Healthcare Vital Signs

Some would see this as big red marker for Mega Corp to pop in the plan of attack board paper, but we see this as the most likely status quo. The reality is that providing excellent quality care on a truly large scale is incredibly difficult and one only needs to Google the criticism of operational structures within now defunct care groups to see examples of such failures. Some do it well and good news stories coming from some of the Big Five are testament to this, but a platform of truly behemothic scale will struggle as care homes are unique businesses in so many ways and the distance from the coal face of care delivery to the board room needs to be so much closer than many outside the sector assume. Maintaining this closeness at scale is a major, some would say unassailable challenge. The UK C&W Healthcare Team raised this with our colleagues in the USA as we had assumed that in the land where bigger is better, such a view would be scoffed at, but to our pleasant surprise the same view was returned. The UK care market will endure as one which is dominated in proportion terms by smaller scale, private sector operators delivering care in a range of settings and in a range of ways. But this is not to say that it is devoid of opportunity for substantial investment. Development and transactions in the private pay focussed element of the market show great enthusiasm from operators and investors alike. For example, late 2016 saw deals such as the acquisition by Welltower and Revera of 4 Signature homes at an industry record value per bed whilst late 2017 saw the sale of the 15 assets comprising trading care homes and some development sites making up Porthaven, giving further reassurance as to where the top of the market stands in terms of operator abilities and investor enthusiasm. What’s the point of these observations? The point is threefold. Firstly, the Big 5 will continue to fluctuate, but it will most likely remain a game of musical chairs. Secondly the current market structure with some 2/3 of beds in the hands of small to medium scale providers will likely endure for the foreseeable. These platforms will not be the beginnings of consolidating Mega Corps, rather they will grow to 5 – 20 homes and then exit to investors looking for excellent assets with strong, private pay focussed income profiles. For investors and commentators, the unlikely future of super consolidation should not be a turnoff or the death knell of a sector’s prospects. Instead we would encourage two lines of action. Firstly, to seek out and support those building small to mid-size quality groups of homes, looking to exploit the ever growing demand for high quality elderly care assets as their prospects on exit remain excellent. Secondly an acknowledgement that with two thirds of the market likely to remain in the hands of small to medium scale providers, do not be swayed by the common assumption that their days are numbered, as quite simply, they are not. Thirdly and perhaps most interestingly we continue to see new platforms being established to build excellent quality homes across the UK , these mostly being successful, entrepreneurial care operators backed by Private Equity or Funds of varying forms. 25 | CUSHMAN & WAKEFIELD