Why we expect the UK healthcare M&A market to remain buoyant

Healthcare is a strong segment of the UK M&A market, which as we highlighted recently is emerging from a “stodgy” 2023 where the overall picture was one of lower deal volumes and values than we had seen in 2022.

At Pinsent Masons, we have already seen strong activity in the healthcare M&A market this year. We expect deal activity to remain ahead of the general market trend.

The appetite for deal making is helped by improving economic conditions – falling inflation and anticipation of lower interest rates later this year is likely to encourage investors reliant on debt financing, in particular. However, there are inherent features of the healthcare market that will continue to make it attractive to investors, regardless of the wider economic picture.

Pinsent Masons and Cooper Parry are teaming up to host an event at London’s Royal Society of Medicine on Wednesday 19 June at which expert speakers will share their views on matters such as current healthcare M&A trends and the political landscape for health and social care. You can register your interest for the event on the Cooper Parry website.

In the UK, like many other countries, there is an ageing population and increasing need to, on the one hand, care for the elderly and vulnerable, and on the other hand help the rest of the population adopt healthy lifestyles – and, in doing so, limit their need for time-consuming and expensive treatments. A preventative system of healthcare is something other European countries already promote.

A lot of healthcare in the UK is provided on the NHS, but a £32 billion funding gap has been identified compared to 2010-11 levels – and that does not include the funding gap pertaining to social care. This reflects the changing demographic position and constraints on public finances.

Policymakers have been seeking to drive greater efficiencies in health and social care provision through better use of data, as well as new technologies and processes, but challenges to staffing arising post-Brexit and the Covid-19 crisis and resultant treatment backlog have contributed an increased NHS focus on core services – with increasing involvement from the private sector on the periphery.

One example of this is the recent expansion of the scope for pharmacists in England to prescribe medicines for a number of common conditions – a move designed to help relieve stretched GP services.

This trend is expected to continue given the prevailing social and economic factors. It provides opportunities for healthcare providers – from digital health or medtech start-ups that develop self-diagnostic or self-administering tools, to new entrants to the care home market that can expand social care capacity – to help relieve pressures on NHS waiting lists.

It is in this context that we are seeing – and expect to continue to see – buoyant investment activity in the UK’s healthcare M&A market.

Healthcare assets already offer the potential of strong returns – the need to keep hospitals and other facilities operational to support local care provision offers investors in healthcare real estate, for example, a reliable income from rent, while the high-growth potential of health tech companies often drives a competitive auction process involving multiple prospective buyers.

Healthcare is already a popular segment of the M&A market for investment funds seeking to demonstrate their ‘ESG’ credentials too. At Pinsent Masons, we have advised clients like Great Ormond Street Hospital NHS Trust, Cancer Fund for Children, CureSearch, and the Northern Ireland Rare Diseases Partnership, which are all continually in the pursuit of delivering profound social value. Funds are attracted to the fact that private sector health and social care providers, by the nature of services they provide, have the potential to deliver social value – like Embla does, by offering people seeking to lose weight access to expert advice and a community of like-minded individuals to support them on their journey. Underlying investors in funds are seeking to achieve social value in tandem with realising financial returns.

In recent times, as part of the ESG due diligence process, we have seen many prospective investors develop and use ‘scorecard’ systems where they survey end users of the services delivered by target companies in the healthcare market and grade how they perform against some key metrics. This is an important exercise, as we have seen – in the social care market in particular – how media exposure of bad practices can impact on the reputation – and viability – of individual providers and of the sector as a whole.

Private equity houses and other prospective buyers focused on ESG investments cannot assume that, because of the nature of the services that a health or care provider provides, investment in those companies will be a good cultural fit – or make commercial sense. They need to look under the bonnet at the target company’s culture and practices and, from an ESG perspective, check things like access to and quality of services and whether good patient outcomes are being delivered. That will help buyers identify the best assets to invest in in a market that is only going to grow.

Written by Rebecca Wilding of Pinsent Masons.