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    HEALTH & SOCIAL CARE: TRENDS, DRIVERS & INVESTMENT OPPORTUNITIES

    Jun 2, 2021

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    What does the future of health and social care look like? Where do the opportunities lie? And how can you make sure your business is best placed to seize them?

    To help answer those questions, we welcomed Giles Johnson, Managing Partner at growth strategy consultancy, CIL Management Consultants, to the Cooper Parry Corporate Finance team’s third annual health and social care event.

    Giles has extensive deals experience and is incredibly busy with the investment that’s going into the health and social care marketplace at the moment, working with private equity investors and companies alike to review strategy and help the investors understand the business and market dynamics they’re investing into.

    Touching on big picture economic trends, long term growth trends and the other forces driving health and social care investment, Giles shared his industry musings with our audience of business leaders in brilliant fashion.

    If you’d like to watch the whole thing back, you can so do here. But for now, let’s take a look at some of the key headlines.

    WHAT MAKES HEALTH & SOCIAL CARE ATTRACTIVE TO INVESTORS?

    To answer this question, Giles used Porter’s Five Forces framework, adding in his own, sixth force: market growth. The sectors typically tick a lot of these boxes, but equally, display some issues:

    1) BARRIERS TO ENTRY

    It used to be relatively easy to set up a care business, such as a children’s care home, an elderly care home, or a domiciliary care agency. But now, with the advent of technology, the regulation of CQC and Ofsted and the emergence of frameworks, the barriers to entry have gone up significantly.

    Together with trust pilot websites like iWantGreatCare, where consumers are increasingly sharing their opinions, Giles sees these higher barriers to entry as one of the key reasons care markets have become more attractive to investors.

    2) THREAT OF SUBSTITUTES

    “This is more around the transfer of emphasis between different modes of care,” Giles told us. “So out of hospital into the community, out of care homes into live-in care, out of children’s care homes into fostering.

    “The public sector itself is a provider as well as a commissioner, which can create a sort of substitution effect there, but it’s something that’s slowed down a lot – it’s not a fast-moving sector in that sense.”

    3) BARGAINING POWER OF BUYERS

    “Bargaining power of buyers is interesting when they have their own services,” Giles continued. “So, if you’re selling to local authorities and they’re also providers, what sort of choice is there?

    “The reality is local authorities don’t tend to provide a terribly good service themselves. It’s one of the things investors get concerned about: am I selling to a single customer here? The government? The NHS? But actually, when you peel back the layers, often the buyers don’t have anywhere near as much choice as you might think.”

    4) BARGAINING POWER OF SUPPLIERS

    Here, Giles chose to home in on staffing, saying: “The staff in care markets are not unionised, so they don’t have collective bargaining. But they do have choice. When unemployment was really low, staffing was a real problem in the sector and, combined with the rises in the national living wage, that was eating away at margins.

    “That’s something to watch out for, but there’s relatively little supply chain power otherwise.”

    5) COMPETITIVE INTENSITY

    Care providers markets are competitive in that there are many providers in each segment of the market but, because there is under-provision in so many areas and providers have different expertise and niches, this often doesn’t result in downward pressure on prices.

    6) MARKET GROWTH

    The underlying market trends and performance, as you’re about to find out, are all positive, which is clearly something investors like.

    THE GOVERNMENT FUNDING GAP

    DRIVING DEMAND FOR PRIVATE CARE SERVICES

    With around £2.14 trillion in debt, government finances are in a parlous state – again.

    “This means the sector has to ration what it does,” Giles told us. “The government can’t continue to absorb the increasing demand. It can only afford to help those that really need it. So, care that can be privately funded will increasingly be so (elderly care, low acuity, elective healthcare, new technologies that expand the care envelope).

    “Older people are richer. They’ve taken their wealth with them as they’ve got older. So,  whilst the government has to continue to look after them, it has to be very careful about where it puts its health and social care pound. It is why we are seeing more private pay or private contribution services and there is a confluence of healthcare and consumer spending”

    This funding gap and pent-up demand for care services are driving investment into the sector, presenting a big opportunity for the private market.

