As it has been since the dawn of austerity back in 2010, the provision of healthcare services in the UK remains a hot topic. With ongoing political power shifts and strained public health services, that won’t be changing any time soon. But how is this turbulence reflected in the M&A Market? The CP Deals team have pulled together their unique insights into healthcare M&A to produce this article, covering market dynamics, key value drivers, healthcare trends and recent notable transactions.
SETTING THE SCENE
As the NHS continues to grapple with resource shortages and capacity issues, the need for Independent Service Providers (ISPs) is growing. In 2023, the NHS spent £11.5bn on private providers – a £600m increase on the year before.
While Labour’s return to power will no doubt place closer scrutiny on NHS outsourcing, there are still significant opportunities for private providers in the future, with long-term NHS initiatives like the new hospital programme as an example of the ongoing necessity of private partnership.
UNDERLYING MARKET THEMES
The UK healthcare M&A market had a slow first half of 2024, with deal volumes yet to fully rebound from the downward trends of 2023. Corporates are doubling down on cash retention due to more expensive debt, and private equity firms are seeing longer lead times on fund raises.
Deals are still being done, however, for businesses delivering high-quality services in emerging markets, and vendors are adjusting to slightly lower value expectations, which bodes well for the future.
As the political landscape changes, Labour inherits c.7,500 contracts for healthcare services with private companies, worth £29bn. 94% of those are set to expire during their first term in government, but private sector contracts have been a key pillar in the battle to cut down NHS waiting lists.
So, while it’s not yet clear how the government will structure NHS expenditure going forward, the need for ISPs suggests a positive outlook for the sector and its M&A activity.
KEY MARKET DRIVERS
While the NHS’ focus on improving efficiency will come with tighter, more rigorous tendering for private providers, there are other market drivers pointing to further opportunities in the sector.
Ultimately, private provision is economically viable to address backlogs and manage expanding waiting lists. And, while Labour’s policy changes aren’t yet clear, a collective prioritisation of outcomes-based care should help tie private and public care together in long-term partnerships.
Away from the government, market demand remains very strong. An ageing population, economic growth and healthcare innovation are all boosting healthcare demand in the UK. Investment in sub-sectors like telemedicine, AI-driven diagnostics and wearable health devices are expanding the capabilities of private healthcare providers, with patients increasingly seeking advanced treatment options offered by ISPs.
Ongoing research and development is also giving rise to emerging markets, like neurodiversity, which are experiencing high growth and have the potential for application in corporate settings.
VALUATIONS & INVESTOR APPETITE
Healthcare M&A pricing has been robust amidst downward deal volume trends. Private equity investors continue to possess dry powder, and healthcare is seen as a favourable sector due to its macroeconomic resilience.
For that reason, private equity appetite remains strong, with investors in the market for good quality assets despite a dip in overall M&A volumes. Sponsor-backed M&A in healthcare as a percentage of deal volumes remains steady as private equity chooses to hold assets for longer and execute buy and build strategies.
Valuations-wise, in the lower mid-market, there’s a clear trend of high single digit pricing for high-growth businesses under £10m EBITDA, and these businesses typically demonstrate a mature customer base with innovative and high-quality service provision.
DEAL VOLUMES
As noted, UK healthcare M&A markets have had a slow start to 2024, but advisers and investors are optimistic for H2 2024, with political stability, a clearer macro picture and potential CGT changes positioned to drive more deals.
It’s not clear whether the market will return to the post-pandemic highs of 2021/22, and right now, it’s sitting in line with wider M&A trends.
If we take a look at deal volumes across the sub-sectors of healthcare, clinical services make up almost 50%, following the wider trend of ISPs relieving pressures on the NHS. Investors favour the underlying dynamics of services into the public sector, with mature contracts and revenue visibility as key value drivers.
GET THE FULL SCOOP
You can read CP Deals’ complete healthcare services M&A report, including all the data, notable recent deals in the space and those advised on by the team.
Then, if you have any questions about healthcare M&A and how the team can support, don’t hesitate to get in touch.
