Doctor's orders: Avoid controversy, seek new opportunities

Visit our healthcare content hub here and read the first instalments of the series

Across many of the more mature European healthcare markets, institutional fund managers have occasionally struggled with unwelcome and controversial developments. The UK has had its share of exposés centring on questionable operations within the healthcare market – in particular, with relation to alleged abuse of patients. Most recently, Terra Firma-owned elderly care home business Four Seasons Health Care made headlines in 2015 when the Care Inspectorate watchdog found a resident had been the subject of “highly inappropriate” and “unacceptable” treatment from members of staff.

Yet controversy surrounding private-equity-backed healthcare providers in the Nordic market has been even greater. In the autumn of 2011, Swedish care home group Carema Cares came under fire from the media and government after accusations of neglect and patient mistreatment, with attention eventually focusing on the company's private equity owners, KKR and Triton Partners. Such incidents have led to some private equity players taking a step back from the sector, due to the ensuing reputational risks.

“Carema was the fire that alerted everybody to the care sector,” says Fredrik Näslund, a partner at NC Advisory, which advises the Nordic Capital funds. “But if you go into the facts of that case, I don’t think Carema was necessarily worse than anyone else – including the public sector. They did have a media issue and could have handled the situation in a better way. There’s still some trauma from that, but it’s a lot less pronounced these days. Still, it has been devastating for the care industry.”

There is still quite a lot of growth in the sector as you can see from the listed companies in the industry, which are posting double-digit growth. Fundamentally, the profits available in the sector remain attractive to private equity" – Fredrik Näslund, NC Advisory

Similarly to the UK and Ireland, the Nordic region has seen a decline in both deal volume and deal value between 2010-2015, compared with the previous five years. While deal volume has dropped by 34%, the drop in aggregate value has been even more drastic than in the UK. The total value of all deals in the healthcare equipment and services sector fell from €14.31bn in the first five-year period to €2.27bn in the second – a drop of 84%.

Yet despite the marked decline in activity, NC Advisory’s Näslund says the sector remains attractive to private equity players.

“There is still quite a lot of growth in the sector as you can see from the listed companies in the industry, which are posting double-digit growth,” he says. “Fundamentally, the profits available in the sector remain attractive to private equity.” Näslund concedes there has been agitation from certain factions of Swedish politics calling for a ban on dividends or profits in welfare services, though he points out this is a debate that has been raging for the past few decades. Despite this, he says, “the private sector now accounts for 20% of all care provision. So in practical terms it’s moving along on a positive trajectory.”

As numerous Nordic deals for healthcare providers over the past decade have been platform investments, their subsequent divestments have often proved more suitable to the public markets or trade buyers with deep pockets, rather than private equity buyers. By comparison, in the DACH region, two of the three largest deals seen in healthcare over the past two years – Marcol Healthcare and Synlab – have gone from one private equity owner to another.

Diagnosing new opportunities
The increased barriers to investing in the provision of care – such as the aforementioned reputational risks and an increasingly consolidated market – have redirected the attention of private equity houses elsewhere. Of particular note, Näslund, Synova partner Tim Ashlin and Apposite Capital managing partner David Porter all highlight the attraction of the diagnostics sector, where the market is not just highly fragmented, but also offers numerous opportunities for organic growth.

“At the moment we are pouring down people’s throats loads of pills that are never going to work for that person,” says Apposite's Porter. “Either the cancer a person suffers from is not going to be affected by that pill; the digestive system and metabolism of that patient isn’t going to manage to work with that pill; or the disease you think a patient has is not the disease they actually have. Ethics aside, the cost of that is completely wasteful, not to mention that all pills have side effects. I see a massive change over the next 5-10 years in the way we carry out diagnostics and the amount of diagnostics we undertake before we start treating people.”

Indeed, of the five largest private-equity-backed deals in the past five years within the healthcare space, three have been for diagnostics-related companies, namely French companies Labco and Sebia and Germany-based Synlab. By comparison, of the five largest deals in the preceding five-year period, only one was for a diagnostics-related business: Apax and Nordic’s acquisition of Capio.

However, while large-cap deals are emerging within the space, the technological focus of such companies means many opportunities are also springing up at the lower end of the market. Small-cap and lower-mid-market investor Synova, for example, recently backed teleradiology services company 4Ways Healthcare.

Where people have struggled in healthcare is where they become overly optimistic about the pace of change the market and regulators will accept" – Tim Ashlin, Synova

“This is a company using technology-enabled models to deliver services in a smarter way, enabling the NHS to operate more efficiently and save money,” says Ashlin. “Patients get reports back on x-rays, MRI and CT scans faster, hospitals clear backlogs quicker and the business does that in a very clinically robust and efficient way. Technological improvements are constant, but we’re focused on incremental innovation that is proven rather than a step change into the unknown. Where people have struggled in healthcare is where they become overly optimistic about the pace of change the market and regulators will accept.”

Another area identified by both Apposite’s Porter and Nordic Capital’s Näslund relates to digitalisation and a move away from an over-reliance on paper. Porter says that the sector has lagged decades behind other industries such as banking and retail in this respect. He highlights that transferring physical documents on a large scale is hugely expensive for hospitals and says paper is cumbersome and inefficient for both doctors and patients.

Näslund says this is already beginning to take place within the sector, though he agrees the industry is not moving quickly enough. “You’re seeing big shifts among the pharma companies when they do clinical trials, for example, where they’re moving the paper service to an electronic platform,” he says. “It is a pretty interesting trend that’s also clear. The healthcare sector is slightly lagging behind and that is offering very interesting opportunities.”

While consolidation of the care provision space is still very much afoot in certain European regions, the relationship between private equity players and the healthcare sector as a whole is evolving. Though northern Europe is seeing a marked shift in appetite towards more technology-focused companies, the same segments are also seeing an uptick across the region as a whole. With an ageing population and increased strain on finances, the asset class is aiming to reduce the strain through preventative technologies and improved diagnosis, playing a vital role in solving Europe’s ever-growing healthcare conundrum.

Further reading

• GPs

Doctor's orders: Addressing Europe's healthcare shortfall

• 13 Sep 2016

• GPs

Taking the political pulse

• 14 Sep 2016

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• GPs
• Healthcare
• UK / Ireland
• Nordics
• France
• DACH
• Top story
• United Kingdom
• Sweden
• Denmark
• Finland
• Norway
• Synova Capital
• Apposite Capital
• Nordic Capital