Investment in the care services sector
As a sector for external investment, the UK Care Services market hardly has novelty value – the sector has been shaped for decades by successive waves of capital from private and institutional investors.
Equally, while success stories proliferate, there have been several high profile failures, of which the Four Seasons saga is only the most recent, which has brought unnecessary disruption to vulnerable service users as well as financial losses. In today’s somewhat uncertain market, should investors be prioritising care services?
In our view, the case for investment in the sector is compelling. Firstly, as with many healthcare segments, care services stands to benefit as long-term demographic shifts play out. The UK’s population is ageing and growing modestly but steadily, driving growing demand for elderly care. In specialist care, drivers are similarly positive, with demand supported by higher life expectancies.
Operators, then, can have high confidence that volumes will grow over the longer term, and that their services will continue to be essential. These tailwinds, however, have been evident for many years. What makes the present environment particularly favourable is the combination of these long-term volume drivers with a more stable backdrop for the prices care operators can negotiate with commissioners.
In the wake of the general financial crisis from 2008, the sector in the UK as a whole saw significant volatility in fee rates. While experiences varied greatly between regions and care settings, most state-funded markets within UK care saw real-terms fee declines as commissioners sought savings in a climate of austerity. A decade on from the crisis, and with the two largest UK political parties competing to outdo each others’ funding promises, most operators are now seeing improved prospects for pricing.
Perhaps the clincher for investors is that most areas within UK care continue to offer the opportunity to create platform businesses in fragmented markets, and to play a part in consolidation as these markets mature. The UK care landscape now features more truly large-scale operators than ever before, but even with the emergence of the likes of Priory Group and NFA, the buy-and-build thesis remains intact – in adult specialist care, for example, the top 10 providers still account for well under 20% of the market (see figure 1). Unlike many sectors, care services is not dominated by a handful of giant strategic groups whose manoeuvres can decide the fate of smaller operators – rather, we are in the stage of consolidation where enough strategic buyers have emerged to create exit opportunities, without really limiting the scope for smaller businesses to grow.
Against this backdrop, it is perhaps not surprising that new investor types have emerged on the scene. Sale processes in recent years have seen an increased presence from non-UK buyers, from real estate-focused investors and, most notably, from infrastructure investors, many of whom have identified healthcare as a ‘core plus’ sector, offering robust cash generation, high barriers to entry, and low correlation to the economic cycle. It remains to be seen whether the flurry of interest that saw investment in businesses such as Kisimul, Choice Care and Regard Group will persist, but for commissioners, the involvement in the sector of investors with such long-term horizons must surely be a positive.
The care services sector, then, deserves to be high up the priority list for investors. Nonetheless, the challenges facing care businesses should not be downplayed. One of the most widespread and widely acknowledged of these challenges concerns staffing. The issue of how to manage risk and cost by hiring and nurturing the right people is a perennial one, but is made more urgent by the disruption caused by the UK’s likely departure from the EU. Equally, domestic factors such as the abolition of bursaries for nursing students and the popularity of agency work among nurses and carers are leading to staff shortages, posing risks to care quality as well as further inflating staff costs.
Beyond this, the sheer operational intensity of generating acceptable returns while maintaining a good standard of care across a portfolio of care settings is undeniably high, and even in the best-run business, the possibility of care incidents or harm to service users can never be eliminated.
For some investors, these risks may be too great to justify investment, but for those prepared for the challenge, the opportunity is clear. In the care sector, the best management teams are those that are motivated by making a difference to the lives of the individuals in their care, and in the long run, the best investors will be those that never lose sight of this principle.