The sector delivering higher returns than tech… if you’re a specialist

G Square Capital has been making bets in an industry with 'colossal' levels of regulation and a diverse region to make outsized returns.

When Laurent Ganem set up healthcare-focused G Square Capital in 2008 he saw an opportunity. The former doctor wanted to emulate the emerging US model of healthcare sector-focused investing, which had not yet reached the continent.

“It did not exist in Europe at the time,” Ganem tells Private Equity International. The Frenchman had been working as a partner at Apax Partners in Paris for 12 years and decided to move his family to London to launch the firm.

Ganem says he believes the firm pioneered this form of investing, using similar private equity firms in Chicago as “a good blueprint”.

Since then G Square has raised two funds and grown its headcount to around 15. It closed its €209 million G Square Capital I vehicle in 2011 and six years later almost doubled its firepower with a €350 million follow-up. The firm is in market with a third vehicle which has a €500 million hard-cap and is understood to be eyeing a final close by the end of June.

Asante Capital, which raised G Square’s Funds I and II, is also advising on Fund III, according to a source familiar with the fundraise.

While Ganem declined to disclose fund performance data, its four exits have delivered cash-on-cash returns greater than 3x, according to a company document. Its best exit – the sale of Finnish care provider Mikeva – delivered a 3.5x return.

Data from Cambridge Associates shows Ganem has been right to emulate US-style healthcare sector-focused investing. For investments initiated between 2001 and 2014, sector specialist funds in healthcare in the US delivered higher gross returns based on multiple-on-invested-capital and internal rate of return compared with generalist funds as of 30 September 2017.

With a 2.7x MOIC and a 34.4 percent IRR, sector specialist healthcare funds delivered higher returns than even technology-focused sector specialist funds at 2.4x MOIC and 23 percent IRR, Cambridge’s data show.

Specialisms and sectors

Sector-focused funds in Europe have historically struggled to take root and flourish as they have in other geographies, according to Monument Group partner Janet Brooks. The region’s “mature and contented base of LPs” as well as natural forms of specialisation derived from European PE firms’ geographic focus have stymied sector-focused funds from taking off, though this is changing, she adds.

Such specialised investment strategies, particularly in healthcare, can be powerful due to better dealflow pipelines, Ganem says. Creating value is easier because the firm understands their businesses, and it’s easier to win transactions – especially primary deals – because you’re chosen by the entrepreneurs.

“Price always counts but even in a competitive situation, it’s not necessarily the highest bidder who wins,” he adds. On several occasions, entrepreneurs chose G Square because they wanted to find a financial partner who had a better understanding of their business, rather than simply sell to the highest bidder, Ganem says.

The firm’s approach to investment goes like this: analyse each country in Europe it is interested in across regulatory, environmental and political levels and try to pick the most fragmented, then find a platform and implement a buy-and-build strategy.

“If I compare the level of regulation in the UK now compared with 20 years ago, it is colossal. It’s an enormous barrier to entry,” says Ted Smith, an operating partner who joined in G Square in 2016. The former pharmacist has been a member of the Royal Pharmaceutical Society for three decades and turned around two healthcare service companies – European Care Group and Craegmoor.

“It’s very hard for a mom-and-pop [business] now with a single care home or single service to get anywhere close to the standards that CQC [Care Quality Commission] or the equivalent regulation in Wales or Scotland or Ofsted in the children’s business,” Smith says. “If you wanted to move into this sector now, you or I just open a care home, you could not possibly comply with everything that’s required.”

‘Aggressive buy and build’

In early April the firm closed its first deal from Fund III by acquiring Dental Care Group, a chain of 21 practices in England. The transaction, financial details for which were undisclosed, marks the firm’s fourth dental deal. G Square plans an “aggressive buy and build” strategy for DCG, according to Ganem.

“It doesn’t make sense anymore for dentists to be by themselves in one flat somewhere on the second floor,” Ganem says. “They need enhanced technology, more efficient and larger clinics, in which you can bundle technology to patients and offer much better service for affordable price.”

Some healthcare investments by private equity firms have attracted criticism. Examples such as UK buyout firm Terra Firma‘s acquisition of care home provider Four Seasons is a case in point: the business went into administration in April after years of struggling to service £525 million ($669 million; €599 million) in debt, bringing into question the role of private equity in delivering essential state-funded services.

Still, the industry continues to attract private equity’s eye. Global PE deal activity in healthcare hit a 12-year high last year, rising almost 50 percent to $63.1 billion, according to research by Bain & Co. European healthcare had its best-ever year, with deal volume rising 40 percent to $17.8 billion, buoyed by deals such as the CVC Capital Partners-led consortium buyout of Italian pharmaceutical maker Recordati and Advent International’s acquisition of Czech generic drug maker Zentiva.

Underlying societal demographics make healthcare investing very powerful, Smith says. “We’re all getting older but we’re not necessarily becoming healthier as we get older.”

An example in the UK is the shift towards private pay. There are many treatments that are not funded by the country’s National Health Service or that involve long lead times. A service that could take months on the NHS could be done privately, Smith adds.

“This is a UK phenomenon. That’s a driver,” he says.

Fast decision-makers

For a target company, partnering with a healthcare specialist private equity firm can be highly appealing. In the case of Oslo-based care provider Unicare, G Square’s 2016 acquisition of its business was the second private equity ownership experience.

“I like the private equity model,” says Tom Tidemann, Unicare’s chief executive. “I like the way that we mutually develop the value of the company. If you go with an industrial partner, we don’t necessarily have the same goals to develop the value of the company.”

Tidemann says he speaks with G Square every week and people from the firm visit him in Oslo around eight times a year. He describes the partnership as “consensual” and says G Square are “very fast decision makers”.

Under G Square’s ownership, Unicare has almost doubled its revenue and made more than 10 acquisitions. It has also expanded geographically, with a third of its revenue coming from Sweden as opposed to solely from Norway in 2016.

Tidemann says his view of taking on debt to grow the business has also changed.

“Before G Square came in I didn’t want to have any long [term] debt in the company. They convinced me that having some long-term debt was good for the company and you can use this money to expand even faster. They gave us the courage to do that.”

Ultimately, capitalising on fragmentation in Europe’s healthcare landscape is the firm’s sweet spot. Ganem highlights the region’s the different regulatory, political and social environments in addition to cultural and language differences which make it a “complex weave”.

“Until very recently you needed to be a pharmacist to operate a pharmacy in France or a dentist to operate a dental practice and you could not create chains,” he says. “This is evolving and we’re trying to capitalise on those opportunities.”