UK Health & Social Care: M&A Sector Trends

UK Health & Social Care: M&A Sector Trends

The report covers deal volumes for the sector overall, and also the key sub-sectors of elderly care, adult specialist care, children care & specialist education, and domiciliary care.

What does the report cover?

  • Current Market Dynamics
  • Elderly care
  • Adult and Children specialist care
  • What is on the investor’s agenda
  • What should be on the healthcare leader’s agenda
  • Tax efficiencies
  • What to do if you are facing challenges

Download the full report

Headlines

Overall, the sector has demonstrated its resilience and fundamental ability to deliver high quality care for the most vulnerable in society. This is underpinned by the growing demand for healthcare services and the sector’s ability to respond to the ongoing challenges of COVID and the more recent backdrop of inflationary pressures, labour shortages and rising cost of capital.

In 2022, deal volumes across elderly and specialist largely returned to pre-COVID levels, but the growth stalled between Q4 2022 to H1 2023 as the sector had to contend with an array of economic pressures. As these headwinds begin to alleviate, we are anticipating increasing investor appetite for high quality businesses and transaction activity returning.

The implementation of technology is becoming more prevalent in the industry with operators and investors appreciating the efficiencies and cost savings offered. This is an exciting part of the sector’s growth and development in the short to medium term.

Continued consolidation offers a route to manage the inflationary environment and deliver efficiencies. Consolidation remains a key growth strategy for many in the sector, and we see ‘buy and build’ strategies continuing in the foreseeable future.

Quality remains fundamental. Operators that are able to achieve high quality ratings are able to attract greater occupancy and fees, in turn leading to greater investor interest.

There is a broader requirement to concentrate on ESG, with sector leaders understanding this requires specific focus. The sector clearly leads on social impact, but all ‘ESG’ elements need development, and clear evidence of this is increasingly required by all stakeholders and funders.

Overall, despite the challenges, this key sector of our economy is set to continue to deliver the fundamental care provision needed across age groups and conditions. It has demonstrated its resilience and investors clearly remain attracted by the combination of the fundamental drivers of the sector, combined with operators focused on delivering successful business plans in changing times.

Who to contact for support:

  • Helen O’Kane, Corporate Finance Partner – M&A, Health & Social Care
  • Kerry Bailey, Partner – Business Restructuring, Health & Social Care
  • Vicky Robertson, Tax Principal – Corporate Tax Services, Health & Social Care
  • Gurpal Ahluwalia, National Head of M&A, Strategy and Commercial, Life Sciences | Health & Social Care
  • Ishpal Bedi, Assistant Director, M&A, Health & Social Care

BDO’s recent Health and Social Care conference investigated potential responses to current challenges, including staff shortages and cost increases. Unlike some other sectors, Health and Social Care has the advantage that it can face the current tough trading environment with an ongoing, underpinned demand for its services, but clearly there are significant headwinds.

What options might operators consider, whilst focusing on delivering the best care? Based on the conference and our follow-up reflections, there are some essential themes to consider.

Workforce training and retention

Your business may retain those attracted to the sector through a heightened focus on training and the clarity of culture and purpose of an organisation. International recruitment is another solution to be considered in detail, as well as its development as a potential option in the specialist-care sector.

Cash flow management

Your finance teams must be undertaking detailed reviews of the cost base, and have clear daily, weekly and monthly cash flow forecasts.  Utility costs, despite the recent adjustments, should be reviewed to consider all available options.  Several providers are conducting energy audits, reducing energy costs and inefficiencies, and delivering long-term energy security. Measures include installing on-site renewable energy systems, low-carbon energy systems, upgrading boilers to condensing gas or natural gas, fitting thermostatic radiator valves, cavity and loft insulation, and light detectors and energy efficient bulbs. Any action taken has the dual benefit of improving ESG credentials.

Acuity & quality of care provision

Quality is key. Consider what’s being offered across your portfolio. High acuity care packages must be delivered by appropriately qualified staff, and it should be considered whether a contract should be handed back to a local authority if specialist care cannot be delivered safely. This may lead to a change in focus regarding certain sites and developments. 

Investment in systems

Adopting better back-office and care management systems will reap rewards in the medium and longer terms. Whilst this may cause short-term disruption having well-invested systems are quickly becoming the norm in care, with signification government funding supporting adoption.

Consolidation as a solution

Smaller operators can partner with larger providers, consolidating to deliver access to a broader workforce and potential economies of scale.  This is a well-known theme in the sector and can still benefit both parties whilst valuations in the sector remain attractive for the right strategic combinations.

Funding

When looking for new investments, the source and structure of funding are key, such as banks, debt funds, and - for some parts of the sector - invoice discounting.  Panellists highlighted that in the context of interest rates over the medium or longer term, rates remain relatively low, and funders are supportive of existing operators.  In addition, operators need to consider their mix of leasehold vs freehold, rent levels, and use of ground rents, in terms of funding options and flexibility, and impact on a possible future exit. 

