Australia: Desperately seeking scale in healthcare

With cities accounting for 80 percent of Australia's population and a government intent on saving costs while improving quality, many sub-sectors within healthcare remain highly fragmented and ripe for consolidation, provided buyers can find assets of sufficient scale. 

Many GPs first moved into the sector around 2011 when valuations were considerably lower, and have since benefited from a willing IPO market. Quadrant Private Equity exited Estia Health for A$1 billion ($720 million; €640 million) in 2014, TPG and Carlyle exited HealthScope Hospitals via IPO for A$4.5 billion and Ironbridge exited Monash IVF in June 2014 for $523 million, bringing A$6 billion of transactions into the public markets in the space of six months.

“PE firms holding Australian healthcare assets have often picked the right moment to sell and have done it very well,” says Jamie Palmer, a partner in law firm Allen & Overy's Sydney office.

Going forward, the nascent and fragmented state of many sub-sectors presents opportunities for GPs prepared to roll up their sleeves. Dental, skin cancer, GP clinics, physiotherapy, behavioural health and day hospitals are all in private equity's sights.

“[These areas] are extremely fragmented which can mean PE has to be willing to start very small to build businesses,” says Crescent Capital partner Tim Martin. Crescent built audiology clinic chain National Hearing Care from 30 clinics to 150, including an expansion into India, by the time of exit in 2010.

Lower mid-market specialist The Riverside Company is planning a similar rollout for Melbourne behavioural health specialist IPAR, which it acquired last July.

Leveraging a global team which has completed 90 healthcare deals proved useful, says Nick Speer, a partner in Riverside's Melbourne office.

“What we often find is that trends in parts of the healthcare industry in North America and Europe have evolved ahead of Australia so we can get a steer on how they may play out here, including where growth strategies have been successfully deployed.”

IPAR is a market-leading case management network that helps injured employees get back to work and Riverside hopes to consolidate its position in a market of more than 130 players, says Speer.

Riverside is also eyeing the home-care sector, but “the number of opportunities with sufficient scale to make a platform investment is less than we would like at this [stage]”, says Speer.

Martin agrees that scale is often an issue for firms seeking consolidation plays.

“There are not many healthcare companies around that already have EBITDA of $50 million-plus. You are often starting with firms that have $5 million-$10 million or less, so it needs a particular appetite and capability set at the PE firm to build these businesses to scale,” he says. 

Crescent has done that with National Dental Care, National Home Doctor Service and, most recently, skin cancer clinic Sun Doctors.

“[Sun Doctors is in] an exciting area. Australia is unfortunately the global epicentre for skin cancer incidence and even though patient awareness is high there is a relatively undeveloped approach to screening and treatment,” Martin says.