Private equity (PE) appears to be shifting its focus away from the social and home-based care sectors, deeming them less appealing than in the past, according to RSM UK’s Jasper van Heesch and Suneel Gupta.

Once lucrative, social care is now grappling with outdated infrastructures and high costs while heavily relying on government funding. 

Van Heesch, director and senior analyst in PE at RSM UK, explains that PE interest is now gravitating towards healthcare services. “For the period 2021-H1 2023, healthcare services accounted for 67% of all PE deal flow in the healthcare space in the UK (and 73% in the US), which also includes biotech, pharmaceuticals, devices and tech systems. Often quite fragmented, the market represents a consolidation opportunity which offers economies of scale and can improve the customer proposition through wider choice under one provider. In addition, the growth prospects, strong underlying demand for the services and ability to improve margins further underpins the investment attraction.” 

Tech’s “magnetic appeal” 

PE is particularly showing a growing interest in data, technology, and artificial intelligence, considering it a “smart” move away from traditional services, Gupta, partner and head of private healthcare at RSM UK, adds. He sees a trend emerging around sophisticated medical devices, with interest evident in both the UK and the US. This extends to various facets of the healthcare sector, such as medical imaging, diagnostics, as well as tech-enabled domiciliary care, he says. 

Van Heesch concurs, adding that PE sees the power of technology and generative AI to deliver a good patient experience and reduce costs of people-centric businesses — not to eliminate workers but to augment and empower the workforce. “In the UK, healthcare tech systems comprise just 9% of deal flow, but many healthcare services firms are tech-enabled. This enhances the patient and employee experience, and can differentiate solutions and improve margins. The innovation that technology allows can also open up new solutions and revenue streams.” 

In the PE realm, investments are typically held for a period of three to five years. During this time, there is a need to craft a compelling investment story for the subsequent owner. And so, from a valuation perspective, healthcare services are traditionally assigned a certain value, denoted by a specific multiple of the firm’s EBITDA. Gupta says: “Businesses that position themselves as technology-driven entities often command higher multiples. The more they can see themselves becoming a tech type of business, the more likely to have more value on an exit.” 

Technology is a big deal for investors, influenced by policies and funding, but so does ESG. “The mid-market is not fully grasping ESG’s impact,” Gupta explains. “The real question is: do they have the resources and knowledge to handle it? And, whose job is it?” Van Heesch adds here that everyone needs to pitch in—not just the government, company x, or investor y. Everyone has got to hustle for ESG changes. 

The challenges ahead 

Van Heesch tells us that challenges in the investment landscape are driven to a large extent by uncertainty for both sellers and buyers caused by high interest and inflation rates which creates valuation discrepancies. To address this, strategies like earnouts are emerging to align interests and ensure successful deals. 

Van Heesch also observes a trend that PE-related exits have seen a drop in 2023 due to economic headwinds. This has impacted the ability to return capital to investors and subsequent further fundraising efforts for some PE houses. That, coupled with the deep knowledge and understanding of the targeted sectors to identify where real value can be found and the ability to execute those deals will determine who the PE industry winners will be.   

Gupta brings another challenge to the discussion: competition authorities, particularly in sectors like dentistry and veterinary services, where consolidation may lead to collaboration among major players. “The fragmented nature of these markets prompts consideration of potential mergers and acquisitions in the future. There could be a time when two or three big players want to collaborate, and that might become an issue.” 

Deal momentum 

There’s a clearer outlook on the trajectory of interest rates and with inflation expected to continue falling in the upcoming year, van Heesch believes this bodes well for the confidence of sellers and buyers. He points out that this will be balanced with a generally weak UK economy, and therefore does not expect a dramatic rebound in transactions.  

Overall, he estimates that there is “substantial” capital available for deployment across various sectors, including into healthcare. “There’s around $70-80 billion worth of dry powder held by mid-market PE houses based in Europe. This is close to an all-time high. Companies in the UK looking for capital and a partner for growth should be encouraged by this”  

As for internationalisation, Gupta concludes by observing a trend in the medical devices sector. Here, US companies strategically leverage the UK as a gateway to enter the European market, thereby facilitating the penetration of local products.