Competition is strong among financiers and investors wanting to support the aged care sector, write Darrell Price and Matt Byrnes.
In a recent survey of Australia’s major financial institutions, health and aged care was the standout sector for prospective lending growth.
The Grant Thornton series Bankers’ Boot Camp brought together almost 400 bankers from across the country in October. Among them, nearly 50 per cent of survey respondents cited health and aged care as the industry with the greatest lending prospects.
This result is no surprise. Aged care executives are well aware of the growth of the industry, driven largely by demographics.
Put simply, Australia’s ageing population means less tax payers are coming, therefore less government funds dedicated to traditional care models, which are at capacity anyway as a result of these growing numbers.
New innovative models are required to support this demand, which will also require financing – not to mention the new players invested in the sector who also want a piece of this growing pie.
This puts aged care businesses in a very good position. Competition is strong with financiers and investors wanting to support this sector.
What are some ways aged care businesses and executives can benefit from this changing investment landscape? Here is a snapshot of this new financing market for the aged care industry.
As Australia moves away from being a resources-driven economy to a services one, traditional lenders are looking to the growth sectors with the most potential for growth as part of their strategies.
Aged care came up tops in our survey with the bankers across Brisbane, Sydney, Melbourne and Perth.
Banks want in – they see the potential this sector provides.
The lending opportunities from the health and aged care industry are broad and infinite for banks, with knock-on opportunities from players also invested in the sector, such as private equity and supply chain specialists generally.
Those seeking financing are looking to fund a range of different opportunities, such as home care services, new aged care and retirement construction projects and consolidated medical centres.
There is increasing interest from the private equity sector in aged care with significant activity occurring these past few months. This activity includes:
- Moelis Australia’s investment into Japara Healthcare is reportedly worth around $53 million;
- Quadrant Private Equity continued its focus on the sector with its latest investment in home care business Sue Mann; and
- One of the nation’s biggest for-profit home care providers, KinCare, is in the market looking for equity or debt investor.
This trend is further supported by our most recent DealTracker report, which pulls together Australian mergers and acquisitions, private equity and initial public offering transactions from the past 18 months and provides insights for businesses contemplating growth by acquisition, exit, investment and so on.
Compared to the previous Dealtracker, investment managers’ preference for consumer staples and industrials was seen to be shifting towards healthcare, for instance.
The new entrants
Alongside the traditional lenders and investors in the sector, Australia is experiencing a proliferation of new non-Australian Prudential Regulation Authority regulated entrants in the lending market: the alternate lenders.
By and large, the emergence of an alternate lender sector improves access to capital for corporate Australia providing flexibility for some customers who are prepared to pay a premium for more flexible debt packages.
Being unregulated like traditional lenders, alternate lenders sit on a different part of the risk curve which businesses need to take into account. However, they can fill the gap in certain situations where major banks have limited appetite for further lending.
At the same series where the poll was taken, the general consensus from the banks when it came to alternate lenders was there is potential for better collaboration between alternate and traditional lenders in the future – working together, with the borrower in the driver’s seat. So, watch this space.
Releasing excess levels of cash tied up in working capital represents the cheapest form of finance available to a business. Put simply, finding opportunities – and changing processes – to create free cash to fund growth ambitions, in addition to bank funding.
In fact, banks are more likely to finance your growth or expansion plans if you are able to part-finance it yourself.
We have seen some real benefits for clients following working capital optimisation reviews in this area. One client reduced their inventory levels by $5 million, or 30 per cent of inventory holding.
Finally, while health and aged care may not receive the same focus as other sectors when it comes to specific government grants or incentives, there are a number of government programs that are crucial for health and aged care businesses to grow.
Those include the Aged Care Approvals Round to apply for bed licences, which are required to grow businesses through development. It is a highly competitive process and ACAR applications need to stand out.
There is no one size fits all when it comes to the most effective financing model in the aged care sector. What might be optimal for one business, might be a risky move with no financial gain for another. And often, it’s a multi-pronged approach you should take to ensure a healthy balance sheet so you can focus on growth.
Darrell Price is Grant Thornton’s national head of health and aged care and Matt Byrnes is the national head of restructuring advisory. Bankers’ Boot Camp is a Grant Thornton annual series run around the country, bringing together senior bankers from all the major financial institutions in Brisbane, Sydney, Melbourne and Perth.
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