UK healthcare companies have become a major target for private equity investors in recent years, according to a report earlier this year from consultancy LangBuisson, with 150 deals struck since 2021.
For some time private equity has been investing in the care and education sector and in mental health hospitals, but now companies are branching out and investments include ambulance fleets, diagnostics, home care, and ophthalmology.
Private equity has seen how healthcare companies were funded during the Covid-19 pandemic and the recent moves by the government to reduce waiting lists and has seen the value of investing in a sector that is underpinned by public funding.
What is private equity?
Private companies, either privately owned or publicly-traded on a stock exchange, have been involved with the NHS for years and the issues surrounding their involvement have been well-documented. So what is different about private equity owned companies?
To understand this, you need to look at the way private equity works and what it aims to do for its investors.
Private equity companies are investment partnerships that buy and manage companies on behalf of institutional and individual investors.
PE funds acquire private companies or those on the public markets, in their entirety, or buy companies as part of consortiums with other PE funds or investors. PE funds do not hold stakes in companies that remain listed on a stock exchange, i.e., publicly traded companies.
In contrast to venture capital which invests in new or very small companies, PE typically acquires small to medium-sized companies that have assets. The target companies are often, but not always, struggling, have seen little major growth for a few years, or in an area of high growth where the PE funds see that quick profits can be made.
Because that is what PE is all about – quick profits. PE funds aim to see a return on investment in three to five years and at a maximum seven years. PE rarely holds an investment for ten years or more. PE is all about a quick turnaround of investment.
Investing in PE funds is not for small investors as significant capital needs to be committed, which is why access to such investments is limited to institutions and individuals with high net worth.
Another aspect of PE funds is that they often buy companies using a mixture of investor money and borrowing. The result is that the companies are often saddled with huge amounts of debt that has to be paid back at some point and this can make the company’s finances very precarious.
What happens to a company acquired by PE?
With such a short time-span to make money for investors (3-5 years), private equity companies often take drastic action to increase company value once they have acquired a company.
This usually includes dramatic cost cuts and/or restructuring, including: a reduction in head-count; transfer of production overseas to a low-cost economy; renegotiation of supplier contracts; a merger with a company they already own; use of lower-skilled workers on lower wages; selling of company subsidiaries; and selling of valuable assets, such as property, which often they lease back.
PE funds have a large amount of leeway with what they can do with a company as they do not have to report to shareholders in the same way publicly-traded companies do. However, this also means there is little transparency over what they are doing.
The private equity strategy of making an acquisition using a high level of debt means that bankruptcy is more likely. Firms acquired by private equity funds are ten times more likely to go bankrupt—which can be disastrous for employees and their communities, though not the fund managers themselves, who often come out ahead.
The entire aim of PE companies is to make themselves and their investors richer. However, in 2020 an analysis published by Ludovic Phalippou, professor of finance at Oxford Saïd Business School he found that private equity has resulted in a handful of super wealthy multibillionaires that have accumulated vast riches from running private equity funds, but the funds have performed no better on average than basic US stock market tracker funds since 2006.
He told the FT that “This wealth transfer from several hundred million pension scheme members to a few thousand people working in private equity might be one of the largest in the history of modern finance.”
Private equity and the public sector
PE is attracted to companies that work in the public sector, such as health, care or education, as their income from the NHS or local authorities is seen as virtually guaranteed.
The social care sector, for vulnerable adults and children, is now almost exclusively privately owned with heavy involvement of PE companies.
The NHS is not at the same stage as social care, but the lack of increased investment in NHS capacity and government encouragement of the use of private companies to reduce NHS waiting lists, means that this sector must now be seen as offering attractive opportunities for PE.
Healthcare companies in the UK that have contracts with the NHS can predict a steady dependable demand and with it a recurring profit. Companies that do primarily private work can also predict steady income due to people on the NHS waiting list turning in desperation to private companies. Hundreds of companies are now listed on several framework contracts to provide capacity to the NHS or set up Community Diagnostic Hubs. Among them will be some targets for private equity.
The table below (Companies) gives a selection of companies that benefit from contracts with the NHS that have private equity involvement. This is not an exhaustive list, private equity deals are often not publicised widely, and often carried out through a series of shell companies, making them difficult to track, although details of changes in ownership will eventually appear on Companies House.
The way private equity works has been criticised for many years. Its negative impact on the UK care home sector has been well documented. The downfall of Southern Cross in 2011 and more recently Four Seasons in 2019 are examples of the impact that PE can have upon businesses; both companies were saddled with enormous debts by PE investors.
Despite this, private equity is still heavily involved with the care home sector making vast profits.
More recently the involvement of PE in children’s social care, which includes fostering, children’s homes and other services such as residential school places, has been the subject of damming investigations by the Competition and Markets Authority, the Local Government Authorities (LGA) and the Observer.
According to a March 2022 report by the Competition and Markets Authority (CMA), the UK has “sleepwalked” into a dysfunctional market for children’s social care with local authorities forced to pay excessive fees for privately run services that often fail to meet the needs of vulnerable children.
In March 2022 analysis by the Local Government Authorities (LGA), compiled by Revolution Consulting, found that eight of the 10 largest providers of children’s social care now have some kind of private equity involvement.
