Doctor's orders: Taking the political pulse

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While some European markets, such as Germany, France and Italy, are currently seeing extensive private equity activity in the healthcare space, more mature northern European regions have seen a marked decline in investment into the industry.

In the UK and Ireland, deal volumes between 2011-2015 were 12.3% lower than during the preceding five-year period, while aggregate value dropped 54.4% from €14.34bn to €6.54bn. The resilience of the sector during the 2006-2010 period that spanned the global financial crisis reinforces the argument made by Apposite Capital's managing partner David Porter (see yesterday's instalment) that healthcare can remain attractive regardless of the wider macroeconomic environment. Yet, with demand increasing as a result of lifestyle choices and an ageing population, the statistics raise questions as to why UK players have seemingly begun turning away from the sector since 2011.

As Synova partner Tim Ashlin explains, many of the UK and Irish deals that took place prior to 2010 were in the social care and hospital space. Indeed, between 2006-2010, the patient treatment space accounted for 90% of aggregate deal value. In the following five years this figure dropped to 85%. Setting aside this sub-sector, investments in medical equipment and medical supplies dropped by only 32% in 2011-2015 compared with the previous five years. This is by no means an insignificant drop, though it is far less drastic than that felt by the healthcare equipment and services sector as a whole.

Rather than pushing through sensible reforms that genuinely transform the way care is provided, we are seeing a thin veneer of reforms that are basically just squeezing costs. At some point that stops working. Austerity is squeezing fee budgets and demanding more for less" – Tim Ashlin, Synova

Ashlin points out that this is partly due to the extensive consolidation that has taken place in the hospital space within the region. However, he also argues other factors have had a significant impact. "Some investors have probably been scared off the care sector by the threat of austerity cuts," he says.

"Demand is rising inexorably because we have an ageing population and therefore rising healthcare spending. That becomes unsustainable economically. But rather than pushing through sensible reforms that genuinely transform the way care is provided – getting people out of expensive hospitals and providing preventative care earlier in the community – we are seeing a thin veneer of reforms that are basically just squeezing costs. At some point that stops working. Austerity is squeezing fee budgets and demanding more for less."

The atmosphere of austerity is one affecting most parts of Europe as a whole. The result is that reimbursements in the care sector are dropping across the continent. But Fredrik Näslund, partner at NC Advisory, adviser to the Nordic Capital funds, says such cuts have been a consistent long-term trend in the sector and points out they have not, on the whole, had overly powerful knock-on effects for investors.

While Näslund concedes that in public-sector driven economies, cuts to reimbursements tend to happen in larger increments, he also argues that they happen less frequently, thus on a year-by-year basis, private equity investors are able to mitigate such developments.

Another UK-specific factor highlighted by Synova's Ashlin is the increase in the national minimum wage, which has been particularly hard on domiciliary care providers, most of whom already operate on tight margins. "This is something that commissioners and the sector as a whole is very aware of," he says.

"There's been a lot of negotiation in the last round of fee increases because people have seen this coming in. I suspect we will see smaller providers, already on wafer-thin margins, and also providers with too much debt on their balance sheets exiting the market as a result."

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