At the time of writing, coronavirus has infected 30 million people and claimed nearly 1 million lives worldwide. Israel was preparing for a second nationwide lockdown and David Nabarro, a World Health Organization special envoy on covid-19 warned the world is still “at the beginning” of the pandemic.

In addition to the toll on human lives and livelihoods it has taken, coronavirus has also put additional strain on healthcare systems around the world, underscoring the level of underinvestment in most countries as well as the risks the healthcare sector is exposed to.

Yet many of the businesses that have been on the frontlines of this pandemic – such as hospitals, clinics and nursing homes – have also been attractive targets for infrastructure investors. But will covid change that?

‘Not shying away’
“We’ve always been supportive of social infrastructure, but now we see even more appetite from LPs, especially on the healthcare side,” says Thierry Déau, founder and chief executive of Meridiam.

“The healthcare sector has proven its essential nature during the pandemic”

Walter Manara

The Paris-based firm has been investing in healthcare since 2007, when it agreed to manage and develop 40 buildings housing primary care facilities under the UK National Health Services LIFT initiative. Since then, Meridiam’s portfolio includes several hospitals in Turkey, France, the Ivory Coast, Chile and Canada. However, the firm does not assume medical risk.

“We manage the hospitals, not the patients,” Déau explains. “We mostly try to invest in publicly run hospitals served by the public healthcare systems. So, we’re not in the business of private clinics, for example.”

InfraVia Capital Partners, a more recent investor in the sector, is in the business of private healthcare. In May 2017, it acquired CareChoice, a private owner and operator of nursing homes in Ireland and the following year, it bought Mater Private, an Irish hospital group.
Even though InfraVia does assume operational risk in these businesses, it is undeterred by the current crisis.

“We are not shying away from it,” says Bruno Candès, a partner at the French firm. “The big picture is that the current health crisis is only accelerating the trend that was already in motion before the covid-19 outbreak.”

The trend Candès is most likely referring to is that of ageing demographics. According to Australian fund manager QIC, life expectancy is increasing while fertility rates are declining. “The UN estimates that 69 percent of females will reproduce at below replacement rates of fertility (less than 2.1 births per woman) by 2045-50, up from 21 percent in 1975-80 and 46 percent in 2010-15,” QIC states in a December 2019 report that looked at healthcare and which segments are suited to infrastructure investors.

That, in turn, means the ratio between working age population and those in retirement age will decline from 8.4 in 1980 to 3.5 by 2050, according to UN statistics. “That is, the financial support a pensioner draws from the healthcare system will be shared across less than half the number of people in 2050 than in the 1980s, driving an increase in healthcare costs per working age population,” QIC explains in its report.

The underlying trend of ageing populations was also one of the reasons DWS, the asset management arm of Deutsche Bank, made its debut in the sector last month, acquiring Medipass, a company providing cancer care and advanced diagnostic imaging services in Italy and the UK.

“The healthcare sector has proven its essential nature during the pandemic, and demand for healthcare services has actually increased,” Walter Manara, managing director in DWS’s infrastructure investment team explains.

“Our strategy focuses on healthcare companies that have strong infrastructure characteristics such as resilient funding, attractive underlying macro fundamentals, low technology risk and high barriers to entry, resulting in a predictable cashflow profile,” he continues, noting that healthcare is a highly heterogenous sector.

Whether or not a sub-sector or asset provides an essential service was the criterion all the infrastructure fund managers we talked to identified as the first prerequisite that had to be met.

“We absolutely believe that for every business in which you invest, you need to have specialist knowledge and skill sets”

Ken Wong

“Covid, to some extent, was a hard-core test to our investment thesis, which was affirmed in the sense that our health and education assets have proved to be very resilient throughout the crisis. That’s because both provide a basic service to society,” Angelika Schöchlin, senior partner at Antin Infrastructure Partners, points out.

