The Mental Care Industry

Recent transactions bring significant changes in control. In the last two years, two of the UK's largest providers, the Priory Group and Elysium Healthcare, have been acquired by MEDIAN Kliniken (a portfolio company of Waterland Private Equity Investments since 2011) and Australian-based Ramsay Healthcare (for £775m), respectively. Ramsay is already the largest provider in France, with 132 facilities.

In the EU, listed player Korian acquired Spain's Ita Salud Mental in 2021, a year after it had acquired Inicea's twenty French hospitals. Investors appear to believe in the value of owning similar services across international borders, despite few obvious cost synergies in such complex services and very different public payment models and policies. There is, nevertheless, an argument for hedging against the fiscal environment across different countries and sharing best operating practices.

Long-term trend towards internationalisation

International acquirers in the previous decade were American. Universal Health Services (UHS) has owned Cygnet Health Care since 2014, and what had been the adult services division of Cambian Group since 2016, having paid £377m for the latter. Acadia Healthcare has been and gone, having bought the Priory Group in 2016 for £1.3bn before exiting to Median-Kliniken. During its ownership, BC Partners formed Elysium Healthcare for £230m in 2016 from the Priory Group disposals required by the Competition & Markets Authority.

It remains to be seen whether Waterland Private Equity Investments, owner of Median-Kliniken and now The Priory Group, will be carving-out any part of the business, as The Priory Group did with its children's services under the brand Aspris.

Private equity — specifically Montreux Capital Management — acquired the Huntercombe Group for £35m, which they subsequently merged with Active Care Group. Huntercombe is known for acquired brain injury provision, while Active Care provides high acuity homecare amongst other specialist services.

We are also seeing many digital-only teleconsultation and subscription services, including personal wellness and monitoring apps, entering the market and attracting significant investment. Though this adjacent sector is very active, we focus here on inpatient services that require physical infrastructure and carers.

UK's 21st Century inpatient capacity decline

The decline in total UK in-patient capacity, including acute, forensic and long-term beds, is clear. NHS providers have closed much capacity and although private provision has grown, this has offset only part of the decline.

The supply demand balance is shifting in the favour of private providers owing to the simultaneous combination of a steady growth in need, the reported mix shift and diminished public supply. No material expansion of NHS capacity is expected in the foreseeable future, owing both to the lack of capital budget, the lack of nurses and the public providers.

Concentrated Private Share

The four main players in the market currently have about two thirds of private capacity in the UK. The Priory Group (Waterland Private Equity Investments), Cygnet Health Care (Universal Health Services), Elysium Healthcare (Ramsay Healthcare), and St Andrew's Healthcare (a charity since 1838).

Mental health is dependent on public spending — the state, through the NHS, pays for 90% of mental hospital services. We estimate the total UK in-patient market at around £5.2bn, once we include internal referrals within and between NHS Trusts at non-market prices and some insurer spend. A third of this, or £1.8bn, goes to private providers.

Growth opportunities

The core opportunity in the sector remains expanding into the gaps created by a lack of capacity in public providers to staff and manage their services appropriately. Corporate providers can perhaps pay front-line staff and managers better but, most often, they can compete by simply making their services better places to work.

There is also no fundamental barrier to corporate players becoming part of the Provider Collaboratives, especially where they can demonstrate savings in inpatient services. Provider Collaboratives are NHS-led consortia of NHS and 'independent sector' providers in specific service areas with common objectives to join up patient pathways, manage capacity more efficiently and reduce out-of-area placements.

Inpatient/residential opportunities

1. Careful organic growth in local markets, where the need is well understood, and more capacity is needed by local commissioners.
2. Vertical diversification into step-down and long-term accommodation, such as community hostels and supported living packages, especially for forensic and detained patients.
3. A smaller opportunity exists for elderly mental illness, especially where there is challenging behaviour.