UK social care reform: threat or opportunity for PE?

Earlier this month, the UK government said it would enact legislation in the 2014 Care Act to give self-funders the ability to ask their local authority to find care for them, in a bid to tackle unfairness in the social care system and give everyone the opportunity to find better value care.

This prompted concerns in the care industry over an unsustainable model for smaller providers. But judging from the reactions of several PE investors and advisers specialising in the space, headaches over funding formulas and regulation should not detract from an overall positive picture.

Funds allocated to the sector by central government are increasing and there is a private equity investment track record in social care to complement this, providing certainty that this in an area to invest in, Palatine Private Equity partner Andy Lees says.

Investment by private equity into care homes and companies focused on the provision of specialised carers will cater to the exponential demand, especially if more self-funders access local authorities for social care, Key Capital Partners' Mike Fell says, with Lees concurring.

Meanwhile, David Porter of Apposite Capital argues that businesses should be better off in the medium term: "Private sector clients will pay the same amount, while local authorities will be able to pay more. This means that care providers can invest in better buildings and better pay for their staff."

Insurance opportunity
The reform also includes a proposed cap, due to come into force in October 2023, on the amount that self-funders pay towards their social care, with a proposed limit of GBP 86,000 on care liabilities.

"Having the cap in place opens the door for insurers to provide long-term-care policies," says Sovereign Capital managing partner Dominic Dalli. "That should encourage people to think about this type of care by providing additional peace of mind, which in turn could benefit providers via the increased demand for their services."

Leonid Shapiro, managing partner at Candesic, adds that this new market for insurance will better manage risk and offer affordable premiums.

Changes around accountability in social care costings are also part of the equation, but again represent quantifiable risks, says Sharon Lamb, a partner at McDermott Will & Emery.

Assessing where the funding is going and how to ensure it goes towards the cost of care homes will be of primary importance. To that effect, Lamb highlights that proposals to ringfence cash sent to local authorities so it cannot be spent outside of care provision, and to allow government access to critical pricing information from stakeholders to obtain transparency on the costing matrix, are both on the table.

The most important aspect is to ensure the funding "hits the front line" and that it is used for staffing, with accountability of local authorities' funding for social care ensuring that the funding goes to carers, Lamb argues.

Care providers could pay higher, fairer wages to their workforce with more money in their coffers" - David Porter, Apposite Capital

ESG concerns
This aspect of the reform has the potential to address one of the longest-running issues in the sector. A number of sources Unquote and Mergermarket spoke to agree: the need for carers is a greater and a more fundamental problem than the funding and the demand.

As local authorities are not providing sufficient financing to care homes to pay these carers, investment in people has been problematic. The fact that carers barely receive the minimum wage means that the sector is plagued by ESG concerns, according to Peter Robinson, managing partner at advisory firm Primary Access & Research.

This presents an opportunity in turn, though. Private equity players are becoming increasingly aware of ESG and are best placed to invest in these assets "as the quality of services typically equates to quality of earnings and this is what PE often does best," says Giles Johnson of CIL Management Consultants.

One could indeed argue that investment by PE in companies providing carers for domiciliary care and for care homes will improve the quality of care in a chronically underfunded social care system. "Care providers could pay higher, fairer wages to their workforce with more money in their coffers," says Apposite's Porter.

The social sector needs to invest in carers, making their job a professional service where there are financial incentives, training and a clear pathway for career progression, Lees says, as this could address the current 30-40% staff churn that creates significant operating costs.

Against this background, it is no surprise that most PE investment in the care space has increasingly gone towards specialist care providers, as opposed to social care, in recent years. This is echoed by Sovereign's Dalli, who notes that staffing concerns are definitely fuelling that shift: "A lot of the growth is still in specialist care; not least because providers can pay their staff better so have fewer retention issues, which has been an issue in the sector more generally."

Size isn't everything
While the changes introduced in the latest reform package could see PE well placed to help the sector – and benefit in turn – opinions are more divided as to whether they could materially boost buy-and-build and consolidation opportunities.

"Consolidation will continue, and these latest developments could certainly spur it on," says Dalli. "However, the diseconomies of scale in this sector have now been recognised: bigger is not always better, and in fact 'bigger' has created problems for some players in the past."

Economies of scale to a certain point can be beneficial if, for example, a carer can work in different care homes or in different councils within one week so there are synergies to be had, Lees says.

Typically, however, efficiency gets worse as the number of homes in a chain becomes bigger, so there is a natural sweet spot for size that is not too big and not too small, Shapiro adds. This "Goldilocks" effect is becoming increasingly recognised by PE players, having been observed in sectors as varied as care and restaurant rollouts.

"A number of these larger care players [that have already undergone consolidation] have come up for sale in recent years but none of this has really panned out, because that large scale can put buyers off rather than attract them," Dalli adds.

The diseconomies of scale in this sector have now been recognised: bigger is not always better, and in fact 'bigger' has created problems for some players in the past" - Dominic Dalli, Sovereign Capital

Integrated care
Creating care behemoths through buy-and-build may not be a panacea for investors, and in fact a number of them are increasingly looking beyond the traditional care setting while still trying to tap into the underlying driver of greater demand for care services.

In that context, the ongoing push towards the integrated care systems (ICS) model could present further opportunities.

First of all, creating an ICS structure that brings together the National Health Service and local authorities for social care could bring more focus on funding for carers above the minimum wage, KCP's Fell says.

And more positive development could arise by combining social care and healthcare services, says Amit Thaper, managing director at Cairngorm Capital. Through its portfolio companies such as Millbrook Healthcare, a community equipment and home adaptations provider, Cairngorm has already been exploring ideas around more integrated models that could deliver better discharge services, such as assessing a patients' needs while still in hospital and providing a kit ready for them to use at home.

The role of technology in integrated systems will no doubt see that particular sub-segment become even more attractive to PE investors as digital technologies become more commonplace in home care settings to assist carers with their job, and there will be more investment in this segment, Palatine's Lees suggests.

That said, this particular investment thesis is not devoid of pitfalls. Cost is one, Thaper says, with some technologies being more costly than human input. Ownership of data is another: tech players might be able to provide services at a lower cost, but they will want to use the data generated by their software and machines, which in the healthcare space comes with significant restrictions for the time being, Thaper adds.

Overall, though, sources Unquote and Mergermarket spoke to remain bullish for prospects in the care sector: increased government financing and growing demand for care, given the UK's demographics, point to a serious opportunity for financial sponsors keen to put dry powder to work. Boosting carer career standards and finding integrated care and technology efficiencies in an overall more transparent market framework will not only be key in unlocking outsized returns for investors, but also in delivering a positive outcome for patients, care professionals and public finances.

Private equity and venture capital-backed UK care companies tipped for possible exit by Dealogic’s proprietary Likely to Issue tool

Portfolio Company	Financial Sponsor	Investment Date
Sciensus (previously known as Healthcare at Home)	Vitruvian Partners	01/02/2012
Lifeways Community Care	OMERS Private Equity	11/06/2012
Shaw Healthcare	Bridges Fund Management	16/11/2017
ABL Health	Foresight Group	04/09/2018
Aspirations Care	Elysian Capital	21/06/2019
Consolidated Healthcare Agencies	Limerston Capital	16/03/2020

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• Topics
• Healthcare
• UK / Ireland
• Palatine Private Equity
• Sovereign Capital
• Apposite Capital