Mad not to invest?

Healthcare investing is not for everyone. That was the conclusion reached in an analysis of private equity involvement in the healthcare industry in the last issue of this magazine (Nordic unquote" July/August 2009, page 15) Data from Private Equity Insight and unquote" showed that despite the hype around the sector, there is plenty of time between each completed deal. The sector saw a 38% decrease in deal activity, with a value drop of as much as 74%. In comparison, the drop for the rest of the buyout sector was 29% and 61% respectively.

The Nordic region was even worse hit with volumes slashed in half from 2007 to 2008. Values nearly vanished, compared with record-breaking pricing of the secondary buyouts in 2006 and 2007.

In 2009 it looks as though deal activity is picking up again, with completed deals half way through the year at almost the same level as 2008. Notably, Nordic deals constitute 25% of total healthcare deals completed in Europe this year. In January, Bridgepoint completed a EUR162m take-private of Finnish Terveystalo, followed by Altor's acquisition of Pulse Medtech in June. In July, Swedish buyout house Valedo acquired two psychiatric care centres in Sweden.

Jan Jensen, partner at Nordic law firm Hannes Snellman, has worked on several healthcare deals over the past months, including Valedo's recent acquisition (see page 32). He confirms the general perception that the non-cyclical nature of the sector makes it easier to obtain financing, and suggests this goes some way to explaining the attraction of the sector. "For many private care businesses the lion's share of clients are municipalities who are long-term and secure payers," he explains.

So could this be a promise of things to come? Bridgepoint director Hakan Johansson's view of the market suggests it just might be: "The Nordic private healthcare market will present a large number of opportunities in the next few years, as healthcare is still predominately provided by the public sector," he says, continuing: "This is a sector with a promising future. Demand is driven by demographics and the subsequent public supply challenges."

Per Forsberg, partner at Valedo, describes the Nordic market as "still relatively immature" and "in a development phase", making it a good opportunity to create value for investors.

Exit opportunities

But although a fragmented industry is perfect for deal sourcing, how does this affect exit opportunities? Jensen is not worried. His firm is currently working on several potential private equity divestments. The processes that started six months ago are primarily trade sales, but he predicts that, if market sentiment continues to pick up, in a few months we could see private equity houses float companies again. He foresees several healthcare companies achieving market capitalisations of EUR30-40m. "But," he notes, "the prices achievable through an IPO are still below the price levels trade buyers are willing to give."

With the emergence of larger pan-European industrial players, we could potentially see more trade buyers, particularly if we see a similar consolidation in the Nordics.

Buy-and-build

Today, there are still few pan-European healthcare providers; most are regionally- or nationally-focused. "For this reason, healthcare investments are often buy-and-build cases, and require in-depth sector expertise as well as regional knowledge," Johansson explains. Bridgepoint for example, has made 12 investments since 2000 totalling EUR4bn in healthcare services, including two in the Nordic region: Attendo and Diaverum, formerly Gambro Healthcare. Valedo owns Solhagagruppen, which provides care services for patients with physical disabilities, and Altor has several portfolio companies within medical supplies and healthcare products.

Buy-and-build often implies longer holding periods. For healthcare companies, however, investors can see even longer holding periods, because of the specific features of the sector. "Our average holding period for any investment is four to five years," Johansson says. "However, we do see that investments in healthcare providers sometimes require longer holding periods in order to realise operational improvements due to the size of the organisations and the public sector culture that defines many of the companies."

Health hazard

Similarly, the fact that the sector originated from public services also means that the services these companies provide carry with them a new set of risks. Although as good as insulated from the volatility of financial markets and consumer demand, healthcare investing is still not for the risk-averse. Most apparent is the PR risk: "The risks involved in healthcare services are primarily related to reputation aspects, brought on by, for example, negligence or poor quality of care," Forsberg tells us. For Valedo this means that a strict focus on quality of care and implementation of control systems relating to quality become even more important in these portfolio businesses.

Another risk is the issue of reimbursement: "It represents a risk to healthcare investments, as countries feel increasing pressure on healthcare budgets," Johansson says.

These risks make the requirement for knowledge of political systems and culture ever more pertinent. "Even in the Nordic countries, there are great differences between the healthcare systems," Johansson explains.

In some countries, allowing private players to offer healthcare services is still a contentious issue, particularly geriatric care. "There is general belief that one should not profit from providing services that traditionally have been provided for by the state," Jensen says. "This is particularly the case for Norway, whereas in Sweden and Finland the privatisation of these services has a longer track record," Johansson points out. Forsberg concedes: "The privatisation and outsourcing of healthcare services have been ongoing in Sweden since the early 1990s, with usually very successful results for municipalities, patients and staff, and the privatisation is therefore unlikely to be reversed." "Of course, a certain political risk does exist since this is a regulated and, to a large extent, government funded sector -in Sweden."

Forsberg's view is clear: "If a care company can provide a better quality service at a lower price, it should not matter if it is private or state-owned." And the trend seems crystal clear, as highlighted by Johansson: "In the next ten to 15 years, public and private providers will increasingly operate side by side to meet the increasing demand."

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