Business and politics do not always make for happy bedfellows. But when it comes to debating the future of the UK healthcare market and the investment opportunities that flow from it, the links between high finance and long waiting lists demand examination. This provided the context to the latest Deal Club event hosted by August Equity and focused on future trends in the healthcare industry. "The Government has realised the NHS neither has the skills in-house nor the sufficient funds to make the change," says Paul Saper, director of LCS International Consulting. "But the money is available through private firms that want to get involved and improve services."
Saper believes the rest of the world has moved on in the past 15 years and that healthcare needs to follow suit: "There are too many patients in acute beds running up large bills. It's not the best option for the individual. Forget political initiatives or whatever the head of the NHS wants to do. Private authorities are going to get to grips with the current change and provide more affordable services."
David Jones, partner and head of healthcare at Deloitte, agrees that the healthcare sector is organic and growing. But, he warns, it is not an easy market in terms of completing ready-made deals. "'It's hard for private equity as there are few pickings out there," he says. "There are nuggets, of course, such as homecare, GP surgeries, cosmetic surgeries and fostering. And there is nothing to stop firms like August Equity finding those nuggets and investing in them."
Healthy trinity
There are three key components to completing successful deals, according to Aatif Hassan, an investment manager at August Equity who hosted the Deal Club event: "A clear growth strategy, an appropriate capital structure and a highly driven management team are all vital." He believes there is a challenge in ensuring the timing and pricing is right for a new investment and that there are times to stand back and be a little more cautious. August Equity currently has an investment in Healthcare Homes Group, the leading provider of residential care homes in East Anglia for the elderly and the elderly mentally infirm. Finding the right deals remains the chief challenge for investors, as Dominic Hollamby, global head of healthcare at Rothschild explains: "If one had bought a house in Knightsbridge two years ago, it'd be twice the price now. It's the same in healthcare."
Best kept in private?
For Hassan, however, it's vital the Government continues to outsource to private companies, as the uncertainty the public sector has shown in the past presents problems for all concerned. "There's no doubt there's a wall of money waiting to be invested and there are more and more private equity companies coming into the sector. There's no doubt it's a good place to invest " it's highly competitive and the winners will be those who really understand the sector."
Certainly, the UK market has seen prices increase as a consequence of international companies entering the market. Capio, which owns 22 private hospitals in the UK, was recently purchased by a Scandinavian investor. Meanwhile Netcare, the South African healthcare provider, has also entered the UK market through the purchase of BMI Healthcare as part of a £2.2 billion deal, rumoured to be the largest global transaction for a decade. All this is driving up the price of assets and adding some froth to the market.
This, according to Jones, is putting increased pressure on management teams to deliver larger profits more quickly. "Firms have been coming along and buying into the market recently, but they'll have to see profits soon in order to carry on," he says. "These providers will have to work harder to meet their targets and keep their backers happy. Advisers are very good at selling strong business plans. But it's the management teams that are tested on day two to drive results. That's a very different and difficult story. Unfortunately, shorttermism is what's taking place at the moment. It's not a good way to commission."
The ability to add significant value is one of the pillars August Equity brings to its portfolio companies. The firm's experience of the issues fast-growing companies face and its ability to complete further bolt-on acquisitions, as well as ensure management completes its organic development plans, is one reason why private equity is increasingly attractive tohealthcare management teams.
A private function
Ultimately, the distinguishing features of the best operators remains top-class management, planning and expertise. When it works as it should, the private sector offers an improved service and better facilities at a cheaper price.
The bottom line is that for private service providers - and private equity firms - to make profits out of the sector they need to bring real market competition to primary care, while promoting diversity rather than the 'one size fits all' mentality that has, arguably, existed for decades in the failing NHS.
"And that's where August Equity fits in," says Philip Rattle, partner at August Equity. "There are opportunities for us, definitely and without hesitation. Healthcare is a core area for us. We've spent years developing a network of individuals. But firms must find niches and understand the sector, not get carried away with the froth of the market. Operational improvement is very much a long-term process."