Some of the world’s biggest infrastructure funds have been pouring billions of pounds into healthcare investments in the UK over the past two years, targeting areas, such as children’s homes, traditionally dominated by private equity.
Infrastructure funds have historically favoured investment in regulated energy and water utilities, toll roads and other assets that deliver steady, low-risk returns over a long period of time.
But faced with an excess of liquidity and a dearth of traditional projects, they have been forced to expand their remit and are competing with private equity in the healthcare market, pushing up purchase prices in the sector.
“This wasn’t a phenomenon in the market four to five years ago, but it is now,” said David Sanders, executive director at DC Advisory, which has advised on several healthcare deals.
There have been at least nine purchases of healthcare assets by infrastructure funds in the past two years, beginning with Antin Infrastructure Partners’ 2017 purchase of Kisimul, which runs four boarding schools for people with autism and complex learning difficulties, for £200m from private equity firm Five Arrows.
Other deals include AMP Capital’s purchase in February last year of the Regard Group, which provides residential care, supported living, outreach support services and day resource centres across 161 services in the UK.
Macquarie was also eyeing a £2.5bn deal to buy one of Britain’s biggest care home chains, Barchester, but recently pulled out of the deal at the last minute. The Australian bank, whose infrastructure arm is the world’s largest asset manager in the sector, walked away because of the volatile exchange rate and uncertainty stemming from Britain’s decision to leave the EU.
Although the social care market remains under pressure from rising staff costs and the government’s austerity measures, Mr Sanders said infrastructure funds were able to sell the case to investors on the grounds that people will always require specialist mental health and disability services.
“These are cash generative businesses where the government is effectively the payer and a good customer,” he said. “So you will always get paid.”
The new wave of investors has pushed up prices for midmarket purchases in the sector as infrastructure funds have a lower cost of capital and thus are willing to buy at 12 to 15 times earnings, compared with 10 to 12 times by private equity. They also expect lower returns — at about 15 per cent compared with the 20 per cent required by private equity — and are willing to invest for longer, holding on to assets for up to 10 years, double of that targeted by private equity.
Michelle Tempest, analyst at Candesic, a consultancy, said infrastructure funds were “politically positioning themselves as more ethical investors, with a longer-term lens than private equity”.
“The infra funds are mostly interested in assets whose residents have a long length of stay, such as the learning difficulty market,” she said.
The infrastructure funds are seeking midsized deals with assets, such as children’s care homes, rather than fostering businesses, which have no real estate component. Deals in the space carry some political risks such as their potential renationalisation under a Labour government.
“But overall it’s about [Boris] Johnson risk, as much as [Jeremy] Corbyn risk, and what’s going to happen with Brexit,” said Mr Sanders.