Healthcare review Q4 2022

While deals activity in the private healthcare market is down from last quarter the sector is proving robust in all areas considering the economic climate. We've seen continued investment from private equity (PE) and private buyers from both the UK and abroad.

Announced M&A activity in healthcare (quarterly)

This quarter has seen investor interest across many of the private healthcare subsectors. PE activity has reduced this quarter, which is in line with overall M&A activity in the private healthcare market. 42% of the Q4 deals still had private equity involvement, which is just 8% down from last quarter.

Announced PE activity in Healthcare (quarterly)

Elderly care

Social care has seen a slight decrease in activity, but still remains a core focus for investors. While the European REITs haven't been as active this quarter, we've seen Aedifica continue to invest in this market with the acquisition of one operational care home and two sites to build two new care homes. The Sanctuary Housing Association has acquired Cornwall Care, which operates 16 care homes in Cornwall and Tristone Healthcare Ltd has acquired K Bond Healthcare Ltd (trading as Next Steps), a Manchester, UK-based residential and nursing care services provider. Santerre completed their acquisition of 49 Caring Homes care homes, uniting the ownership of the property and operations of the 49 homes.

Specialist care

The Specialist care market has continued activity through this quarter seeing Civitas acquire a £200 million property portfolio from CareTech under a sale and leaseback scheme, this follows the privatization of CareTech backed by Three Hills Capital in June 2022. At the end of the quarter, Civitas also acquired through specialist care provider ivolve Group (previously Envivo), Cavendish Care, who we advised.

Q4 also saw Swanton Community Care, backed by Apposite Capital make four acquisitions. They acquired Deanston House Ltd, a UK-based disabled adults care home operator, Freedom Care and Support Ltd, a UK-based supported living and home care services provider; Child and Family Services (CFS); and Care Homes for Adults with Disabilities (CHAD). These acquisitions will give Swanton the ability to expand through the local hubs.

Medical devices 

The medical devices market remains interesting to investors in the UK and abroad. KKR has acquired a majority stake in CliniSupplies Ltd which supply chronic care medical devices. Halma plc has acquired IZI medical the US developer and manufacturer of radiology and imagery medical devices. UK medical device developer Nexa Medical UK Ltd was acquired by the US medical device manufacturer Advance Oxygen Therapy Inc.

Digital health

As private healthcare continues to move into the digital space, we continue to see the digital health market grow with interest from investors and overseas buyers. Octopus VCT plc led a group of investors to invest in HelloSelf Ltd, the local provider of a digital therapy service platform. The UK-based menopause app Vira Health acquired Alva, a UK-based menopause treatment prescriber. Palatine PE invested in Redmoor Health Ltd, a UK-based digital healthcare technology consulting, web design and marketing services provider, and August invested in Onetouchtelecare Ltd, the Ireland-based healthcare patient and staff SaaS provider.

Retail healthcare

The retail healthcare market saw sustained motion this quarter, which is very positive for the sector considering the economic climate. We advised on the sale of Veincentre Ltd a UK-based varicose veins treatment clinic operator to CBPE Capital LLP. Dentex resumed its acquisition path with the acquisitions of four dental groups, Rory Morris Dental Excellence, Alex Jones Dentistry Ltd, Hedon Dental practice and Edward House Dental Studio. RCI Group, part of the Literacy Capital portfolio has acquired Prometheus a healthcare services company providing support to individuals with mental health needs. Spire Healthcare Group has acquired The Doctors Clinic Group Ltd, a private GP office operator for a consideration of GBP 12 million.

Pharma services

Once again pharma services have proved a very appealing subsector of private healthcare for investors. M Ventures headquartered in the Netherlands has invested in Nucleome Therapeutics Ltd, the biotechnology company and Storm Therapeutics Ltd, the UK-based research laboratory, focused on the identification and development of small molecule drugs. Aspire Pharma, owned by H.I.G Capital acquired Morningside Pharmaceuticals Ltd, a UK-based pharmaceutical products distribution services provider. RxCelerate, an international out-sourced drug discovery and development platform, acquired Methuselah Health UK Ltd a drug discovery company, the launch of ProQuant, a proteomics service has followed this acquisition.

Three key deals 

Veincentre

Veincentre is a leading private provider of varicose vein treatments, founded in 2003 by husband and wife, Dr David West and Deborah West. Palatine Private Equity’s Impact Fund invested in the business in 2019 and substantially grew the clinic base across the UK. The business has focused on increasing the accessibility and affordability of treatment; serving to both alleviate the burden on the NHS, and increase the number of individuals who have benefited.

Having invested in and successfully exited SpaMedica earlier in the year, with healthcare and pharmaceuticals being a core sector, CBPE were both management and the founder’s preferred partner – based on their extensive knowledge of private healthcare clinic rollouts and commitment to the delivery of the Veincentre values.

Cavendish Care 

Cavendish Care is a specialist care provider located in the South-East of England, providing residential care and supported living for adults with learning disabilities and challenging behaviours. The business has been family-owned and run since its inception 25 years ago, developing into an important asset to the local community.

