Nordic GPs look to new verticals in private healthcare

Despite the reputational and political risk sometimes associated with them, the Nordic private care and hospitals sectors have been a popular play with private equity in recent years, as private healthcare services increase their share of public provisions across the region's market.

Following substantial consolidation, the Nordic market has seen several large-cap exits of private medical, elderly and disabled care providers recently, and more are expected to follow as the verticals grow from being predominantly small- and mid-cap companies to an upper-mid- and large-cap game.

"This has historically been a fragmented space and competition for the existing targets from the large listed companies has become intense as they promise their investors ongoing consolidation" – Rasmus Molander, Adelis Equity

"It's definitely becoming a large-cap game for private equity," says Rasmus Molander, investment manager with Nordic SME-focused buyout firm Adelis Equity, though other healthcare subsectors such as dental care and home care remain less consolidated. "This has historically been a fragmented space and competition for the existing targets from the large listed companies has become intense as they promise their investors ongoing consolidation."

With the consolidation among corporates operating in the sector and listings of former private-equity-backed companies, the competition for small- and mid-cap assets increases, making investments in the sector a more expensive proposition for private equity.

"It may be the case that there is a difficulty for private equity to compete with trade players," says Fredrik Näslund, partner at Nordic Capital advisory firm NC Advisory. "You have very strong strategics in Sweden – such as Aleris, Attendo and Capio – which have a way of operating and a track record that may make them an attractive owner, as well as the ability to finance deals with new shares. However, I wouldn't say it's a case of private equity not being able to compete."

Healthy exits
Exits in the private care sector so far in 2016 include CapMan's sale of residential care provider Esperi to Intermediate Capital Group, HgCapital's loss-making exit of care services company Mainio Vire to Triton-backed healthcare group Mehiläinen, Former EQT-owned healthcare operator Aleris's acquisition of Altor's Curato radiology business, and the final exit by IK Investment Partners of its stake in care services business Attendo after its IPO in 2015.

Despite the solid flow of exits in the sector, more are likely to happen in the coming months and years, as more private equity assets reach maturity - particularly in the large-cap segment. "There are a number of assets still in private equity hands or in private hands," says Näslund. "The Nordic care sector is quite mature compared to other European markets, but I wouldn't say it's so mature that there are no opportunities for private equity." He says the private sector continues to grow as a proportion of the total care industry and very attractive growth prospects still remain in the market, making it a viable prospect for private equity investors.

Untapped growth
Of the Nordic countries, Sweden is both the largest market by population, but also by proportion of users of private healthcare offerings, with around 20% of hospital care provided by private companies and a slightly higher percentage in the primary care sector. Contracts to private companies increased under the centre-right coalition of the last Swedish government. Despite the current centre-right government having historically taken issue with privatisation of public services, no real change in policy has happened and the sector's growth outlook continues to be positive.

The Finnish healthcare system is funded in part by taxes and partly by user fees. It is predominantly public, but with some services operated by the private sector, such as Triton-owned healthcare services group Mehiläinen. With the private sector as a long-standing partner in Finland, to a larger extent than the other Nordic countries, and roughly 25% of primary care being private, it is a lot less controversial in the public eye.

Denmark's healthcare provision sector is predominantly publicly funded, supplemented by private groups in cases of long waiting lists, as well as for the privately insured. An increase of privatised services happened under successive centre-right governments in the early 2000s, though reimbursements to the sector were subsequently cut, making it less attractive for private equity.

Many private healthcare operators have expanded into Norway, though the overall provision by private parties remains low, due in part to the health of public finances. However, the current right-of-centre parties controlling the government are looking towards more privatisation, though efforts so far have been slower than originally intended. Due to the expected pressure on public finances as a result of the oil-price-driven economic slowdown, there is a substantial expectation for Norway to privatise more of its care services.

"There are a number of assets still in private equity hands or in private hands. The Nordic care sector is quite mature compared to other European markets, but I wouldn't say it's so mature that there are no opportunities for private equity" – Fredrik Näslund, NC Advisory

"The different countries are in different places," says Molander, giving the example of Danish governments' toing-and-froing on privatisation in healthcare - having first moved quickly forward and subsequently reversed some efforts. "Denmark is probably the toughest one, because they privatised a host of services and then cut reimbursements, which caused a withdrawal of investments as people burnt their fingers." He says activity will continue in Sweden, though given its relative maturity, it is likely to experience fairly stable growth rather than explosive surges in the future.

"The country where most will happen is Finland. If you look at the demographic pressure, it's by far the largest in Finland where the post-war generation is the biggest, relative to subsequent generations," he says. "The public finances are strained, so there's the most pressure to do something about costs across government spending."

Molander believes the first step will be consolidation within Finland, driven by the large listed companies and unlisted corporates, as major healthcare reforms are in progress that will bring substantial changes to the Finnish care landscape. "It is fairly clear there will be a benefit to being big in Finland, so clearly consolidation will happen ahead of that," he says.

While the hospital, elderly and disabled care sectors are perhaps coming towards the end of the investment cycle with a high level of consolidation, private equity players already have an eye on other attractive verticals in the region. According to unquote" data, subsectors that have seen a spike in deal activity this year in the Nordic region include diagnostics and healthcare digitalisation companies, Finnish dental care, home care across the region and medical devices manufacturers.

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