Unquote

Doctor's orders: Addressing Europe's healthcare shortfall

Just what the doctor ordered
France, Germany and southern Europe are emerging as the continent's most active markets for PE investment in healthcare provision
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An ageing population and a sharp rise in long-term chronic illnesses is putting a strain on Europe’s healthcare provision. In the first of our series, Kenny Wastell explores the regions at the forefront of PE's push to resolve the continent's healthcare conundrum

There are few industries that stir public emotion as strongly as the healthcare sector. As conflicting ideological parties squabble over the merits of a private market model versus the sector’s role as a vital public service, the developed world finds itself facing the conundrum of how it will meet an exponential increase in demand.

Two factors in particular have led to the increasing pressure on Europe’s healthcare sector. The first of these is a rise in chronic diseases related to lifestyle choices. The second factor – an ageing population – is paradoxically the result of longer life expectancies owing directly to medical advances, as well as declining birth rates. A report from the European Commission in June 2016 found people aged 65 and over accounted for 18.9% of the EU population, an increase of 2.3% over just a 10-year period. The resulting increased strain on publicly funded services has historically presented an opportunity for private equity players.

Healthcare is a very nice sector to talk to LPs about at this time. Unfortunately, people continue to get sick and the incidence of disease is going up irrespective of Brexit, the European economy, China, steel prices, oil prices or anything else" – David Porter, Apposite Capital

Since 2013, across Europe as a whole, the aggregate value of deals in the healthcare equipment and services sector has increased sharply, according to unquote” data. In 2014, the segment enjoyed its highest total investment from institutional fund managers since before the financial crisis, with an aggregate deal value of €10.49bn. Last year saw a slight drop to €9.76bn but, aside from 2014, this still represented a higher total than in any other year since 2007.

“Healthcare is a very nice sector to talk to LPs about at this time,” says David Porter, managing partner at Apposite Capital. “Unfortunately, people continue to get sick and the incidence of disease is going up irrespective of Brexit, the European economy, China, steel prices, oil prices or anything else. When you get the meeting of the rise in lifestyle diseases combined with an ageing population you have a perfect storm.” Porter explains that this combination manifests itself through an increase in cancer incidence, dementia – in particular vascular dementia caused by type II diabetes – and various other age- and lifestyle-related illnesses.

Leading the way
Geographies that have seen the strongest growth in healthcare investment include the DACH region and France. The latter has seen a dramatic rise in terms of aggregate deal values for healthcare companies in the past two years. In 2014 and 2015, the country witnessed a combined €8.14bn’s worth of deals within the sector, 44% higher than the previous eight years combined. Data for the DACH region also shows a similarly dramatic increase in aggregate value over the past two years. The €10.46bn changing hands between 2011-2015 combined represented a 158% increase on aggregate values seen in the preceding five years.

Yet while valuations have risen across these two regions, dealflow has remained relatively constant. Over the past five years, the DACH region has seen the exact same number of deals as in the previous five years, while France has seen just a 17% increase – notably less drastic than the rise in aggregate value. While valuations can grow for a number of reasons, the scale of this increase indicates the sector is undergoing a period of increased consolidation, with larger assets understandably commanding larger fees.

Indeed, two of the three largest deals seen in France were Bridgepoint-backed Médipôle Sud Santé acquiring Médi-Partenaires in 2014 and CVC-backed Vedici buying Vitalia in 2015. The third deal, Cinven’s acquisition of Labco in 2015, was quickly followed by the bolt-on of German business Synlab. The prevalence of high-cost deals is a strong indicator of a maturing market, though with acquisitive strategies still being pursued and private equity investors still active, there are signs that consolidation opportunities clearly remain.

Following a particularly quiet period in 2013 and 2014, southern Europe also saw a dramatic rise in activity within the healthcare space in 2015, with both aggregate value and dealflow reaching a 10-year high. Italy led the way, accounting for five of the eight deals seen in the space and an aggregate value of €242.9m over the course of the year.

The development follows structural changes to the Italian healthcare sector; with cuts to public spending, the Italian government recently decided to stop all funding to hospital facilities with less than 60 beds by 2017. This has paved the way for private equity firms to buy smaller state-owned hospitals in a consolidation play. Trilantic Capital Partners Europe cited this very development when it invested €66m in private hospitals operator and healthcare researcher Fondazione Salvatore Maugeri in February 2016.

In tomorrow's instalment of our series, unquote" will look at developments in the continent's more mature healthcare regions for private equity investment.

Further reading

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