Can private equity provide a crutch for the ailing NHS? Tim Stafford gauges the mood of healthcare backers and advisers to chart the investment opportunities of the future.
If the only two things in life we can be certain of are death and taxes, state provision of healthcare is a subject to engage us all. The Government's large and very public spending spree on UK healthcare has been a common source of conversation in recent years. Although most praise the extra funding, they also criticize the results: a huge proportion has been swallowed by paying out higher salaries to NHS employees, while productivity gains have been largely absent.
However, some of those closest to the debate think the next few years will herald a revolution in healthcare provision, as the NHS struggles to cope with its mandate and barriers to entry are dramatically reduced. Although the Government retains its commitment to making healthcare accessible to all, experts believe the way those services are provided - and by whom - will change dramatically.
Two men who agree with this are Richard Clough, chief executive of private long-term care supplier Healthcare Homes Group and Kingsley Manning, chief executive of healthcare consultancy Newchurch & Company. Clough believes the best investment opportunities for the private sector, at least in the near future, remain in long-term care, where the private sector is culturally, politically and financially established.
Speaking at a recent seminar organised by August Equity and the Corporate Finance Faculty of the Institute of Chartered Accountants in England & Wales - Fit for Investment? Doing Deals in Healthcare - Clough explained: "If you're advising anyone, tell them to start in long-term care. That's where the private sector is accepted. In acute care you've got competition and, frankly, in primary care you've got dogma against you."
Manning, however, believes the private sector will become established in all areas of UK healthcare. He says NHS employees now anticipate working extensively with the private sector - for the first time since he began advising public and private providers. "Some are even energised by the fact," he adds.
Both men agree that social, political and technological factors will ensure UK private healthcare provision becomes commonplace.
Demographic and social trends will play a major role in this development, with the UK's aging population resulting in greater demand for healthcare. "Currently, 17% of the population is over 65," says Clough. "This will grow from the present 9.9 million to 12.7 million in 12 years." This expanding customer base is disproportionately wealthy. "That 17% of the population owns 24% of the UK's housing stock. Changing consumer aspirations also play a part, particularly in acute care. People expect to choose when and where they have elective surgery and the private sector is best placed to meet this demand."
Manning says the industry is ripe for technological revolution: "The technology is, essentially, the same as in 1948 - a desk, a chair and a bed." The private sector, which is much more inclined to innovation, can use technology to improve service provision immeasurably.
Another factor is the shift in Government policy. The Government is now far more willing to purchase from the private sector and has introduced legislation beneficial to well-run corporate providers.
Productivity is the fourth driver. Manning predicts the private sector could realise cost advantages of 20-30% over the NHS in acute and primary care. Clough agrees that effective private sector long-term care providers are more efficient than those run by the state.
Compounding these four drivers is what Manning calls the NHS's "brittle" state:
When these four factors burst the bubble in which the NHS currently operates, the private sector will be ready.
Clough and Manning believe the two most important aspects of any healthcare services provider are quality and focus. Given the slew of regulation in the sector and consumers' understandable discernment, companies known for a quality service will prosper.
Aatif Hassan of August Equity believes success will come from focusing on a niche: "The tendency in the healthcare services sector is to develop specialisms."
This, says Clough, provides focus for the management team, but also makes the company a reliable supplier in the eyes of the government. Healthcare Homes, in which August Equity recently doubled its funding to £19.5m, has done exactly that. "The company is successfully fulfilling the buy-and-build plan and methodically building a business that can service a growth market," says August Equity director Philip Rattle.
Manning outlines the importance branding will play. "If a company is good at establishing and maintaining customer relationships then sales costs relative to revenue will be very attractive," he says.
There are pitfalls, however. Clough warns of the need for large amounts of fixed capital, resulting in companies being highly geared. However, private equity can offer guidance here - and a large outlay upfront can be offset by some highly lucrative returns thereafter. Other concerns are that the government is a notoriously difficult customer and that healthcare can generate bad PR. However, well-run, focused firms, with a good understanding of all stakeholders in their operating niche, can effectively mitigate many problems.
State provision of healthcare is ripe for change and the market is well positioned for private capital to play a large part in that transformation - culturally, politically and financially. As Manning says: "This is the largest opportunity - in any industry - currently facing the UK investment community."
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