This week the UK’s Financial Conduct Authority (FCA), which regulates the UK’s financial markets, set out changes to the rules for publicly listing on the stock market in the UK. 

The changes, which include removing requirements for shareholder votes on certain transactions and removing restrictions on dual-class share structures, are designed to encourage more companies to list in the UK and ultimately boost economic growth.

This could be good news for private equity owned healthcare groups. 

Hedley Goldberg, Managing Director at multinational investment bank Rothschild, explained at HBI’s conference last month that healthcare providers are very underrepresented on the stock market, particularly in Europe. 

Despite about 70% of total healthcare expenditure being spent on healthcare services, only about 5% of the total market capitalisation of all listed healthcare companies is accounted for by healthcare services companies. 

Goldberg also pointed out that of the top 25 listed healthcare services companies in the world, only three are European. One of these is Fresenius. Another is Fresenius Medical Care, most of whose revenue comes from the US. And the third is Eurofins, which is as much a testing and inspection business as a healthcare company.

Primarily this is because there haven’t been that many for-profit healthcare providers that have reached sufficient scale. Healthcare provision in Europe has tended to be dominated by public and not-for-profit entities in the inpatient sector, and small independent clinics in the outpatient sector. 

Another reason is that, with super low interest rates over most of the past two decades, PE investors were able to raise huge amounts of debt to make highly leveraged acquisitions, and therefore able to outbid potential public market investors. The result was that multiples rose and rose, and this inflation in valuations became the second biggest driver of PE’s returns (after revenue growth).

“I think it’s fairly obvious that private equity is not going to continue swallowing its tail through the next cycle. There have to be other forms of capital which come in to see these assets realised again,” Goldberg said.

“As a sector, healthcare services offers a lot of what the public market wants. It’s sustainable, organic growth and also pretty defensive growth, with high barriers to entry, a high return on capital and particularly in some of the out of hospital cases, it’s relatively low asset intensity, with good growth, macro resilience, and, typically, given the demand picture, there’s a lot of runway.”

In light of this Goldberg predicts that over the next five years we will begin to see more healthcare providers IPOing.

“We need to be conscious that somebody is going to get to a €300-500 million EBITDA healthcare services business. IPO needs to be seen as a viable exit path.”