Highly fragmented sector
Despite its size and potential, the UK specialist care sector is highly fragmented, in which the top 10 providers control more than 15% of the market and in excess of 81% of assets lie outside of the top 16 operators. This presents a huge opportunity for larger participants to purchase some of the many smaller care groups at low P/E multiples, lean out process and bolt on existing platforms and resources. Such actions will fashion earnings growth through cost savings and increase the scope for revenue creation.
Transactional activity in the space shows smaller assets are currently being bought at 6x earnings by larger assets trading at 10x, some as much as 13x earnings. It is easy to see how this process is lucrative for investors.
Transactional activity has accelerated over the last year, driven primarily by private equity and REIT buyers. When looking at the size of the market, current M&A activity and the scope for further deals, we believe the investment opportunity will peak within two to three years before the market’s largest participants have captured the majority of the market. The main reason this has not already happened is that healthcare provision in the UK is a staunchly regulated space, with high fiscal and care driven barriers to entry. However, there are ways for investors to participate.
Rewards considerable
Private equity, REITs and open-ended funds – such as the Montreux Healthcare Fund – have gained traction in the institutional market and are ideally poised to fuel M&A activity in private healthcare. The investment rewards for such vehicles could be considerable. Montreux Capital Management, for example, recently acquired The Regard Partnership and ACH Care Homes, measurably improving the companies’ earnings with ACH’s run rate EBITDA moving from £4.49m to £5.46m and its investment increasing 99.1% in ten months*.
The UK care market is a compelling investment case underpinned by irrefutable demographic trends providing strong natural returns and a high inflation-linked level of income. The private healthcare sector will continue to grow unabated on the back of these inherent fundamentals, however, the ‘window of opportunity’ for M&A driven value uplifts will be largely over in two to three years as the larger participants attain greater market share.
*Taken from Fund NAV & ACH actuals April 2014 & January 2015
