggests, utilising our propensity algorithm, that there are 53 private equity owned businesses that will exit in the next 18 months.

David Cole explained: “There is a renewed focus on businesses considered to be defined as non-discretionary spend, especially by those investors who were previously exposed to such environments i.e. hospitality, retail, travel, etc.”

Of those businesses, over a quarter (26.4%) reside within the social care sector. Businesses that focus on Children’s Services, Special Educational Needs and Mental Health provision have performed above expectations this year.

Mark Hall, Senior Partner of Graphite Capital, argued: “The pandemic has shown that specialist care is an essential service and that plurality of supply is crucial.” Upcoming deals include Consensus and Accomplish (to name a couple), suggesting that investors may look to the social care sector as a robust sector for future investments.

New investor landscape

As the social care sector experiences renewed interest, this has led to a number of new entrants into the healthcare market. Specifically, it has seen the rise of interest from infrastructure funds who are looking to diversify their portfolio and enter into other core service areas. With an approach that mirrors the patient capital model, and a lower cost of capital, these funds are sometimes able to outcompete the more traditional investors you would expect to see for these assets. Most recent deals, which include Antin’s investments in Kisimul and Hesley, as well as Icon’s venture into the learning disabilities sector with Choice Care and Nua, may have set a precedent.

NHS services

Due to the shutdown of many frontline NHS services, there is now a significant backlog with the waiting list for elective NHS procedures; in August 2020, the number was 4.2 million, but experts predict it could reach 10 million by the end of the year.[i]  Despite these services experiencing a short-term hit, this high demand, especially in areas like diagnostics, physiotherapy, ophthalmology and numerous out-patient surgeries/procedures, appear to have presented an opportunity where clinical healthcare businesses will see the benefit.

However, this is not reflected in the analysis provided by drxData. Over the last 18 months, Clinics and Outpatient Services contributed to 23% of all private equity exits within healthcare, but over the next 18 months they are forecast to account for 15%. This may be due to uncertainties surrounding the sustainability of what looks like being substantial short-term growth.

David Cole further commented: “Since the onset of Covid-19, NHS organisations have generally got better at seeking forgiveness later rather than permission in advance. This has also fed the demand for services, especially those that support innovation and service redesign.

As the initial restrictions were eased, there was a brief hiatus where acute Trusts were being told to restart planned care but to remain Covid-ready. It took them a while to figure out how to do both, but since then, demand for what are increasingly being viewed as non-discretionary services or spend has rocketed. Accompanying this has been an increase in the immediacy with which Trusts are wanting solutions; they simply don’t feel they have the luxury of long planning lead times. Having said that, the lack of medium to long-term visibility over continued Covid recovery funding is holding some Trusts back from committing to longer term contracts. I hope the upcoming spending review will unlock this.

The NHS long-term plan was a good settlement in the times of BAU, but BAU went out of the window when C-19 hit. A big area of focus now is going to be diagnostics. During the first wave, for example, endoscopy activity fell by 90%, and the knock-on effect on cancer diagnoses and survival rates is a real area of concern.”

The investment landscape for the healthcare sector suggests it is likely to be a very active period. However, despite an increasing number in adviser-led processes, there will always be some caution with completing deals in a situation where valuing businesses correctly has become a significant challenge.


Kit Walker
Associate Director, Healthcare & Education
kw@draxexecutive.com

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[i] https://www.health.org.uk/publications/long-reads/elective-care-in-england-assessing-the-impact-of-covid-19-and-where-next

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