“And what you’ll find, particularly when you look at healthcare, is that there’s been very strong government support – and rightly so – for the sector across the jurisdictions in which we have invested,” she explains.

Antin’s social infrastructure portfolio currently comprises private healthcare group Almaviva and psychiatric care provider Inicea, both in France; two UK-based companies – Hesley and Kisimul – that provide residential care and education to children and young adults with special needs; and Amedes, a diagnostics lab company in Germany.

Operational risk
But is investing in healthcare – whether that’s hospitals, clinics, diagnostic labs or nursing homes – going up the risk curve compared with more traditional types of infrastructure such as transportation and utilities?

“I don’t think we can make such a generic statement,” says Ulrich Köllensperger, a partner at Swedish firm EQT. “We could make that statement on a company level but that really comes down to specifics. We assess risk based on a combination of factors. We need to see that it’s essential, it’s resilient; that it has downside protection and therefore cashflow visibility. And, at the same time, because we are investors, we want to see the value creation potential.”

An example of that value creation is Charleston, a care home operator in Germany, which EQT founded in 2014. When it sold it in 2019, EQT had executed nine add-on acquisitions, began several greenfield projects and grown revenues 16-fold. At the end of August, the Swedish firm added another care home to its portfolio, acquiring a majority stake in Colisee, a France-based operator of nursing homes.

Ruben Bhagobati, co-head of Europe at AMP Capital, points out that operational risk comes with infrastructure investment regardless of the sub-sector. One lens through which the Australian fund manager looks at risk, he explains, is within the “context of what are the risks we can influence and what are the risks we can’t?”

“We’re not an investor that comes into a broken business and tries to fix it,” he continues. “We’re the type of investor that wants to buy a high-quality business, back a good management team and often give them capital to help them grow in a way they weren’t able to before.”

According to Bhagobati, AMP Capital has been investing in healthcare “in different ways and particularly in Australia” for roughly 20 years. More recently, in 2018, the fund manager acquired Regard Group and later that year CMG, two UK-based companies providing residential and supported living services for adults with learning difficulties and mental health conditions. The merged entity has been re-branded as Achieve Together.

A specialised skill set
Given that those investing in the business of healthcare – as opposed to the physical infrastructure only under a public-private partnership scheme, for example – are assuming operational risk, the question then becomes whether that requires specialist knowledge and skills.

“These [social infrastructure] assets require a level of governance around quality of care and reporting and transparency”

Bruno Candès
InfraVia Capital Partners

“We absolutely believe that for every business in which you invest, you need to have specialist knowledge and skillsets,” Ken Wong, who is managing director at EQT and responsible for Australia and New Zealand, comments. “Even more so in these types of businesses where you are dealing with people who are potentially vulnerable members of the community; or people who are more vulnerable due to current circumstances.”

For those skills and knowledge, EQT draws from its network of more than 500 former and current managers, who support the investment team on due diligence, but also serve on the boards of portfolio companies to ensure that the focus on quality of care and outcomes is there.

AMP Capital relies on internal resources, utilising the knowledge and skills it has acquired since investing in the healthcare sector for nearly two decades, but also taps industry experts for their insights.

“We understand that we don’t know everything, so we spend a lot of time working with other industry experts to look at opportunities, to make sure we get comfortable with them [and the risks involved],” Bhagobati explains.

Reputational risk
Just as infrastructure investors are no strangers to operational risk, they are also familiar with reputational risk. But is reputational risk greater in a sector as sensitive as healthcare?

“That’s something people often claim and given that in healthcare and education you’re dealing with fragile people or people in fragile situations, you do have a heightened responsibility towards patients, your clients and your staff to make sure they stay healthy,” Schöchlin remarks.

But “the reality is that infrastructure investing carries with it heightened responsibility towards the assets and your employees”, she adds.

“We used to be invested in offshore pipelines that transferred 20 percent of the UK’s gas. If something were to happen to the pipeline and the security of the UK’s gas supply were affected, that would be a very heightened responsibility,” Schöchlin says, by way of example.

