Funding for growth: alternative finance and the UK social care sector
ThinCats is supporting businesses in this sector to exploit market opportunities, providing debt funding to accelerate growth through acquisition, extension and reconfiguration, organic growth and, investment in the latest technology.
Attractive M&A targets
The UK healthcare sector’s struggles during the Covid pandemic are well documented but it has shown remarkable resilience and continues to be viewed as a relative safe haven for investors during the current challenging economic times. Confidence remains very high.
With positive long-term fundamentals and a fragmented marketplace, the care home sector can offer attractive M&A opportunities. Favourable demographic trends ensure healthy long-term demand, which will drive stable, predictable earnings. In fact, with the oldest of the baby boomer generation now being a key client, capacity is struggling to maintain pace with demand. Average occupancy level was 83.4% last year, according to recent research by Knight Frank, up from 79.4% in 2021, while average weekly fees had grown approximately 3.3%.
Overall EBITDARM (earnings before interest, tax, depreciation, amortisation, rent and central management fees) as a percentage of income also shifted upwards last year, to 26.3% versus 26.2% in 2021. Although a modest increase, the fact that the sector managed to keep margin compression to a minimum during the pandemic and has now begun to move back towards normalised levels should provide further confidence.
Economic pressure
Despite the positives underpinning the sector, government funding is falling increasingly behind rising costs. A recent government-led exercise looking into the true cost of care in England found a £2.3 billion shortfall. These findings are based on data from 2021/22 and do not account for recent increases in inflation. Another key concern is the extent to which weekly fees can continue to rise in line with costs.
In a recent survey by Knight Frank, 96% of respondents said they believe that current inflationary pressures will greatly impact their operations and only 70% have contingencies plans in place to manage this pressure.
Inflation threatens stability
Source: Knight Frank
Market opportunities
Much of the resilience of the healthcare sector has been based on this large scale, long term, structural public funding which, has become less effective. This has led to corporate groups offloading assets, the most notable of which has seen Four Seasons, one of the largest groups in the UK which, put over 100 over its care homes up for sale earlier this year
The market remains fragmented with participants owning single assets or small, localised portfolios but it also extends to wholesale providers with a diverse and nationwide offering. This backdrop, combined with (current) issues in recruitment/retention and access to future funding, is likely to result in more consolidation for the sector. For operators running efficient and profitable businesses there will be opportunities to add additional care homes to their portfolios.
Funding successful growth strategies
An example of funding for growth is ThinCats’ support for We Care Group. From acquiring its first care home in 2007 the group has grown to 29 homes, providing over 1,500 beds across the North of England and employing more than 2,000 staff. With our support, the group acquired a group of 7 homes across Merseyside. It has also made significant investment in technology, offering electronic care plans and activity tables that enable both residents and families to access full information on their care and wellbeing.
At the opposite end of the age spectrum, First Blue Healthcare & Education acquired Nurture Childcare Services with support from Thincats. Headquartered in Staffordshire, First Blue provides residential care and support to vulnerable children with special educational needs. The six-figure structured funding package helped acquire the company and, provided additional capital to fund the purchase of a further five properties. First Blue is also in the process of developing educational services and, a family assessment centre.
Businesses like these - that can adapt to changing circumstances quickly and take advantage of any opportunities that they present - will be the ones that prosper in this challenging climate.
Richard Henshaw, Director, National Development, Healthcare