We will explore these themes further in future panel discussions. For more articles, please see the related links.

Hosted by BDO’s Helen O’Kane (M&A Partner) and Gurpal Ahluwalia (Head of Strategy and Commercial Due Diligence, Lead for Healthcare and Life Sciences), the recent BDO Health and Social Care Conference webinar saw a mix of experts and senior market participants providing insights into the sector’s outlook and top strategic areas of focus in the current macroeconomic environment.

The conference indicated that as growth of demand is stable and inevitable, technology, recruitment and retention will be the major focuses moving forward for providers, regulators and investors, essential in allowing businesses to navigate internal and external challenges.

The view from the Care Quality Commission (CQC)

Stuart Dean, CQC Director of Corporate Providers and Market Oversight, discussed key themes emerging from the CQC’s 2021/22 State of Care report, including the gridlock of care, insufficient workforce capacity and retention and the varying quality of care for people with a learning disability or autism.  Focusing first on the current issues facing care home management, he said, ‘I consider it to be the toughest trading environment that most providers will probably have to experience, with the combined effects of utility costs, workforce, agency staff and increasing interest rates.’ Stuart noted that occupancy rates in the elderly sector have recovered to an extent post COVID, although seem to have flattened out / plateaued below pre-COVID levels, and it would be important to monitor how occupancy performed over the winter months.

In contrast, non-specialist domiciliary care, he said, was relatively buoyant, with profit margins above pre-COVID levels and with some M&A activity over the last 12 months. However, there are similar workforce challenges, with energy prices impacting on commuting costs an additional factor.

In care homes, he added, providers have been able to address staff shortages through recruiting overseas staff. However, in the specialist care arena, this has been less possible, due to the limited size of facilities and the additional skills required.

In terms of where future growth opportunities lie, Stuart emphasised the importance of delivering high quality care, at all times; so successful models would need to deliver cost reductions with better outcomes, most likely from greater focus on technology in the sector.

Challenges and opportunities for front-line providers

Dan Hayes OBE is Chief Executive of the Orders of St John’s Care Trust, a not-for- profit registered charity. He cited figures showing 44% employee turnover in social care compared with 11% in the NHS, describing how the Trust is undertaking overseas recruitment initiatives to address this and how offering career pathways will help attract workers from other sectors. He emphasised that estate renewal is the current priority, with growth second. He added, ‘We’re doubling down on our investment in transformation, so digital care, and in particular for us, addressing legacy back-office systems to make the centre ever leaner and more capable, and to locate the expertise inside the services where we deliver care.” The cost-of-living crisis is affecting many in society and he had a strong message of the importance of supporting his teams where possible.

Whilst at the height of the pandemic there was a need to protect vulnerable residents, long term and with the benefit of vaccines, in Dan’s view use of PPE detracts from the care that can be given and makes it more challenging to recruit and retain staff.  He pointed to the consistent demand for care, and the ways in which digitisation could help not only the residents, but also the caring experience, and support greater recognition of this essential role in society. He sees acquisition opportunities in the sector, with his expectation that funding settlements are going to be better than the current consensus.

An Investor’s perspective

Sanjay Panchal, Investment Director from Livingbridge, a mid-market private equity firm with a long and successful track record in health and social care in the UK and internationally, was the third expert speaker. He commented that from an investor’s perspective the most important factor in any social care investment was “understanding how a business can demonstrate improved care outcomes and the ability to deliver those outcomes consistently as it grows.” He added that “growth is intrinsically linked to the ability to recruit and retain quality staff, and we focus on finding businesses that share our ethos of being the best place to work and investing in their employee propositions.”

Sanjay underlined that health and social care investments require both patience and agility - unforeseen changes in government policy or the market environment mean organisations need to constantly adapt. He discussed key trends in the market such as developments in social care for adults with complex needs, a greater focus on mental health, the potential for technology to improve care outcomes while supporting integration and efficiency across the care systems, and consolidation of specialist services across Europe.

He noted that Healthcare is one of the most resilient areas of consumer spending with a recent survey showing healthcare to be the third most protected area of spend after groceries and children. He said, “we see the self-pay market evolving over the next four to five years with consumers wanting greater control and visibility over their health in a post-COVID world.” In response to questions, Sanjay went on to say that “ESG (environmental, social and governance) should be viewed as integral and an enhancement to any care provider’s strategy particularly as it relates to the benefits of a diverse workforce and the social impacts of delivering better care outcomes.”

Bringing together key participants for this interesting discussion supplied unique insights from differing stakeholders and highlighted the current headwinds and opportunities in this critical sector.

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