Black Death – coming to a country near you soon
The debt crisis feels like a slow motion version of the Black Death. Inexorably, it creeps across the continent and slowly the casualties mount. But even in Athens people haven’t started dying yet. Whilst the entire healthcare services sector is in suspended animation, no one has gone bust – yet. So what impact will the European debt crisis have on private equity and the healthcare services sector?
Investment bankers (like estate agents) tend to be sunny individuals not given to pessimism. But private equity investors say things are starting to smell.
The impact can be divided into the impact on companies operating in the PIGS or rather the PIIGS and the issue of general liquidity.
Taking those in the region first, one told me: “If companies have exposure to the Mediterranean countries then there is an automatic discounting of value and an assumption that receivables will be worthless.”
Another, who has exposure to several companies in the area, says: “When we talk to healthcare companies in Portugal, Spain, Italy or Greece who are dependent on public sector payors, they admit that bills are not being paid fast. When you push a little harder, they admit that the money stopped completely several months ago in most of these countries.”
Certainly, these days talking to Greeks is an upsetting experience. A Greek banker says that government spending remains uncontrolled: “In the first half, the tax take fell €8bn despite all the tax increases. Spending rose €13bn, €3bn more than expected.”
And there are clearly more nasty surprises to come: “The entire Greek banking system has been hiding bad debts for two years. An individual with three consumer debts totaling, say, €35,000, who was only able to pay €100 a month in interest, simply has had his products merged and reclassified as a new low interest product. After another year, the banks will no longer be able to hide this.”
Meanwhile the government is focused entirely on endless discussions with the EU and IMF. There is no execution.
Of course, it is dangerous to generalise from Greece to the Southern Mediterranean. But there are clearly problems elsewhere. The Wall Street Journal reports an €8bn deficit in healthcare in Spain. And similar banking issues could crop up elsewhere.
What of the wider picture? Has liquidity in Europe for private equity been affected?
So far the latest problems in Greece, Italy and Spain haven’t affected banks willingness to lend. Private equity says it can still get 4 times EBITDA and sometimes as much as five. But the optimism of a year ago has faded and multiples are stationary or falling slightly.
On the other hand, the high yield bond market has come from nowhere in the last year. Bankers say that it remains open and, as the example of Advent’s acquisition of The Priory shows, such bond issues can be used to finance acquisitions. However, the market remains fickle. Last week it was switched off by the bond crisis. It could open again next week.
Behind all this there is a bigger issue. Private healthcare in Europe is very much a bet that the public sector will outsource more over the next 1-3 years. That sounds entirely reasonable – if outsourcing labs or imaging could save a couple of billion euros in the larger countries why not do it?
But our sources say it is not really happening in Europe today. Rather the first thing that is cut tends to be private sector contractors. They may be more efficient, but they are easier to axe than doctors and nurses. As one private equity source put it: “The decisions appear to be political, rather than rational.”
So privatisation remains parked in Germany, private hospitals in Italy are seeing their budgets cut and terminal confusion surrounds the English NHS. Only Sweden is firmly set on the outsourcing path.
As our Greek source put it: “The government seems to be incapable of cutting public spending. This is its power base, the political constituency it created.” You could say much the same for the rest of Europe. The difference is that other countries remain complacent. The plague has not yet reached their shores.
We would welcome your thoughts on this story. Email your views to Max Hotopf or call 0207 183 3779.
