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According to global mid-market investment bank Alantra’s latest report, the UK’s specialist care market is growing and offers an attractive investment opportunity for those prepared to put quality at the top of the agenda. Justin Crowther, partner and head of healthcare at Alantra, gives an overview of the findings

The UK’s leading specialist care businesses continue to grow rapidly and the average business in the Alantra Specialist Care Fast 50 has posted a compound annual growth rate of 18.2% over the past two years.

The Specialist Care Fast 50 comprises those businesses that have increased their revenues at the fastest rate over their past two financial years. At the top of the ranking, the fastest-growing businesses are powering ahead. Select Healthcare Group, which operates a range of facilities throughout England, has delivered compound annual growth of 44.4% over the past two years. In second place, Healthcare Homes has managed 34.4%.

Such impressive performance reflects the underlying dynamics of the sector. This remains a fragmented industry where the demand for specialist care services significantly exceeds supply.

Factors driving demand include increasing awareness of mental health problems, better diagnosis and support for conditions such as autism, and rising life expectancies, meaning there are more older people with specialist care needs.

In this area of the market alone, Johann van Zyl, chief executive of Cornerstone Health Group, estimates there are around 5,000 beds available across the UK for older people with complex neurological, physical and mental health needs, but 15,000 people who need this care. “Placements are coming in from all over the country,” van Zyl says. “You’re not just dealing with your nearest local authority or clinical commissioning group, but commissioners nationwide.”

At health and social care provider Potens (ranked third), founder and chairman John Farragher says: “We have become more specialist in what we do over time, working with higher acuity residents, and there is huge growth in many areas.”

For those delivering a high-quality service, fees can rise with more specialist care needs, Farragher points out, boosting the revenues of providers that move up the acuity scale in this way.

On the supply side, meanwhile, the potential for increased provision is constrained by factors such as the lack of care facilities and homes, and shortages of staff with specialist care skills. These are not problems that are easy to rectify quickly.

A limited pool
Given the mismatch between supply and demand, local authorities and CCGs have not been able to drive down bed prices in the same way as in the less specialised market for residential and domiciliary care. 

“There is a very limited pool of providers able to meet people’s needs,” says Oliver Pritchard, a partner who specialises in the sector at solicitors firm Browne Jacobson. “Meanwhile, a local authority that has a legal duty of care has no choice but to pay for it.”

At health consultancy Marwood Group, Tim Read, director of UK and Europe healthcare advisory, says the ingredients for continued outperformance are all in place. “You have commissioners for whom it is statutory to provide funding, growth in the number of people needing care, and supportive policy drivers,” he says.

This is not to suggest that operating specialist care facilities somehow represents an opportunity to make easy money – far from it. Regulation of the sector is understandably strict, with operators required to invest significant sums in high-quality services and compliance. The penalties for regulatory failure, moreover, are high, with reputational damage impairing operators’ ability to win new business from public sector payors in particular.

It is not just ongoing care where regulation can be problematic, but also in a growth context, with the Care Quality Commission taking an increasingly tough line on implementing a national policy that favours care delivery through smaller units. 

“Overall, the CQC is a force for good, but its almost de facto view that new units with more than six beds are no longer appropriate is stifling new registrations,” warns Read. “The principle of smaller units is right, but its rigid application is very difficult for those wanting to invest in new capacity.”

Recruitment challenges
Recruitment and retention are a constant challenge in a sector where pay rates are relatively modest. Specialist care operators require staff with the skills to deal with high levels of need and often challenging behaviours – and such staff are limited in number and high in demand. Brexit may add to this pressure if a settlement (or no deal) makes it tougher to employ staff from across the EU.

Paul de Savary, managing director of Home From Home Care (ranked 15th), says dealing with all of these issues requires specialist care providers to be much more agile and flexible. At Home From Home Care, this has meant developing a bespoke technology platform capable of supporting the business. “We’ve built the platform ourselves to manage every aspect of the business other than front line care delivery,” de Savary explains. “It’s created a new model of care for us, with intelligent care that is based on real-time data.”

Strong fundamentals
Despite the various challenges facing the specialist care sector, many see it as a sound investment choice. “Overall, the fundamentals of the specialist care sector are strong,” argues Jamie Stuart, deputy head of health and social care in the corporate and structured finance group at banking holding company CYBG. “Where businesses have a strong focus on quality of care and regulatory compliance, performance will follow.”

This is why the sector is attracting increasing interest from a variety of investors and experiencing ongoing consolidation. Indeed, in a fragmented market where the 10 largest providers account for only 15% or so of a sector dominated by smaller operators – often family owned and run – M&A activity is now accelerating.

Larger providers able to build nationwide businesses have an exciting opportunity to streamline operations, drive efficiencies and, most importantly of all, deliver improved care outcomes. As John Farragher of Potens, one business which continues to make acquisitions, explains: “Greater scale enables you to build a strong centralised team that can deal with challenges such as regulation and recruitment.”

Overseas buyers
Overseas buyers add an extra dynamic, meanwhile. “The UK market is attracting considerable international attention,” says Christopher Jobst, a director of healthcare at Alantra based in Germany. “Compared to continental Europe, it offers fewer barriers to entry and a single reimbursement system to get to grips with.”

Consolidation is certainly a favoured route to a higher turnover. Organic growth, by contrast, is more difficult to secure, given that many operators are already operating with very high occupancy rates and that opening new facilities takes time and requires substantial investment.