InfraVia’s Candès echoes that view. “These [social infrastructure] assets require a level of governance around quality of care and reporting and transparency,” he says. “But these are the same principles that have been driving us in transportation, energy or any infrastructure sub-sectors we invest in.

“I think this debate around reputation has been exaggerated,” Candès continues. “If you buy a nursing home and then you understaff it in order to extract profit, resulting in poor quality of care and abuse of elderly people, then obviously that is bad and damaging to your reputation. But, with the right governance framework in place, I fundamentally believe it’s perfectly manageable.”

Handle with care
Operational excellence is also a priority, EQT’s Wong stresses.

“We believe that value creation and quality of care go hand in hand,” he says. “So, we very much focus the management team on setting up operational KPIs rather than necessarily focusing on financial performance, to ensure that management is providing the best quality of care.”

His view dovetails with that of QIC, which emphasises the need for a “customer-centric approach” to healthcare infrastructure with a focus first on patient outcomes and quality of care.

“It is only with such an approach that investors can hope to retain a social licence to operate and deliver sustainable long-term returns whilst managing … reputational risks,” the Australian fund manager states in its report.

Given that infrastructure investors are in the business of providing services that are both essential and critical in meeting society’s needs, they are also very familiar with the concept and importance of maintaining their social licence to operate.

That, combined with their long-term investment horizon, should make them better stewards of healthcare assets – provided they handle them with care.

The view from Down Under
Peter Coman, head of social infrastructure and property at Morrison & Co, tells Daniel Kemp how the firm navigated the covid-19 pandemic

Australia’s healthcare system consists of a mix of public and private provision, with most privately owned hospital assets procured by governments as public-private partnerships. These have generally remained steady performers throughout the coronavirus crisis, helped by relatively low prevalence of the virus in the country compared to other nations around the world. The country’s biggest outbreak to date took hold in the state of Victoria, with the virus severely impacting care homes, as it has in so many other places globally.

Morrison & Co, one of the region’s largest investors in social infrastructure assets through its PIP Fund series and other vehicles, is the manager of Retire Australia, a chain of retirement villages in New South Wales, Queensland and South Australia. Retire Australia is owned by ASX and NZX-listed investor Infratil. Peter Coman, head of social infrastructure and property, says there is a big distinction between the retirement village assets his firm holds – which are less prone to severe outbreaks of covid-19 – compared to the more concentrated environments of care homes. Still, the risk was high for both. Thankfully, there have been no recorded cases at Retire Australia’s properties to date.

“This whole event has caused us to become far more intensely focused on that business and how we’re running it. Our primary focus has been the safety and wellbeing of our residents and staff. We heightened the level of communication between us as shareholders and our senior management teams, and from them to their employees working at the coalface, and then to the customers,” he says.

The team increased the number of asset management meetings internally, up to several times a week for the most at-risk assets such as Retire Australia. With regular internal updates across the business, Morrison & Co was able to quickly assess where it was most exposed and allocate resources accordingly.

“We ran through what was effectively a covid-19 budget for Retire Australia and allocated additional operating expenditure specifically to address the covid-19 situation,” he says. “Working with our senior management teams in those businesses became critical. A lot of time was spent talking through the issues and how we should be managing them. You need to have capable and experienced people who can assist during a time like this.”

There’s clearly uncertainty for the future, even though case numbers remain relatively low in Australia and Morrison & Co’s other major market, New Zealand (where it does not own any healthcare assets).

“Our expectation is that it will be well into FY22 before we see some kind of return to normality, whatever that is,” Coman says. “Our FY22 budget and planning process will, I think, assume many of the things that we are assuming for FY21. And it may be longer – the long-term normal may end up being slightly different from what we used to think was normal.”

This is the second installment of a three-part Deep Dive on social infrastructure. The first installment that provides an overview of the sector you can read here. The third installment on education will be published later this week.