Clearwater International shares views with Unquote” about the veterinary care market: “veterinary sector proves pedigree with litter of PE deals”

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European private equity’s interest in the veterinary care sector has manifested in increasingly large and high profile buyouts in recent years. Mikkel Stern-Peltz looks into the sector’s attraction

With an estimated value in excess of €500m, EQT’s buyout of British veterinary group Independent Vetcare in December 2016 was the latest deal by private equity firms in the European animal care sector.

Tapping its €4.75bn sixth flagship fund, the buyout further emphasised EQT’s belief in the sector, having previously acquired Nordic animal healthcare group Evidensia in September 2014.

The Nordic and UK veterinary markets have enjoyed the majority of private equity investment in Europe, both fostering buy-and-build strategies. Indeed, Bath-based Independent Vetcare was born from August Equity’s merger of Advanced Vetcare and Rowe Veterinary Group in 2011, with a subsequent bolt-on of Berry House Group made two months later. Later, in 2014, Summit Partners bought the group and continued the consolidation.

Elsewhere in the UK, KKR acquired British pet store, animal surgery and grooming salon operator Pets at Home in a £955m SBO from Bridgepoint in 2010, listing it on the London Stock Exchange four years later with a £1.2bn market cap. Also in 2014, buy-and-build specialist Sovereign Capital acquired a majority stake in Willows Veterinary Centre and Referral Service – another UK-based veterinary group – marking the GP’s return to the sector seven years after reaping a 11.9x multiple on its investment in veterinary services group CVS.

The Nordic vet care industry is further consolidated still, with two of the region’s largest private equity firms in control of two of the most prominent Nordic veterinary groups: Evidensia and Anicura. In addition to EQT driving consolidation with its investment in Evidensia, Nordic Capital bought out Fidelio Capital to acquire Nordic provider of specialist veterinary care, Anicura in June 2014.

The industry is characterised by having stable income and good cashflow, as people are spending more money on their pets’ health, and that payment typically happens up front,” says Jakob Tolstrup Kristensen, an associate partner in the Danish practice of corporate finance outfit Clearwater International.

Cash cow

Activity in the sector has been driven largely by two of private equity’s favourite factors: strong demographic trends and fragmentation. “There are fundamental trends that are true across Europe,” says Thomas Vetander, a principal at Nordic Capital funds adviser NC Advisory and a member of Anicura’s board. “Pets are viewed more and more as family members; the general pet population is growing; and pets are living longer than they used to.”

These factors are increasing the amount of money spent on welfare, including maintaining health – not only to increase the animals’ lifespans, but also to treat lifestyle diseases such as obesity, which are on the rise among pets.

“There is an increasing penetration of insurance and various types of wellness plans, which allows for more pets getting the right treatment,” Vetander says, with insurance uptake most prevalent in the UK and Nordic countries. Penetration of pet insurance in the European market is growing, with more than 40% of Swedish pet owners insured, according to a 2015 Cowen and Company report cited in a PwC analysis. In the UK, the amount exceeds 25% and more than 14% of Norwegian pet owners have insurance.

The veterinary industry has historically been very fragmented, consisting mainly of smaller clinics serving local areas. Tolstrup Kristensen says the industry is prime territory for buy-and-build cases, as it is made up of abundant numbers of smaller practices. “There is a multiple arbitrage in this type of buy-and-build strategy, as it is often possible to acquire the smaller veterinary practices cheaper than larger operations,” he says. Additionally, synergies can be achieved through equipment, medicine and general purchases, co-branding, internal training and taking on treatment specialisations. “All of that results in a favourable and growing market, which is an attractive underlying backdrop,” says Vetander.

At the investments’ tail end, the veterinary care sector has already illustrated the broad options of exit routes available to GPs. “Further SBO iterations, IPOs or sales to international corporates are all exit options,” says Tolstrup Kristensen, noting confectionery and pet food maker Mars’s $9.1bn acquisition of US veterinary hospitals group VCA in early January. Likewise, KKR’s Pets At Home flotation in London provided proof of concept for an IPO route.

Deregulation driven

This consolidation opportunity in the UK and Nordic regions has mainly been driven by deregulation of the sector. Previous regulatory barriers to creating larger vetcare groups have been increasingly lowered in the two regions, paving the way for economies of scale, and the overall trend in Europe is increasingly toward deregulating local animal health markets.

“The Nordic countries and the UK are pretty deregulated, whereas Belgium and France are still highly regulated, while Germany is somewhere in between,” says Vetander. “But [deregulation] is slow and quite binary.” He sees the German market opening up and consolidation happening as a result, and though it remains in its early stages, what was seen in the UK was an increase in the pace of consolidation as the advantages of larger groups became apparent and insurance penetration grew.

Veterinarians have historically owned their own clinics – and largely still do – but private equity firms have not encountered excessive resistance to their approaches, as a proportion of self-employed veterinarians are looking to crystallise some value in their clinics. Similarly, the prospect of relinquishing some of the administrative and financial burden that comes with operating an independent practice has been welcomed by some, as the investment in education, equipment and IT needed can often be substantial.

“There is no NHS or state healthcare for pets, and veterinary practices need to be financially sustainable and well-resourced to be able to progress. We need to consider as many viable funding models as possible, including private equity” – Gudrun Ravetz, British Veterinary Association

The industry’s need for investment is reflected in a statement by Gudrun Ravetz, president of the British Veterinary Association (BVA): “Veterinary medicine is continually developing. Veterinary practices are making significant financial investments in their practices to bring new evidence-based advancements that have an animal health and welfare benefit to their clients and their animals. There is no NHS or state healthcare for pets, and veterinary practices need to be financially sustainable and well-resourced to be able to progress. We need to consider as many viable funding models as possible, including private equity.”

However, some criticism of private equity’s consolidation platofrms has emerged. In Carolina Neurath and Jan Almgren’s 2014 book about Swedish private equity, De Svenska Riskkapitalisterna, some veterinarians suggest the entry of private equity has brought a focus on profits that has supplanted the wellbeing of the animals being treated.

Veterinarian and owner of Halland’s animal hospital in Sweden, Marjaana Alaviuhkola, says in the book she believes vets have “given away their profession” and that the investors’ only focus is to maximise profit and sell the company on. “When a veterinarian builds a clinic, it is not because he or she wants to get rich, but rather to provide good care,” she says.

The statement from the BVA’s Ravetz does not criticise non-clinician ownership of veterinary practice, but does echo the theme of vets’ focus on care, saying considerations are twofold: animal welfare and financial health. “One is whether or not the business decision is sound, helping to build a profitable business with resources available to update equipment and ensure staff skills keep pace with medical and technological developments. But above and beyond the balance sheet, a vet must consider and ensure any investment has a positive impact on the health and welfare of the animals under their veterinary care, which will always be a vet’s number one priority.”