Funding the caring society


A radical upsurge in mergers and acquisitions (M&A) activity in the residential care sector is set to accelerate, according to fresh research.

Research by specialists at Clearwater Corporate Finance into M&A activity in the residential care market reveals a significant increase in deals of all sizes in recent years.

The combined value of all mergers & acquisitions (M&A) activity between 1996 and 1999 was about £2.7 billion, rising to around £4.8 billion between 2000 and 2003. In 2004 alone, this figure was more than £3 billion.

Clearwater attributes this strong growth to a combination of an ageing population, the expanding scope of treatment and the rising cost of care. These factors have contributed to increasing government expenditure on healthcare services and the inevitable knock-on demand for value for money.

Clearwater partner Carl Houghton comments: “Central government cost-saving measures and general public expectations have given rise to a vast array of suppliers of specialist, niche healthcare services that provide rapid and cost-effective alternatives to the NHS services.

“Indeed, areas such as long-term care, rehabilitation and psychiatric care are increasingly becoming the responsibility of private sector operators. At the same time, programmes such as the Private Finance Initiative (PFI) are providing capital for the upgrading and ongoing maintenance of NHS infrastructure.”

High growth in expenditure is forecast on residential care as a whole in the near future as the boundaries of care expand, the government encourages a greater number of patients into primary care, and patient treatment becomes more sophisticated. This will result in further private sector involvement in the market as the opportunities for niche operators are enhanced.

A recent sector survey by Clearwater of the wider healthcare services sector in the UK focused on which areas of the market are of particular interest to the private equity community. More than 70 per cent of respondents said that they have investments in the sector, with 43 per cent indicating that they were particularly interested in investing in the residential care sector.

“The survey showed that 74 per cent of venture capitalists see deal activity increasing, with 77 per cent interested in investing between £5 million and £50 million of equity in single transactions. Indeed, 69 per cent are actively seeking opportunities to invest in healthcare services businesses in the next 12 months,” added Houghton.

Among residential care deals on which Clearwater advised was the disposal of Green Corns, one of the UK’s leading providers of acute childcare, which was sold to a management team in February 2004. The deal involved a £26 million funding package provided by 3i and the Bank of Scotland and gave the business a platform for future growth and further development in a market with 55,000 children requiring specialist care.

Clearwater Corporate Finance also advised the vendor and assisted in negotiations in the sale of Advanced Childcare Ltd, a supplier of care and education to children and young adults with behavioural, emotional and social difficulties. In December 2004, the company was bought out by a management team funded by Bowmark Capital and the Royal Bank of Scotland.

Houghton added: “The larger operators are likely to be the driving force behind future consolidation in the residential care sector, as they will be able to manage the requirements of wider NHS outsourcing.

“At the same time, private equity activity will begin to turn to issues of critical mass. Multi-service operators which demonstrate both market-leading expertise in several niche specialisms and strict compliance with legislative demands will become increasingly attractive.”