    POPULATION TRENDS

    CREATING A NEED FOR CARE SERVICES

    The investment community buys into the underlying demand-side trend. If we look at the graph below, with similar growth trends in the population of those with learning difficulties, plus increasing demand for children’s services, it’s easy to see why there is a general sense among investors that these are growing markets, with “good, strong, underlying tailwinds”.

    ADULT COMMUNITY CARE: A CHANGING LANDSCAPE

    “In adult care, community/home based care markets are growing fastest, with a shift towards private pay,” Giles continued. “The compound annual growth in private elderly care is starting to really outstrip state funded home care, and that’s an example of the transfer from public sector to private pound where that is possible.”

    Source: LaingBuisson and CIL analysis

     

    LOCAL AUTHORITY FUNDING

    ADULT SOCIAL CARE & THE IMPACT ON THE PRIVATE PAY MARKET

    After several years of declining real terms expenditure on adult social care between 2009/10 to 2015/16, expenditure has started to increase; however, not fast enough to match demand.

    “Essentially, the government has got its hands in handcuffs,” Giles told us. “It can’t throw too much money at adult social care in local authorities, or at least it doesn’t think it can, in terms of the priorities it’s got.

    “Personally, why not cancel HS2 and spend money on this instead? When talking to bond markets, I suppose they can argue that spending money on HS2 increases the country’s productivity. Whereas there’s a general sense that throwing more money into social care doesn’t increase productivity, meaning there isn’t a payback for those bond holders.

    “The good thing, from an investment point of view, is that means there’s no capital for local authorities to build up their own provision in whichever sector you’re in. That means less competition, and less crowding out from the public sector themselves.”

    STAFFING

    TOP OF THE AGENDA FOR ALL HEALTH & SOCIAL CARE COMPANIES

    “It’s a more benign staffing environment now. Unemployment’s going up quite a lot in the UK which is good for staffing in the care sector.”

    It’s no secret that health and social work received a lot of positive press during the pandemic and the figures back Giles’ point up. Between February and November 2020, payrolls increased by 74,000 jobs in the sector; a stark contrast to falls of 297,000 jobs in hospitality and 160,000 jobs in retail.

    Andy Parker, Head of Cooper Parry Corporate Finance, said:

    “The high profile carers received during the pandemic increased the flow of applicants for jobs early on but there are still massive staff shortages, particularly with skilled staff, which has been exacerbated by Brexit. Prof Martin Green is right when he argues for an integrated training methodology between health and social care as workers can then see more opportunities and career progression.”

    CHILDREN’S CARE SERVICES

    A BUOYANT M&A MARKET

    Investors are looking for the opportunity for buy and build, which makes children’s care very attractive.

    “The LAC (Looked After Children) population was growing by 3-4% per annum pre-COVID,” Giles shared. “Investors will give this a tick in the box, and the impact of the pandemic must be that these numbers are going to grow. I know that all the providers are seeing very healthy demand here, which isn’t great for society, but it’s good if you’re an operator.

    “The number of children with SEN (Special Educational Needs) plans has also surged in the last two years. Again, this is surely going to go up as a result of the pandemic and home-schooling.”

    Andy added:

    “We saw the pandemic’s effects in two key ways on the deal we completed last year. Bryn Melyn Care focusses on working with young people with autism and learning difficulties requiring care and education, and others with a high level of behavioural, emotional and social difficulties (BESD). Last year, we saw a growth in BESD requiring help but challenges around face-to-face assessments slowed down placements, particularly in the schools side of the business. Going forward, I think there will be pent up demand for both of those streams of care.”

    IN SUMMARY: WHAT ARE INVESTORS LOOKING FOR?

    CATCH UP ON THE REST OF THE CONTENT

    Professor Martin Green OBE, Care England’s Chief Executive, also spoke at our event, laying out his “new vision for social care”. We’ve collated all the nuggets into this write-up. Enjoy.

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