The report also highlighted concerns over the level of debt taken on by some of the groups. Nine of the top 20 providers had more debts and liabilities than tangible assets.
The LGA report noted that many private companies were often failing to provide the right services in the right places with children frequently placed in homes miles from where they live, often separated from their siblings, and unable to access care and therapies they need.
An Observer investigation found more than 100 privately run children’s homes in England with serious failings have been branded inadequate by inspectors, with several found to have links to private equity firms.
But the companies, themselves, are making huge profits with the profit margins “higher than expected”, according to the competition regulator. The profit was not being invested in the staff at the companies as the report noted that despite the high levels of profit, wages had not risen nor had there been more investment in training.
Now private equity is branching out to other healthcare sectors in the UK, according to the data on deal-making. Here there is evidence from outside the UK, on its negative effect on healthcare.
A recent BMJ paper, which derived most of its data from the US market, showed that the takeover of healthcare services by private equity funds is associated with a worse quality of care and higher costs.
And in Germany, where more than 500 ophthalmology practices and hundreds of dental practices have been bought by private equity companies in recent years, a programme similar to Panorama reported on the pressure that can be put on employees to make a profit by selling additional services. This included reports of dentists drilling into perfectly healthy teeth.
One of the first targets in healthcare for private equity has been the mental health sector. NHS capacity in mental health is not sufficient after years of underinvestment. The result is that the private sector supplies over 30% of NHS mental health hospital capacity, including over half the NHS inpatient beds for children and teenagers with mental health problems, and almost all of the secure beds for adults.
In October 2022, a Sky News investigation highlighted repeated allegations of over-restraint, abuse and inadequate staffing, stretching back over a decade at hospitals run by the Huntercombe group, which at the time was a subsidiary of Four Seasons, owned by private equity funds.
When the Four Seasons care group went into administration in 2019, the Huntercombe Group, was sold on to another private equity firm, Montreux Healthcare based in the Isle of Man, which merged it with its Active Care Group. As well as the Sky News investigation, previous years have been peppered with complaints and reports of issues at the Huntercombe hospitals.
In December 2020 The Priory Group was acquired by private equity group Waterland. Despite its reputation for treating celebrities, The Priory’s main business is funded by the tax-payer; the company received £440 million from the NHS and £179.8 million from UK social services in 2021.
In an interview for the BBC, former members of senior management at the Priory Group, said that when they were working for the company, they found it difficult to recruit or retain staff, due to poor pay and conditions. They believe this resulted in patients being placed on wards that did not have staff equipped with the right skills to handle their conditions.
The two whistleblowers told the BBC they felt the Priory Group wanted savings to be made, with the main priority of the group’s central senior management being keeping bed occupancy as high as possible to maximise income, despite not having enough staff to ensure good practice.
In January 2023, the BBC reported that three women had died at the Priory Hospital Cheadle Royal near Stockport in a three month period in early 2022, Beth Matthews, Lauren Bridges and Deseree Fitzpatrick, with the coroner citing neglect and failings by the hospital. This was just the latest in a long list of issues in recent years.
Private equity has been criticised for many years over the way it operates. The authors of a BMJ article called for regulation. In March 2023, Wes Streeting, mooted that private equity-run care homes will be stripped of public sector contracts by a Labour government if they fail to meet quality and value-for-money standards. With the Care Quality Commission given powers to require state-funded providers to maintain a “safe” level of reserves to ensure financial stability, Streeting said.
|Company Name||Private equity company||Area|
|The Priory||Waterland||Mental Health|
|Active Care Group||Montreux Healthcare Fund||Mental Health|
|Care UK||Bridgepoint||Care Homes|
|Practice Plus||Bridgepoint||GP /diagnostics|
|HCRG Care||Twenty20 Capital Ltd||Community Care|
|Vita health Group||Archimed||Mental Health|
|18 Week Support||Summit Partners||Insourcing/Elective surgery|
|Cornerstone Healthcare||Ignite Growth||Specialist care homes|
|E-zec Medical||Cairngorm Capital||Ambulance services|
|EMED||Cairngorm Capital||Ambulance services|
|Veonet (SpaMedica)||PAI Partners||Ophthalmology|
|Diagnostic Healthcare||G Square||Diagnostics|
|Community Health & Eyecare||G Square||Ophthalmology|
|Connected Health||G Square||Home care|
|Together Dental||G Square||Dentistry|
|Accomplish||G Square||Complex needs/mental health/learning and physical disabilities|
|Medacs||Twenty20 Capital Ltd||Staff recruitment|
|Connect Health||LDC||Community MSK services/Mental Health|
|Medical Imaging Partnership (Imaging Holdings)||Apposite||Diagnostics|
|Swanton Care & Community||Apposite||Mental Health|
|Medinet Clinical Services Ltd||Fremman||Recruitment/Insourcing|
|Sciensus||Vitruvian Partners||Clinical and pharmaceutical home care|
|Sonderwell||August Equity||Complex care|
|The Dermatology Partnership||August Equity||Dermatology|
|Exemplar Healthcare||Ares Management||Complex care|
|Agile Recruitment||Owned by nGAGE and Partially owned by Graphite Capital||Insourcing|
|HomeLink Healthcare||Foresight Group||Hospital at home|
|Zero Three Care||Montreux Healthcare Fund||Complex needs/mental health/learning and physical disabilities|