In rude health

24 June 2009

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The is currently something of a buzz around the healthcare sector, but there may not be opportunities for all. By Ashley Wassall

(This article is taken from Private Equity Europe, the pan-European publication from the publisher of unquote")

If investment activity is an effective barometer of market sentiment, then it is fairly clear that the current economic conditions have taken a heavy toll on the mood of the private equity community. However, anecdotal evidence suggests that the prevailing mood is best described not as pessimism, but rather uncertainty. Leaving aside problems with incumbent portfolio businesses and the problems in the banking sector, the largest barrier to new investments continues to be pricing issues driven primarily by a lack of visibility over future earnings.

For this reason, there continues to be much talk surrounding so-called defensive industries, which can display a stability in their earnings and that can therefore be valued with more confidence (and for which banks may be prepared to get out their chequebooks). In this regard an area that is frequently discussed is healthcare, a space that is obviously much less at the mercy of volatile consumer demand. Indeed, in the case of care home providers and the like, aging populations mean that demand is likely to rise irrespective of economic cycle fluctuations.

That said, as often proves to be the case this talk is not yet being reflected in deal statistics, particularly in the buyout space. In 2008 there were 35 private equity-backed acquisitions in the healthcare space across Europe worth collectively €3.9bn, representing respective declines of 38% and 74% year-on-year. This is compared to drops of 29% and 61% in the wider buyout market. Moreover, in the first four months of 2009 unquote" has recorded just four healthcare buyouts, with aggregated value of €330m.

But these statistics perhaps do not accurately reflect the nature of the sector, many areas of which are populated by small independent businesses that offer strong consolidation potential for buy-and-build specialists. A case in point is Integrated Dental Holdings: acquired by LGV Capital in April 2006, the business was subsequently built up from 127 practices to 200 and was eventually exited to Merrill Lynch Global Private Equity for £300m in February 2008, reaping a 4x multiple and an IRR of 120%.

This assertion is further reinforced by the statistics for acquisition finance deals in the healthcare space, which saw an increase in volume from six deals to seven in 2008, while value rose by 67% from €344m to €576m. Furthermore, between January and April this year there have been four healthcare bolt-ons worth a total of €70m, accounting for 25% of the overall European figure by volume and almost half by value. In contrast, in terms of buyouts deals this sector represented just 7% and 11% respectively of the market.

In truth, then, healthcare does not provide a particularly attractive hunting ground for larger firms that are currently finding dealflow difficult to come by. And even generalist small- and mid-market groups could struggle to make impressive returns from investments, given that sourcing off-market bolt-ons and implementing aggressive roll-outs is key to success - both of which arguably require a deeper knowledge of the sector. However, for those with the required expertise and human capital to pull off the strategy, healthcare investments made at the bottom of the market could be amongst the top performers when it comes time to exit.