During the last decade, investment from Private Equity (PE) Firms into health & social care has grown significantly within the UK. The onset of the COVID-19 pandemic accelerated PE deals in healthcare especially in fields most critical to the pandemic response, such as telehealth and healthcare IT. With wider global demographic trends such as an aging population and increased life expectancy, the scale of the market and its long-term drivers creates strong investment opportunities across the entire healthcare value chain.
The sector offers a consistent track record of strong returns – from 2010 to 2021, healthcare PE deals outperformed the broader market with an Internal rates of return (IRR) of 27% vs. 21% all-industry average. Compelling returns for the sector continued in 2022– a year that stands to be recognised as the second-largest year on record for healthcare Private Equity in terms of volume and value. While healthcare continues to show resiliency, 2023’s macro challenges including inflationary and credit pressures will have an impact on its future growth.
PE firms growing involvement in health and social care has been met with a degree of scepticism. Advocates of PE in health & social care champion its ability to fuel growth and deliver health improvements by funding innovation and R&D; recruiting and retaining excellent management; streamlining costs and crystalising value. PE capital can also be an important catalyst – enabling small firms with big ideas to reach scale, which not only helps those firms and their customers, but sometimes can create a new market.
Critics paint a far more damning picture, arguing that private equity’s playbook, is the wrong fit for this sector compared to other industries, given its competitive, for-profit model. Opponents accuse PE firms of prioritising investment returns over quality care and workers’ pay which leads to “lower quality care at higher costs to patients.” Furthermore, the heavy debt that is placed on some PE acquisitions can lead to bankruptcy which has a knock-on effect to patient access and care. Southern Cross, one of the biggest care home providers infamously collapsed in 2012 and Four Seasons Health Care parent companies went into administration in 2019 after struggling to restructure its debt pile. Four Seasons Health Care is now putting the bulk of its operations up for sale (NB: The operation of the care homes is expected to be unaffected by the sale process).
PE firms have long been attracted to the care home sector lured by the promise of a steady government income and the long-term demographics of Britain’s aging population. Britain’s care homes are separate from the NHS, funded by the government. Care homes rely on support from local authorities, but there has been a significant drop in state funding. Private equity has become an important source of capital to fund new beds and upgrade assets. As of 2022, private equity companies alone accounted for 55,000 beds, or about 12.6% of the total for-profit care beds for older people in the United Kingdom, according to LaingBuisson, a healthcare consultancy. Today, private equity firms own three of the country’s five biggest care home providers.
PE investment in social care is becoming increasingly divisive. With care costs spiralling since the pandemic, compounded with inflation, staff shortages and delayed policy decisions, the care system is at crisis point. Scrutiny around the role and impact of PE firms in the sector will only intensify. Stories around deteriorating standards of care seeping into media reports are rising and with the spotlight on price to earnings ratio, any instance of failure tends to get magnified.
As health pressures become more severe, care home operators are pressing the UK government for higher prices to take in NHS patients as they look to tackle staff shortages. The Financial Times reported last month that companies such as market leaders HC-One, Barchester Healthcare, Four Seasons and Care UK could receive up to £200mn under the new NHS crisis plan to clear patients from hospital beds by moving them to care homes. Providers argue the extra money would help them pay staff more, so they do not lose workers to more lucrative and less stressful jobs. Some critics have raised concerns about whether the NHS should be funding care home operators, particularly those that are owned by private equity firms. There are also growing questions over the public accountability of some of the larger private equity-owned care homeowners. Just last week, the Biden administration proposed rules requiring nursing homes to disclose more information about their ownership and management to provide clarity about investments by private-equity companies or real-estate investment trusts.
In the run up to a General Election, views around the financialisation of care – who benefits and who pays will become even more polarised. Labour’s Health Secretary, Wes Streeting, pledged that the next Labour Government will build a National Care Service that requires private providers to meet decent standards, including delivering quality care for residents and running care homes in a financially sustainable way. He tweeted that PE firms are “leeching millions of pounds” out of the care system. Strong words indeed – especially as PE firms have provided an important source of investment over the years due to constraints in state funding.
The problems care homes face is complex, involve demographic trends, and the solutions are not simple or amenable to a quick fix. Private equity firms argue that they have much to offer to help curb costs, improve efficiencies, and infuse capital into the healthcare market which advance health equity. And some do. Healthcare assets continue to be attractive to investors for many reasons including, for some, the healthy returns that have been evident in certain areas. Revenue seeking happens about as much with not-for-profit as with for-profit healthcare organisations. Undoubtably, it is a challenging debate.
To shift the boogeyman narrative, PE firms need to carefully consider their communications strategy and be conscious about the messaging they want to put forth to the market and current LPs. Communicating and explaining their investment thesis to stakeholders and sharing success stories will help demonstrate the measurable impact they can provide. It is better to be proactive and on the front foot with some storylines to educate, inform and correct misconceptions.
We have a profound healthcare deficit in the UK. Opportunities for private investment in many cases have come on the back of a lack of state provision or a need to increase the quality of facilities and the provision that is available. Healthcare is not a retail good. It is a basic human right. As industry practices are examined and oversight of PE healthcare investment is tightened, the investment community need to be acutely aware of the political and reputational risks of failing to make the positive case for the role that private investment has played and will continue to play in improving the health and wellbeing of our communities.
If you’d like to discuss a communications strategy for your Private Equity firm get in touch with our team today.