The scale of demographic change in the modern world is disrupting the healthcare landscape globally. Although this sector has not been traditionally considered part of the infrastructure asset class, infrastructure health assets offer essential services, defensive characteristics and stable revenues.
Moreover, the need for private capital in the health sector means investors will have an important role in supporting the development of new healthcare infrastructure. Infrastructure health is a growing sector, presenting attractive investment opportunities for the selective investor.
As the world’s population continues to age, the changing demographics globally mean healthcare models are being forced to adapt.
Health expenditure has outpaced GDP growth by two per cent in OECD countries for almost 50 years. People are living longer, thanks to improved health technology and successful medical intervention, but in many instances their quality of life has declined.
In addition to an increased need for elderly care, there’s a prevalence of diseases associated with ageing and fuelled by affluent lifestyles: cardiovascular disease, diabetes and many cancers; currently, approximately 84 per cent of health resources are spent in OECD countries where only 18 per cent of the global population reside. As developing markets “catch up” with the OECD, their spend on healthcare is expected to jump similarly.
The increase in cost and demand is leading the healthcare model to change – and we believe change creates investment opportunities in a rapidly evolving sector. For example, hospitals tend to be the most expensive component of the healthcare system. It’s therefore prudent for governments and other payors to aim to keep people from entering hospital where possible and help them to leave quicker when they are admitted.
This has led to a trend for non-emergency healthcare services such as primary care, step-down care and rehab, which reduce dependence on hospitals and therefore reduce cost of care. The patient benefits from tailored care, usually delivered closer to their community.
The investment opportunities presented by the step-down care model are varied in different markets.
Nordic countries have pioneered the shift towards the integrated care model, which is a holistic path to long-term health centred around the individual. Ireland’s health service, the HSE, facilitates investment in the primary care space, recognising the benefits of the multi-disciplinary primary care model and the reduction of strain on acute care hospitals. In February 2017 AMP Capital established Valley Healthcare, a business in Ireland which now owns six primary care centres. These centres are located in community hubs across rural Ireland and provide a comprehensive range of non-critical healthcare and related services.
The other broad area of healthcare where we see significant need for private investment is the long-term care space. This sector is sub-divided into mental health and social care, and aged care. The ageing population in developed markets translates very clearly into a high demand for elderly care, while customer demand is driving improved services and high-quality care.
Demand has also increased for specialist care as medical intervention has allowed many people with severe disabilities to live longer and fuller lives. Meanwhile there is a significant number of parents who have provided long-term care to adult children who are unable to maintain this role, given their age. There is growing demand for both residential and supported living facilities.
With long-term care, there is a fine balance between affordability for stretched payors and sufficient quality of care: economies of scale and experienced management teams help to achieve both, meaning consolidation in the fragmented market via a high-quality business is a sensible approach.
When assessing the investment opportunities in long-term care, one of the most supportive factors for a business is owning real estate. This requirement rules out the suitability of many businesses for infrastructure investors.
“Sale and leaseback” has been a trend in the sector, leading to many “asset-light” care businesses which are beholden to lease agreements and dependent on their landlords for continuing capital investment. There have been some high-profile collapses of long-term care businesses whose failures in part are due to their significant rental burden in difficult market environments. Fortunately, the “sale and leaseback” model is less prevalent in Australia, where operators tend to own their real estate.
Not only does owning assets insulate a business’s financial position to a degree, it also offers strategic flexibility. This plays a part in improving the physical standards of care-homes – for example, people have moved from being housed in wards to private rooms with en-suites, which requires adaptation of facilities. As the care offering develops, it’s important that long-term care businesses have the flexibility to adapt their premises to consumer demands.
One of the most important elements of any healthcare business is quality of care, which forms a natural barrier to entry in this industry. Businesses operating within a community will be judged by their reputation, and a poor reputation takes many years to turn around. Care is a vocation and staff need to feel valued and know that care, not just profits, are a priority of their employers. Maintaining and motivating the workforce is one of the biggest challenges of a long-term care business.
We recently made our first investment in the UK specialist care market with the acquisition of The Regard Group on behalf of our investors, and we’ve been active in the aged care space for many years in Australia.
In the UK, the funding model for specialist care, which is local authority funded, has been more consistent than the aged care space and remained attractive to investors. Conversely, in Australia the funding landscape for learning difficulties and mental health is less straightforward, but the aged care model is an attractive proposition due to stable funding and supportive regulation.
The sector in Germany is interesting, as there is strong government funding provided by the mandatory national long-term care insurance scheme, which was put in place in 1996. However, many of the larger businesses have followed the “sale and leaseback” model, making them less attractive for infrastructure investors.
Like the UK, in Canada elderly care is underfunded by the state system. It has been significantly underinvested by both the government and private sector, leading to acute bed shortages and obsolete facilities, but offers potential for transformational investments from an experienced investor.
“Infrastructure health” means investors can provide solutions and cooperate with the public sector to support a stretched system, while capitalising on growth opportunities for high-quality sustainable businesses.
With rigorous management and a focus on ESG and quality of care, infrastructure funds have an important role to play in resolving what may be one of the greatest demographic challenges for the developed world in the coming years.
Julie-Anne Mizzi is global head of social care at AMP Capital.
