Opinion: Justin Crowther

There have been a number of private equity backed transactions in domiciliary care since my last blog, which started with Lyceum Capital backed Carewatch acquiring three businesses in early April. Lyceum has added a total of 11 businesses to Carewatch, which they acquired in 2008 for £37m from Nestor.

This deal was followed by August Equity’s Enara acquisition of 6 domiciliary care businesses. August Equity has been one of the most prolific acquirers in this space, completing more than 15 bolt-on’s since 2009. August also acquired Active Assistance in March, a live-in care service for people with spinal and neurological conditions, which has been merged with their portfolio company, First Call Care Services.

The last private equity backed domiciliary care deal in April was Sovereign Capital backed City & County Healthcare’s acquisition of Sterling Homecare. This was Sovereign’s first bolt-on transaction and we are likely to see many more in the near future following their £25m commitment to expanding City & County.

These deals demonstrate the buy and build strategy of private equity firms and continued opportunities which exist for consolidation in this fragmented market.

These investments also show that confidence is returning to private equity investors, who are keen to deploy capital now. There have been a number of recent healthcare deals involving private equity, including ISIS’s investment in spinal implants distributor Surgi C and Synova Capital’s buyout of the Dental Buying Group. The healthcare services sector continues to punch well above its weight in M&A, and our view is that this will continue well into 2010 and beyond.

After a number of reputed attempts, Virgin have at last managed to get a foot into the UK healthcare market after acquiring Assura’s GP Provider medical services business. Virgin paid a mere £4m, together with a £4m loan note, for a 75% stake in Assura Medical. Virgin had previously attempted to enter the healthcare market back in 2008, but pulled out at the last minute for reasons never made apparent.

It is clear now however that Branson has committed to the sector, and Assura will give him the instant scale in primary care he has been longing for. The PCT contracts will also help to build a solid foundation with the NHS, which could eventually lead to Virgin running NHS hospitals as well – a distinct possibility now, given that outsourcing of NHS hospitals to private operators will begin soon, with Hinchingbrooke being the first.

Virgin are obviously relaxed as to the impact of the election and I share their view. The direction of travel is set and that will lead to more involvement for the private sector in coming years. Whether the Virgin brand succeeds though, only time will tell.

Meanwhile, Bridgepoint have announced a recommended offer to buy Care UK for £281 million, representing a significant 50% share premium based on the share price prior to offer talks which began last September. This price shows that private equity is confident paying strategic prices for scarce, quality assets with good growth prospects. It may also signify that the banking market is returning for the "big ticket" deals.

Investments by private equity firms in UK based healthcare companies have been falling over the past few years. Only 12 investments were made in 2009, compared to 23 in 2008 and 36 in 2007. This is symptomatic of the broader market correction, although the sector, especially the care sector, has been hit by excess leverage in a number of businesses, with the result that private equity houses have focused on portfolio companies rather than new investments. Sellers have also been concerned about selling at a time when business valuations have fallen.

However already in the early days of 2010 the ingredients are in place which should lead to an upturn in investments. Those ingredients include a more stable economic environment, increased debt appetite (albeit at sensible lower levels than 2006-2008) and a sector generally that has strong long term prospects. The majority of private equity firms we have spoken to are expecting a revival in investments levels. Already in 2010 there have been some notable transactions, including Apax Partners £975m acquisition of Marken (a clinical logistics provider), GI Partners acquisition of Shirebrook Care Group and Ontario Teachers Pension Plan’s £150m acquisition of Acorn Care & Education. Bridgepoint have also made an estimated £300m offer for Care UK, which has attracted significant media attention.

In my view, a number of private equity players will also plan to exit some of their current investments now that the market appears much more settled and will look to provide returns for investors. IPO’s are likely to be a popular method of exiting some of the larger investments, especially as the equity markets have shown steady growth over the last few months. Two businesses rumoured to be considering a listing are General Healthcare Group and the Priory Group for example.

As long as the banking sector continues to provide access to credit for transactions, then the next 6-12 months should prove to be an active period for private equity once again.

Shock, horror - that the NHS does not rate highly in terms of speed and choice compared to its peers is the (sadly) not unsurprising conclusion from a new survey published by the Economist Intelligence Unit.

