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It's time to say it out loud - the market is turning

This comment from Ian Wilkie appears in the March 2013 issue of Healthcare Business magazine.

This comment from Ian Wilkie appears in the March 2013 issue of Healthcare Business magazine.

There comes a point in every recession when the gloominess of the situation is accepted and becomes the norm. Energy put into resistance and denial has been spent and the received wisdom is that things ‘are what they are’, and we just have to accept it.

In the case of this particular recession - or depression - the situation has been the same for so long (6 years this year since Northern Rock), it seemed that toward the end of 2012 we had collectively entered an entirely new frame-of-mind altogether. This effectively replaced the mindset that things ‘are what they are’, with the new belief that ‘things will never be the same again’. That is a particularly damaging and insidious position to be in, as it destroys hope and optimism, crushes the entrepreneurial spirit and justifies inactivity. I am pleased to say however that in my view the market, at least as far as the social care sector is concerned, is now showing signs of recovery. This is why I believe that to be the case:

For a long time now I have been as quick as anyone to criticise the banks for peddling the mantra that they are ‘open for business’, when one only had to look into the eyes of the poor souls sent out to deliver this message to know that they had as much chance of selling a bag of pick’n’mix from Woolworths as they did getting a care home loan approved at credit. In recent months however, there have been encouraging signs that we are at last beginning to see some real and, more importantly, consistent activity on the part of the banks with Lloyds, Santander and Barclays all making a good showing. It is postulated in some quarters that the banks have made a conscious decision to back ‘winners’ and have selected the existing operators who fall into this category. If there is any truth in that theory, and even if the ratio only amounts to 1 in 3 existing operators who are able to secure acquisition funding, it is still a significantly higher proportion of the market able to do so than was the case 18 months ago. Besides that, it represents a clear strategy and sets out a framework within which those in the sector understand the boundaries and can seek to move forward. That strategy is likely yet to involve a lot of blood-letting and separating of wheat from chaff, however it is, if nothing else, activity.

More generally speaking, at both macroeconomic level and from our own direct experience, there are a number of indicators that give encouraging signals which point to a recovery. In the United States, hedge funds and private equity firms have been reported to be rushing back to invest in every part of the housing supply chain. Closer to home, UK house builders are more optimistic than has been the case for many years, with the successful return of Crest Nicholson to the stock market, after more than five years away, a solid indicator of that trend. Sir Mervyn King, current Governor of the Bank of England, reports that despite high inflation ‘a recovery is in sight’ and that there is ‘cause for optimism’. More specifically, within the social care sector we have at HPC in recent weeks seen direct engagement with a number of private equity houses in respect of a substantial specialist care portfolio. We have been approached by New York based advisors acting on behalf of a global investor, seeking advice in respect of a major acquisition in the UK care sector. We have seen approaches to a client who operates a substantial group of elderly care homes with competition from both European and US investors. We have seen acceleration in the rate of completions and exchanges and at the most basic level, it is quite clear that there is quite simply a renewed appetite and desire on the part of owners and investors to get out there and make things happen.

The long term care sector has been beset by so many problems that there is little point in repeating them all here. I am no denier of the issues affecting the sector and equally any turn-round is not something that will happen overnight. Inexorably however, time is moving on and with that comes change, which is either through choice or forced upon the market. The old chestnut, the fact that everyone knows about the long term care sector, is that the ageing demographic profile is set to hugely increase demand for long term care provision. Couple that to the inertia in development of new facilities over recent years and we have created a situation of almost unbearable stress on the sector, which is beginning to generate activity.

There are, undoubtedly, major issues of significance, not least the ongoing battle with local authorities over fee rates, which will continue to dog the sector. My observations are very much from the point of view of transactional and investment activity rather than operational issues.

So whilst any turn-round will not happen overnight, I for one am willing to say that I believe we have come through the worst and are now on the road to recovery. My message to potential investors is therefore get in quick, because in 18 months time it may be too late to be the ‘smart money’.

March 2013