In sickness and in rude health

Private equity owners are bringing their own brand of tender loving care to European hospitals. Colm Gilmore reports

Unlike death and taxes, growing old isn’t an absolute certainty. Nonetheless, it’s a likely outcome for most of us given rapid medical advancement and healthier lifestyles. Among the beneficiaries of this phenomenon are European private equity firms, which are committing considerable time and resources to searching out investment opportunities in the healthcare sector.

As a result, deals are occurring regularly. For example Barclays Private Equity’s Paris team and Cobalt Capital recently teamed up to complete the €320 million acquisition of French private hospital group Medi-Partenaires, only days after 3i completed the purchase of Nordic healthcare services company Carema. So what are the attractions for private equity houses of this burgeoning sector?

According to Alan Mackay, 3i head of healthcare buyouts, there are two key explanations for the level of interest that saw 25 deals last year worth almost £1.5 billion in total in the UK alone. “The reasons are pretty fundamental on a European-wide scale. First, you have an ageing and crucially, increasingly affluent, population and, secondly, there have been significant structural changes in healthcare provision across Europe – away from public sector providers – creating significant opportunities for both strategic buyers and private equity firms.”

Those opportunities are coming thick and fast. In the first quarter of 2005 alone, the total value of deals completed more than doubled the entire amount seen last year. According to figures supplied by Nottingham, UK-based Centre for Management Buyout and Research, nine transactions worth £3 billion have already been completed this year.

Breaking it down

Healthcare is a broad sector comprising many subsets. 3i divides it into just three for investment purposes: pharmaceuticals; medical devices and healthcare services. Explains Mackay: “Within the first two sectors [pharmaceuticals and devices], there are opportunities in the second tier just below “big pharma” –

The entire services sector…provides opportunities for private equity firms

Alan Mackay, head of healthcare buyouts, 3i

midsize companies developing devices and products. The entire services sector – which is still incredibly fragmented across Europe – provides opportunities for private equity firms.”

One private equity firm that has been active on both the buy and sell side recently is mid-market European buyout house Electra Partners. Having made 6x cash on the disposal of elderly care home provider Ashbourne Healthcare for £280 million to Bank of Scotland Corporate Banking in March, earlier this month the firm re-entered the healthcare market by acquiring UK hospital company Covenant Healthcare from Phoenix Equity Partners. According to Phoenix managing partner Hugh Lenon, Phoenix made a return of 6.2x money on the transaction.

And it’s not just mid-market players which have been revelling in the steady cash flows, consolidation prospects and securitisation opportunities that care home chains provide. In January, Blackstone Group took Nursing Home Properties off the London Stock Exchange for £563.5 million and last month Cinven, the London-based European private equity firm, bought psychiatric care business Partnerships in Care from its parent company General Healthcare Group for a cash price of £552 million.

Opportunity knocks

According to 3i’s Mackay, there are still plenty of opportunities to be had across the healthcare board. “It’s not the case that the only low-hanging fruit has been picked off – there are still lots of opportunities in a fragmented sector.” But he warns: “There’s a lot of competition – healthcare is an attractive segment for the private equity industry, but it’s not just a fashion. Healthcare is a medium and long term sustainable sector.”

One of the major advantages for private equity investors in the healthcare sector is that – unlike in certain other sectors – there is broadly favourable sentiment towards the concept of private equity ownership. Says Mackay: “Management teams tend to be welcoming because it means they can remain independent. They prefer that to becoming a subsidiary within a huge corporation.”

As an ageing population grows increasingly affluent; as European healthcare providers become better at treating various forms of illness; and as governments reduce their appetite for providing publicly funded care, opportunities will abound for private equity firms to apply their own brand of tender loving care to the healthcare sector.