ghp June 2015

12 | ghp June 2015 longevity. Whereas a man or woman born in the UK in 1981 had a life expectancy of 84 or 89 years respec- tively, a child born in 2030 might expect to live until 95 years. These factors are exacerbated by declining birth rates over the last four decades. The irrefutable demographic trend is particularly rel- evant for the UK health and specialist care sector, as expenditure on healthcare tends to rise exponentially with age. Government actuaries predict the number of people living in residential care, for example, will almost triple by 2050. There is a far greater risk of chronic health problems in older age, and this has significant implications for a country with an ageing population. In the UK the number of older people unable to live independent- ly – whether due to limited mobility, frailty, or other mental and physical health impediments – is forecast to quadruple by 2050. Most require some form of long-term care. The demand for local care is set to rise even among those suffering from chronic mental and physical conditions unrelated to age. At present, only 8% of families get health and care services from their local social services. This figure will soar as the popula- tion ages and unpaid caretakers such as parents or relatives are increasingly unable to provide support. Many of the 29,000 adults with a learning disability, for instance, live with elderly carers who are too old or too frail to continue in their caring role. By 2030, the number of adults over 70 years of age using social care services for their disabilities will more than double. Local authorities have planned alternative housing in only one in four of these cases, though they have a duty of care for all individuals with recognized conditions. In the 2010-11 year, authori- ties spent £260 million on direct payments for adults with learning disabilities, which represents an annual increase of 40% per year from 2005-06 after taking inflation into account. Equally, sales of disabled equip- ment in the UK have increased by 92.6% over the last 10 years. Evidently, demand for care is currently far outstripping supply. Care homes offer high and sustainable income Healthcare has always been an attractive alter- native form of investment. It is a defensive sector immune from short-termism: the provision of healthcare is not impacted by market forces and the payers for such services are not subject to fluctuating market sentiment. The sweet spot for investing in care is with the operat- ing companies, which are both the providers of care and owners of the real estate. The leading operators are creating profit levels in the region of 25%-28% for care provision, with gross fees being linked to RPI. In addition, the requirements to provide the capital and have the appropriate specialist regulatory experience have created high barriers to entry in the sector. This supports such high return levels. Such a solid level of return helps to provide a high and inflation proofed income stream for investors, which is currently producing a running yield in the region of 7%-8%. In the current low interest rate environment, high and predictable income levels are a rare com- modity. It is especially favourable when compared to other alternative assets, the majority of which produce no income at all. The valuation of care homes is driven by the net fees generated by each bed, rather than property market dynamics, thus insulating returns from a property market, bond market or stock market correction. How- ever, there remains a real estate value underpin to any portfolio, which acts as embedded risk support. Consequently, the return stream from the care home sector looks very different to any equity, bond or alternative asset and more closely resembles an infla- tion-linked, high yielding liability – such as a pension or endowment. The M&A ‘window of opportunity’ is closing The global financial crisis created a paradigm shift in the perception of risk. The unprecedented collapse of most traditional asset classes prompted investors to look further afield for truly alternative forms of invest- ment, immune from the short term impact of market movements. Additionally, the subsequent low interest rate environment of today has also resulted in a major quest for income – driving the prices of many yielding assets well above fair value. The private healthcare sector will continue to grow unabated on the back of these inherent fundamentals, however, the ‘window of opportunity’ for M&A driven value uplifts will be largely over in two to three years as the larger participants attain greater market share. Oliver Harris biography: Oliver Harris is a director of Montreux Capital Man- agement. A finance graduate of the University of Surrey, Oliver has had an extensive career working for some of the world’s most respected financial institutions as well as following several successful entrepreneurial pursuits. He previously worked in the City for the investment advisory wing of a large in- vestment bank before leaving to become a partner in a successful healthcare group. After that was sold in 2007, he moved to Switzerland to work for a private wealth manager. These roles have brought him into contact with some of the most important luminaries and companies within the financial, property and healthcare sectors. Montreux Capital Management: Founded in 2010, Montreux Capital Management is a Swiss investment firm specialising in boutique, alternative funds. With a global institutional client base, investors benefit from a specialist fund range which bears low correlation to the wider market, managed by our experienced partners. Introducing funds to some of the world’s most respected global institutions and other well-informed, professional investors, Montreux understands the importance of a disciplined and sustainable approach in the investment process. By focusing on specialist asset classes and strategies, Montreux Funds aim to consistently generate returns regardless of movements in Equities, Bonds and the wider property markets. industry insight