Graph 1: Announced M&A activity in healthcare (per quarter)
Graph 2: Announced PE activity in Healthcare (per quarter)
In Q4 retail healthcare (particularly veterinary, dental and NHS outsourced services), specialist care and domiciliary care have continued to see much activity, but we have also seen more activity in pharma services and an uptick in medical devices.
For retail healthcare veterinary activity has been dominated by EQT Partners backed Independent Vetcare (IVC)’s continued spending spree, having acquired more than eleven practices in the UK and Europe in the quarter. Additionally, BC Partners backed VetPartners also acquired family-owned Goddard Veterinary Group in October. The dental market has seen further consolidation with CBPE backed Rodericks Dental investing in Wales based Gowers Dental and Apposite Capital backed Riverdale Healthcare continuing their buy and build strategy with the acquisition of Perfect Smile’s North-east portfolio of dental practices. The latest acquisitions taking Riverdale to c.38 practices. NHS outsourced services has seen recent activity. As the post-pandemic market adapts to long waiting-lists and cancelled NHS surgeries by using private operators for NHS procedures (and simultaneously facilitating an uptick in private-pay clients), so the investment stock of such services is on the rise. In December Virgin Care was acquired by Twenty20 Capital. Virgin, which operates community health services has been rebranded HCRG Care Group and private hospital KIMS (which also offers routine NHS surgeries) was acquired by LycaHealth in October.
Specialist care continues to be a highly attractive market with bolt-on acquisition being made by Stirling Square backed Outcomes First Group, acquiring Care First and Apposite Capital backed Swanton Care acquiring LH Social Care and Lavender Group Homes. For domiciliary care, Cera continued to acquire, taking Allied Healthcare Group Limited and CRG Homecare from HCRG and PE investor, Weight Partners invested in Local Authority home care provider, Grosvenor Healthcare facilitating an exit for founder Ravi Bains.
Three key deals
Healthcare M&A Outlook
The strong end to 2021 indicates that, the much of the Healthcare sector has emerged from COVID-19 with renewed strength. Q4 has shown us that whilst financial investors continue to be a robust presence, there is still significant interest from trade, who (for the right asset) will compete with these investors. We anticipate that 2022 will continue in this vein with European entities increasingly participating in the UK market (trade, but also property funds, infrastructure funds and investment companies as well as the already active PE houses). Medical devices will see increased activity as the sector navigates EU directives. We have already witnessed an uptick in UK investors acquiring in Europe such as Apposite Capital investing in Crestoptics (Italy) and Fremman Capital investing in Palex (Spain). Pharma services will also continue to be active as key innovators in the market are acquired. We have seen such activity this quarter with BenevolentAI being acquired by Odyssey (a Dutch special acquisition vehicle).
Despite the challenges of 2021, the healthcare sector has proven resilient and we anticipate 2022 being a year of growth for those who were able to adapt and refocus strategy during 2021.
The general outlook for healthcare may be buoyant, but one sector potentially facing a much more restrictive future is private social care. The government's proposed new strategy may force providers to make difficult decisions.
The white paper on adult social care claims to put people at the centre of social care and fleshes out how the government plans to spend taxes raised from a new health and social care levy, which will be introduced in April 2022. This is intended to help fund the social care system and address financial challenges in the NHS. This is expected to raise over £36 billion over the next three years. Only £5.4 billion is expected to go into social care, with the rest supporting the NHS catch up on its pandemic-related backlog.
Levelling the playing field for self-funders
One of the white paper’s goals is: “to ensure that self-funders can access the same rates for care costs as local authorities for care homes, ending the unfairness where self-funders have to pay more for the same care.” It also pledges to ensure local authorities move towards paying a fair cost of care to providers.
This should be welcome news at a time when some providers have had to hand back local authority contracts due to ‘non-viable’ below market rates. The question then becomes whether the definition of ‘fair costs’ will be enough for a sector already under pressure? We have first hand experience of working with providers who have closed homes where local authority rates have been insufficient to generate a sustainable level of profitability.
A difficult choice for care providers
Care homes are already under pressure to decide whether to keep taking council-funded patients – knowing that they may only cover marginal costs – or whether to focus solely on private-sector patients. If new measures mean that rates for self-funded patients are suddenly reduced to those previously reserved for council patients, they will find themselves under even more strain.
Those wishing to continue taking council patients may have to resort to price discrimination and offer a two-tier system, for example with options around bedroom size and aspect, ensuite bathrooms, or standard of food. In a healthcare setting, large adjustments may not be ethically or practically feasible.
The government has stipulated that the adult social care cap applies to “personal costs” only. This means that accommodation-related costs such as food and energy in a care home do not count towards the £86,000 cap. It remains to be seen if they are charged to the local authority or the resident directly.
No seat at the table
As of July 2022, the introduction of integrated care systems will change how health and care services are planned, paid for and delivered in England. Under current proposals, each ICS would be led by an NHS Integrated Care Board (ICB), an organisation with responsibility for NHS functions and budgets, and an Integrated Care Partnership (ICP), a statutory committee bringing together all system partners to produce a health and care strategy.
Despite a focus on social care, an amendment was tabled to the Health and Social Care Bill, which prevented the private sector from taking a seat on the newly created ICBs. This means that there is no representation from private care homes, who own the majority of care beds in England. To succeed, the ICS must find a way to work with the private sector.
The government white paper states that further details will be announced shortly as to how it will pay care providers a fair rate. Both care providers and local authorities will be carefully analysing any announcements to ensure that funding for England's care homes is viable for all involved.