In its report, which compared the UK against corresponding systems in the USA, Germany and India, primary areas of concern included waiting times for operations, with just 18% of UK respondents expressing satisfaction in this area (versus 30% of Americans), and a perceived lack of influence over treatment decisions, with nearly 60% claiming they are not encouraged to choose a doctor or hospital (as opposed to 70% in the USA claiming that they are).

The findings are likely to be disappointing for a government striving hard to reduce waiting times and foster an environment of patient choice, in the hope that competition will improve standards across both primary and secondary care.

Reassuringly for the private sector, despite some political rhetoric from the health secretary Andy Burnham recently, both government and its opposition appear steadfast in their belief that striking a partnership with the private sector will ultimately lead to a better quality of care.

This, combined with potential efficiency savings, should see significant opportunity for the private sector in 2010. With money from investors increasingly finding its way into the healthcare sector seeking its positive returns, I am convinced that 2010 will also see even more M&A activity than ever before.

The acquisition by Synova Capital of Clearwater Care is an encouraging sign for a healthcare market that in terms of M&A and private equity investment had completely stalled since early 2008.

Clearwater is a provider of specialist residential care facilities and supported living services for people with learning disibilities, with 14 care homes located in the South East.

The deal was notable for a number of reasons:

1. Initial deal for Synova Capital, a relatively new mid market private equity firm
2. The key members of the Management Team, MD and FD, were introduced as part of the deal. Both have a strong track record in the sector
3. Focus on supported living mirrors the strategy of a number of businesses in the space currently
4. Bank of Ireland provided a debt package, this is a positive sign that confidence is returning to the debt markets

I think this deal demonstrates that the sector continues to have strong fundamentals that make it attractive to the investment community. With a return of banking confidence I expect to see a steady upturn in deal flow in the next 6 months.

Government reforms to the National Health Service in England have sought to increase the choices available to patients and stimulate competition between healthcare providers. In Primary Care this has been underpinned by the introduction of the Alternative Provider Medical Services (APMS) contract, which allows Primary Care Trusts (PCT's) to contract services from organisations that are outside the NHS.

The initial APMS contracts were awarded at the end of 2008, start of 2009. The majority of the APMS contracts were awarded to GP led companies, (or companies that had a significant element of GP ownership), with the corporate providers Atos, United Health and Care UK only securing circa 10 practices.

The momentum of contract awards has rather slowed down recently, due to two factors. Firstly there have been rumblings that some of the initial contract terms have proved to be relatively onerous and therefore commissioners/providers are needing to revisit some of the contract terms. Secondly with an impending general election in 2010 many commissioners have little incentives to embark upon protracted contract tendering processes now.

However a recent positive trading statement from Assura and with the "direction of travel" in Primary Care moving toward greater involvement of the private sector (albeit slowly) I am sure momentum will once again pick up again in 2010. Next year is also likely to see further investment in private sector operators looking to take advantage of the opportunities that will arise. The market may also see some consolidation of existing players in order that companies can gain scale and the associated economies that come with it.

2011 sees the end of the current public spending round and NHS practitioners and providers are gearing up for a tightening of NHS finances, in light of the current economic backdrop. This is likely to increase the focus on more centralised and more effective NHS procurement. The NHS's Purchasing and Supply Agency (PASA) is to close under plans recently revealed, with functions transferred to the Treasury's Buying Solutions organisation.

I see this further centralisation as an opportunity for private sector firms to further supply primary and secondary healthcare services. NHS management recognise the need for the private sector and the "direction of travel" is to further outsourcing. Unit costs are reduced and choice increased. The Department of Health has stated that it wants PCT's to be commissioners not providers of services. Yes there is resistance, the BMA have recently launched a high profile campaign against further outsourcing and market reforms, but the genie is out of the bottle as evidenced by the recent awards of a number of APBS (Alternative Provider Based Services) to private sector companies to provide GP and primary care services.

Yes the public spending round will be tough, but health is a priority. I believe that significant amounts of private equity capital will be invested in the next couple of years to support businesses that provide outsourced primary and secondary care services. The public finances will require it!