PE still hungry for retirement homes, but infra funds loom

Eight deals were completed in the retirement homes sector across Europe in 2019, the largest being Naxicap Partners and Ardian's investment in France-based Emera group in July, reportedly valued at more than €600m. This was followed by Capvis's acquisition of Tertianum Group, a Swiss care homes business, from listed real estate company Swiss Prime Site.

The sector has been seen as attractive to PE for some time, with five buyout or expansion deals on average taking place annually in the 2014-2018 period. The main draw for private equity owners has always been the non-cyclical aspect of the sector, which suits the current macro environment in 2020 as well as it did immediately following the financial crisis. The ageing demographic across the continent indicates there will be more need for beds in the coming years: 19.7% of the EU population was aged 65 or over as of July last year, an increase of 0.3% compared with the previous year and of 2.6% compared with 10 years ago, according to Eurostat.

Buy-and-build aspirations
The sector is also very fragmented. Although some public groups, such as Euronext Paris-listed Korian and Orpea, are well-established pan-European retirement home businesses, PE-backed businesses that have built a European or international network are much more rare.

Based on this landscape, a number of buy-and-build platforms have been set up by European mid-market sponsors in recent years. Colisée Group has been backed by IK Investment Partners since 2017, and acquired Belgium-based Armonea in February. The combined group now has a presence in Spain, Italy, France and Belgium. Waterland's buy-and-build platform, Germany-headquartered Schönes Leben Group, which the GP has also held since 2017, is expanding internationally as well.

The Spanish market is interesting, and very reminiscent of the French market in the 1980s" Romain Bled - Amundi PEF

PAI Partners' investment in DomusVi from 2014 to 2017 exemplifies how a domestic player can grow in Europe: during PAI's holding period, the purely French provider turned into the third largest nursing homes operator in Europe and the largest in Spain, when the business was sold. The business generated a money multiple of 3.3x for PAI when it was reacquired by its founder, with support from ICG.

Building a pan-European group from scratch in the sector requires a significant amount of preparation, and GPs have had to be strategic about which new market to enter. Stefano Drago, a partner at PAI, says there is a shortage of beds everywhere in Europe, but every country has a drastically different demography, property market, regulation and national health service, therefore the value of a retirement home asset varies according to location. For example, Drago says that in Germany, increasing the pricing is difficult, because the public authority's ability to constrain increases even extends to the private-pay portion of the price; in France, the public-pay portion is smaller (around 35% vs. 50% in Germany) but the public authority allows price increases on the private-pay portion for new clients.

Says Drago: "PAI saw an opportunity for DomusVI to enter the Spanish market due to a less competitive landscape, leading to lower M&A prices versus France, despite a higher demand for beds. We also spent eight years researching the sector all across Europe ahead of the acquisition of DomusVi, and knew well in advance the add-ons that we wanted to pursue to create further value for the business, and which we ultimately completed in Spain."

Opportunities in the Spanish market were also a key driver behind one of the latest deals in the sector: Amundi Private Equity Funds and Societe Generale Capital Partenaires (SGCP) recently invested in French care home operator Vivalto Vie alongside a number of existing backers, partly to finance the acquisition of Spain-based Solimar. "The Spanish market is interesting, and very reminiscent of the French market in the 1980s," Amundi PEF partner Romain Bled told Unquote. "It still consists mostly of a lot of independent players, but it isn't easy to seize on these opportunities and consolidate if you haven't got the right connections and approach."

Current valuations are often very high for PE, while infrastructure funds typically have a lower return expectation" Stefano Drago - PAI Partners

Infra funds loom
PE funds are not the only investors that have been eyeing the sector. One of the standout deals of 2019 in France, with a valuation of more than €1bn, was the sale of nursing homes operator Domidep by BNP Paribas Développement, BPI France, Crédit Agricole Corporate & Investment Bank and UI Gestion to US-based infrastructure firm I-Squared. AMP Capital, Bridgepoint, EQT, PAI, Nordic Capital, Cinven and Wendel were among the private equity bidders in the auction process, alongside infra funds Antin, Infravia, I Squared and Macquarie, Unquote sister publication Mergermarket reported at the time.

According to Drago, GPs that are best-placed to transform retirement homes into pan-European players will increasingly include infrastructure funds in the future: "For example, infrastructure funds' core-plus is a long-term strategy and the current valuations are often very high for PE, while infrastructure funds typically have a lower return expectation than PE," he says. "When we acquired DomusVi it was a lot less common to invest in this sector for infrastructure funds. Having said this, there is still plenty of scope for PE to build some really high-quality businesses operating nationally, and subsequently internationalise them." DomusVI was acquired at a 9.6x EBITDA multiple in 2014, but Drago underlines that multiples are much higher at the moment.

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