Still, Graham Baker, chief executive of Outcomes First Group (ranked seventh), points to opportunities here too. “We’re focusing on enhancing existing services with additional capacity, but also developing new services in adjacent areas that open up new markets,” he says.

As for profitability, staffing costs and the compliance burden are key margin pressures, but the specialist care sector’s relative ability to command higher (and increasing) fees from care commissioners offsets this risk.

Nor are providers concerned about volatility in the political and economic environment, currently worrying so many other industries. Clare Connell, managing director of Connell Consulting, which advises on deals in the sector, says: “This is a non-cyclical sector that is just as busy in July as it is in December, and in demand whether the economy is slowing or accelerating – there’s remarkably little volatility.”

Against this supportive backdrop, the Alantra Specialist Care Fast 50 constituents are in a strong position to continue growing rapidly with stable margins that can be reinvested to continue improving specialist services that are greatly undersupplied.

Competition for assets
The UK’s specialist care sector, which offers a reliable income stream underpinned by public funding, physical property assets, and good growth prospects, appeal to an increasingly diverse range of investors.

On the one hand, trade buyers, with backing from private equity and other investors, are becoming more acquisitive as they focus on consolidation as a means to secure economies of scale, as well as greater bargaining power with commissioning groups.

On the other hand, the market is also attracting a new breed of institutional investors with a slightly different agenda.

Christian Dubé, a partner at August Equity, an investor in Orbis Education and Care, agrees with this analysis. “For private equity, M&A is all about building a platform from which you can grow,” he says. “Acquisitions give you access to new geographies – and therefore new commissioning groups – as well as an opportunity to move into services that are complementary to your core business.”

That approach is typified by BC Partners-backed Elysium Healthcare, launched in 2016 (and therefore lacking the three years of financial statements required to qualify for entry in this year’s Specialist Care Fast 50). It has built a portfolio of specialist care businesses, which has so far expanded to include investments in mental health, neurological care, education, children’s services and private patient services.

However, Elysium is far from alone in seeking to build up its exposure to the sector, with other firms pursuing similar strategies. At private equity firm Ignite, for example, partner Forbes Stuart sees a real opportunity to scale through M&A. The company invested in Cornerstone Healthcare, which provides specialist care to older people with complex mental and physical health problems, in September last year and Stuart is keen to follow up on that deal. “It will take time and we may also seek to grow organically through developing greenfield sites to increase capacity, but there’s an opportunity because there’s just no business of any scale in our niche of the market,” he says.

Similar competition for assets also comes from beyond private equity. The US healthcare firm Universal Health Services has been an acquirer of UK specialist care businesses through its Cygnet Health Care subsidiary, which recently acquired The Danshell Group, ranked 18th in this year’s Fast 50.

By contrast, for institutions such as the large infrastructure funds now showing so much interest in the sector, the rationale is different. Their interest is more long-term with the view that the specialist care market is a potential source of non-cyclical growth that offers stable cash flows with ultra-defensive features, as well as a longer-term opportunity for returns from increasing property valuations.

These funds are increasingly important players in the market. Last year Australia’s AMP Capital made two acquisitions. The Regard Group was AMP’s first investment in the UK and was followed by the complementary acquisition of Care Management Group, which provides residential and supported living services for adults with learning difficulties and mental health conditions. Similarly, Caledonia Investments-backed Choice Care Group’s sale to iCON Infrastructure marked iCON’s entry into the UK social infrastructure market.

AMP is just one example of the increasingly international nature of investors in the UK specialist care market, for whom the depreciation of sterling since the EU referendum has to give the sector an additional lure.

Christopher Jobst, a director of healthcare at Alantra expects this to continue. “For investors looking for exposure to European healthcare, the UK’s specialist care market is by far and away the most mature,” he says. “In many continental European countries, there aren’t private sector equivalents of these businesses.”

“I’ve never seen the market so busy,” adds Connell Consulting’s managing director Clare Connell, who has been preparing due diligence reports for buyers of specialist care businesses since 2001. “The weakness of sterling, allied to the general sense of uncertainty in so many markets, has given this sector something of a safe haven feel – we’re seeing interest from all around the world, with Chinese investors in particular very attracted.”

Firms such as Connell Consulting may yet get even busier, predicts Browne Jacobson partner Oliver Pritchard. As he points out, fragmentation in the sector remains widespread, with as many as nine in 10 facilities still owned by very small operators that very often run just a single unit. 

“We’re still at an early stage of the consolidation of this market, but there’s a growing realisation among a range of investors that the margins available in specialist care are very attractive,” Pritchard says. “Whether as a property play, or a strategic investment in a platform business model, these assets have a great deal to offer.”

Inevitably, that will impact on valuations, particularly with the value of the pound giving international investors greater firepower. Deal competition looks set to remain fierce for the foreseeable future, as a disparate cast of potential buyers vie for the most attractive assets.

Still, price is only one part of the equation. “This is a sector where commercial due diligence alone is not enough,” argues Marwood Group’s director of UK and Europe Tim Read. “If you just crunch the numbers you can miss fundamental and critical aspects of the business.”

Investors considering UK acquisitions need a clear view of the reimbursement outlook for the business in question, Read argues, which will often depend on the specific policy dynamics of their leading local authority or clinical commissioning group clients.

(Click to enlarge)

Posted on: 21/05/2019

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