Rude Health

It’s not every day, nor indeed every decade, that a buyout the size of HCA comes along (US$33bn), and the implications for private equity in the healthcare sector could be significant.

Private healthcare is one of the fastest growing industries in the UK as a result of government policy changes and an ageing population, and it’s an area which has proved a fruitful hunting ground for private equity funds. According to data from CMBOR, healthcare reached a record value of £6.6bn in 2005 from just 31 deals, three times the previous high of £2.4bn in 2000.

In July this year Blackstone floated care homes operator Southern Cross Healthcare on the London Stock Exchange. The IPO raised around £200m and, at 225 pence per share gave the business a market value of £423m, and made £23m for Blackstone, which is reducing its holding in the business from 88% to 48%. The shares have performed well post-float, now priced at around 280 pence, giving it a market cap of £523m.

HgCapital, which apparently has the largest dedicated healthcare team of any private equity firm in Europe, recently sold Castlebeck, a UK provider of specialist healthcare and rehabilitation services for adults and adolescents with learning disabilities and challenging behaviour, to Castle Holdings Limited for £255m, four years after the British mid-market specialist acquired the business from 3i.

One of the largest exits of the year came in April, when BC Partners sold General Healthcare Group (GHG), a provider of private acute care in the UK, in a tertiary buyout transaction to Network Healthcare Holdings, a consortium including three leading UK-based financial and property investors, including Apax, London and Regional Properties and Brockton Capital, for £2.2bn, the largest private equity deal in European healthcare ever.

Philip Rattle, head of the healthcare team at August Private Equity, formerly Kleinwort Capital, says ‘there are three main drivers behind the growth of the UK healthcare sector. The first is demographics; the population is ageing and people are living longer. Ninety per cent of an individual’s healthcare spend comes in the last year of their life. Second is the fragmentation of the NHS. Healthcare will represent 9.5% of GDP in the UK by 2008. Of this, the NHS will make up 80%. By 2022, healthcare will stand at 11% of GDP, leading to more outsourcing to the private sector. Thirdly, there is an increasing amount of consumer choice as to where they go when they need treatment, and this, combined with wage increases, has meant private healthcare is an option for many more people than it was a decade ago. People are prepared to pay for their healthcare now, which is a significant change in attitude. An additional reason the sector is attractive to private equity is because healthcare operators often own a lot of assets, such as property, which a fund is able to leverage against’.

The industry is still fragmented, certainly at the smaller end, which is where a firm like August Private Equity comes in. The firm currently has two healthcare businesses in its portfolio: Healthcare Homes Group (HHG) and InterMed. HHG is a specialist care home operator in the elderly and frail residential sector, with an increasing focus on Elderly Mental Infirm [EMI] patients. August’s approach is to take a small business, embark on a buy-and-build strategy, turn it into a medium-sized business before selling it to a trade buyer.

This is certainly the plan for HHG, which became the largest care home provider in East Anglia following the acquisition in March of PriMed Group, a privately owned care and nursing home group based in Suffolk.

Private equity will play key role in the consolidation of the more niche healthcare markets, not to mention at the larger end. One of the problems facing funds however is the dearth of experienced commercial managers in the sector, which means that private equity firms have to rely heavily on personal networks which in many cases have been built over significant amounts of time.

It is highly unlikely that Europe will ever see a healthcare deal reach the size of HCA, mainly because the US healthcare market is unified and larger. The opportunities for consolidation in the US are also much rarer, where in Europe there is plenty of scope, and it is this potential for consolidation which could, in the long-term, give rise to the kind of huge healthcare companies seen in the US, and so raises the possibility of a HCA type deal, especially as so many healthcare deals are secondary buyouts.