Civitas Investment Management Limited is a fund manager dedicated to investing exclusively in social care and social infrastructure in the UK. Civitas and ivolve Group established a partnership in 2018 to acquire high-quality specialist care operators in the UK. This acquisition represents their eighth acquisition since the inception of the partnership and provides them with an established footprint in the South East of England.

ivolve Group, formerly known as Envivo Group, recently entered the market following its integration of existing providers Heathcotes, New Directions, and TLC Care and Support into a new enlarged brand name. With the acquisition of Cavendish Care, ivolve Group becomes one of the largest social care providers in the UK.

Alva Health Limited 

Alva runs an online portal where women experiencing menopause can be prescribed hormone replacement therapy, specific hormones that boost oestrogen in the body and relieve symptoms.

UK-based Vira Health founded in 2019 is a digital healthcare company that has created an App ‘Stella’ that supports women through menopause by combining data, clinical best practices and behaviour change to solve the health and quality of life problems that affect billions of women worldwide.

Vira acquired Alva as part of its expansion in the UK following the launch of a government-led Menopause Taskforce to change societal attitudes. Co-Founder Rebecca Love says “Acquiring Alva allows us to rule out alternative conditions, diagnose their stage of menopause and, when appropriate, recommend the appropriate HRT for their specific symptoms.”

Healthcare M&A Outlook

The activity above shows that the private healthcare market maintains strength in all areas. We're still seeing continued investments from private equity and commercial firms in the UK as well as abroad. We've seen a slight downturn in the volume of deals this quarter compared to the previous quarter, but the volumes remain in line with the start of 2022.

Looking back at 2022, private healthcare has sustained growth and activity despite the unpredictable markets, while elderly care picked up activity following COVID-19, but activity did slow with the cost-of-living crisis. The digital healthcare market has been an area of keen interest which we would expect to continue in 2023, as more companies and associations introduce digital solutions to improve services and care.

We anticipate that the 2023 market may prove difficult for some, but the private healthcare sector has shown to be resilient in the past and has been a continued area of interest for investors.

For more insight and guidance, get in touch with Peter Jennings, Dan Smith and Matthew Stannard. 

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Care-home profitability has been on a downward trajectory for the last decade. The uncertainty and disruption of 2022, not only worsened the position of operators already struggling to balance the books but introduced extra challenges for those who thought they had a healthy operating model. 

The cost of living is hitting homes

At the start of 2022, Laing Buisson estimated a 30% increase in operating costs, comprising utilities and food; higher insurance costs in the wake of the pandemic; and staff shortages exacerbated by Brexit. The actual rises, however, could be much more. 

Consumer price inflation in December 2022 was c.11%. While it may reduce depending on the extent of government support, the pain is likely to continue for some time. Staple foods, such as bread, meat, dairy, oils and fats are seeing inflation of between 16% and 29%. The Financial Times has reported that care-home providers face insurance rates of up to four-times pre-pandemic levels: potentially putting many at risk of going out of business.

Nurses and care workers

Staff are by far care homes' most valuable resource. In the last 12 months, staff have been lost faster than they can be recruited, resulting in an increased reliance on more costly agency workers. Staffing is impacted by increases in the National Living Wage, with a further rise from £9.50 to £10.42 being implemented from 1 April 2023. 

The severity of recruitment and retention issues in the sector is well demonstrated by care workers leaving for supermarkets and retailers. Some might say this is because society doesn't value the work being done in social care, however, other employers outside the healthcare sector do pay more than the minimum wage, and some even offer a joining bonus. 

A recent Care England survey of c.70,000 beds in England, advised that over 88% of providers reported difficulty securing agency resources and that rates had more than doubled between 2019 and 2022.

Utilities and the energy crisis

Energy is a significant cost for care home providers and is a serious concern for those who were unable or failed to hedge their utility costs. Energy broker Box Power CIC and Care England reported that energy costs for care homes had increased dramatically during 2022, with its latest reports finding a significant increase in costs: 

• August 2021: energy costs were c.£660 per bed per annum/ £13 per week
• July 2022: energy costs were c. £3,950 per bed per annum/ £76 per week (433% increase on August 2021) 
• August 2022: energy costs were £5,166 per bed per annum/ £99 per week (683% increase on August 2021) 

Care England advises that most providers who hadn't re-contracted their energy costs in the last 12 months expected very significant price increases. This is because providers with less than 1,000 beds are unlikely to be on a fixed-price energy contract as their volumes aren't conducive to a hedging policy.

• The Energy Bill Relief Scheme and then the Energy Bills Discount Scheme (EBDS) will discount energy costs for businesses until April 2024, although as it is a discount and not a price cap, care homes could still see an increase in their utility costs. If providers are required to move onto fixed price contracts, which could see more than six-fold increases (despite the EBDS discounts), these costs won't be affordable.

What does the future hold?

For some operators, the future could be bleak. Years of long-term austerity, coronavirus, spiralling costs, and the staffing crisis are combining to create the most challenging year the sector may have ever faced.

Predicting the future of the energy market is impossible and it's uncertain how much support may actually come from the government. This position is further exacerbated by the certainty that inflation is high and may remain so for a while, placing upward pressure on operating costs, and leaving no opportunity for real cost savings. Furthermore, commentators expect the Bank of England may increase interest rates to over 5% by mid-2023, placing further pressure on providers with high levels of borrowings.

It now seems inevitable that the government will need to provide some additional financial support in the coming months and beyond, or face the real prospect of some homes closing down, precisely at the time when they're needed the most.

For more insight and guidance, get in touch with James Hichens.

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