Capvis: Creating value in the care sector

Despite some headwinds following the pandemic, Boris Zoller, managing partner at Capvis, sees plenty of growth potential in elderly care across Europe.

This article is sponsored by Capvis

Where do you currently see the greatest investment opportunities in elderly care across Europe? What types of services are in highest demand?

Boris Zoller
Boris Zoller

Healthcare is a focus area at Capvis. Over the last 20 years, we have invested in medtech companies, service businesses and in one case in a contract research organisation. We see the sector as difficult to ignore, with the ageing population as a key driver, it requires substantial additional investments in care facilities, with private operators playing an important role as public authorities and non-profit operators often facing budgetary constraints, especially post-covid.

The investment opportunity is not only in stationary care but also in ambulatory as well as hybrid models, such as assisted living – all of which are growing. People prefer to stay in their own homes for as long as they can but often require support to do so, which can range from simple assistance services to care and nursing.

Ambulatory care is likely to grow even faster than stationary, but at a certain point people need to receive medical support in a dedicated environment and thus move into care homes.

At the same time, we see increasing demand for assisted living concepts that provide a sense of community together with a comfort and safety-oriented service offering. Another element that we see presenting opportunities is the integration of care along the value chain, going from simple care services to medical services and developing into areas like mental health and rehabilitation.

The demand now goes beyond just taking care of elderly people to providing more of the services they might traditionally access via doctors. Investor appetite for elderly care has increased steadily. A few years ago, we looked at these opportunities and people probably paid around 10x for these platforms; pre-covid that had increased to 12x and now it is sometimes beyond 14x. The appetite is high because the market is still highly fragmented and that creates real consolidation opportunities. We have seen this in many markets including Germany and Switzerland.

What impact has covid had on the market and how has that affected the investment thesis?

Covid had a direct impact. The guests aged over 80 were the most vulnerable to the virus, and it certainly put additional pressure on guests, employees and relatives as well as additional costs onto the operators. The available reimbursement schemes varied a lot across countries, with some countries de facto bailing out their operators while in other markets the operators bore the costs themselves.

“This is an industry where ESG plays a vital role, and especially the E for environmental and the S for social are prominently represented”

Covid also led to a drop in occupancy that was widely observed, though I feel certain this is only a short-term phenomenon. The vaccination rollout in care homes is well advanced and has proven highly effective from what we are seeing. With those over 80 now almost 100 percent vaccinated in Europe there has been a very positive effect on new incidence levels. So, we believe occupancy will normalise over the medium to long term. However, we currently observe a relatively high resistance and hesitation from both guests and relatives to move into a care home.

That is a shame because the press coverage depicting care homes as dangerous places that are run like prisons was not representative of the situation in our experience, with everything possible being done to safeguard the guests. Many operators really made significant efforts to entertain people and give them a feeling of home despite their isolation.

Also, with so many people working from home, many families have been able to take care of the needs of elderly relatives at home. My expectation would be that as lockdowns come to an end and restrictions are eased, people will go back to work and there will likely be an increase in occupancy rates, so normalisation will occur.

How can you integrate ESG considerations into your value creation strategy? Can you give an example of a recent investment?

This is an industry where ESG plays a vital role, and especially the E for environmental and the S for social are prominently represented. Basically, the care operators are really providing essential services to people that need it the most. From the perspective of our portfolio company Tertianum, which is a leading elderly care service provider in Switzerland with over 80 locations and around 5,000 guests, we really believe these people deserve fair treatment, a high level of autonomy and a high quality of life.

Secondly, the services are provided by human beings and we all know that there are staff shortages in this sector in many countries. That means we need to train our people, take care of them and be a really good employer in order to recruit the best people and provide that high-quality service to our guests. So there is a real social component to all aspects of the services we deliver and how they are perceived.

“The covid crisis served to strengthen the theory that size is an advantage because the large platforms were able to act quickly”

From an environmental perspective, our guests need to live in homes so we have a high impact on how those are built, especially if we do greenfield sites. We have to give a lot of thought to our carbon footprint, making this a sector where you can look at ESG through many lenses.

There is also an element of reputational risk if you get these things wrong, but in healthcare generally this is something that you have to actively manage starting with the values and the processes you implement. It’s essential to have high-quality controls in place that monitor everything and really put excellence at the heart of everything you do.

That’s something we have further improved since we acquired Tertianum last year; our guests are at the heart of all of our work and the framework we have implemented to drive our strategy is based on client’s benefitting from high-quality functions.

You need to be open to innovation and constantly evolving your services, your infrastructure and your methods to be at the forefront of what can be done. We can provide all our services with efficient use of resources, good levels of staffing and a low carbon footprint and if we do that we also minimise costs for our guests and for society as a whole, which is good for all our stakeholders.

How do you expect private equity interest in elderly care to evolve in the next few years, and what will be the drivers of deal activity?

The appetite for these investments has certainly increased, as we have seen in the increase in valuations. I see even more infrastructure-oriented investors entering the space, even though many of the operators are purely opcos that no longer hold property, because there are still highly predictable revenues. In normal times, you can model demand based on demographics, which makes these very attractive investments for a wide range of investor types.

I also think that in certain segments there will be roll-up opportunities that are interesting for private equity, especially in the ambulatory segment where there is a pressure to build up new players. Pan-European consolidation will continue, and there will also be further integration of care and medical services, which creates opportunities for private equity.

We see a lot of activity in the smaller end of the market as operators who have one or two homes are seeing the benefits of a larger platform in order to manage their operations efficiently and to grow further. The pan-European platforms are seeking to scale economies so I expect there will also be some larger combinations over the next 12 to 18 months at the European level. Many of them are private equity-backed and have sufficient capital to embark on sizeable acquisition strategies.

Covid has lowered occupancy levels but people are really looking beyond that and we can see from the way assets are being valued that the expectation is that the market will readjust quickly and occupancy levels will rebound.

Lastly, in the markets where public provision of healthcare is more dominant, like Switzerland, public-private partnerships are becoming more important and the communities that run their own care homes are realising the potential benefits of partnering with larger operators. The pressure on public finance post-covid will inevitably be another driver of consolidation and create further opportunities for external investors.

Jigsaw connection

How can investors create value when investing in elderly care service providers? Is there an opportunity for market consolidation?

The obvious levers are around market consolidation, greenfield roll-out and digitisation, as well as expanding through the value chain to offer a broader range of services covering a longer part of a guest’s journey.

Cross-border consolidation has started, so far driven mainly by the large French operators such as the listed groups Orpea and Korian or the PE backed platforms DomusVi or Colisée, for example. Those guys are really pushing beyond borders and operating on a pan-European basis, but many have not yet reached the desired level in Germany, for example, which is the largest market in Europe.

So, cross-border consolidation is certainly a key element of value creation for those large platforms, while domestic consolidation is also a big theme in most European markets.

The covid crisis served to strengthen the theory that size is an advantage, because the large platforms were able to act quickly to implement professional safety protocols across their groups and benefit from advantages in sourcing materials faster than the smaller operators. The size advantage was key and, as a consequence, the thesis that M&A consolidation will go on even further is now stronger than before, as we see smaller operators that have really struggled through the pandemic now seeing a benefit in joining a larger platform.