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Health and Care update - Funding Opportunities

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13 May 2016

For good quality operators and services, the social care sector is currently in fairly good health in respect of funding availability.

Mainstream High Street lenders are still extremely keen to fund the reasonably secure, low-risk businesses with good quality freehold property, management, CQC ratings and levels of occupancy. This market is quite competitive at present and terms are generally very good for a quality business.

If you move away from the high quality care business with asset backing, the High Street banking appetite to lend reduces. That said, it does not mean they will not lend and we have recently been involved in a number of debt financed transactions in domiciliary care, live-in care and foster care.

There is, however, still a need and room for additional funding streams and a number of our clients have successfully utilised different types of funding over recent months.

Alternative funding streams include the following:

Ground Rent sales

Selling the Ground Rent of the freehold property portfolio on a long and low yielding lease, whilst retaining a virtual freehold which does not affect senior security (i.e. existing bank loans), nor diluting the EBITDA multiple on sale. However, this may only be an option for larger portfolios of assets.

Crowd Funding

A number of our clients have used Crowd Funding for both working capital purposes and making small acquisitions. There is very often more appetite in these scenarios than via High Street banks. Confidentiality of information on a web-based system remains a key risk and costs of finance can be fairly high.

Alternative investors such as High Net Worth Individuals

High Net Worth Individuals are frequently seeking better returns from their cash and continue to investigate bridging the “equity gap” in smaller transactions.

Non mainstream banks and smaller investment funds

There are a number of such institutions who are currently keen on lending into the sector. They tend to lend in slightly less asset rich companies, although the returns required by them will be higher and they may even lend to levels that require small equity stakes.

Pension Funding

Pensions can be utilised to buy trading properties and going concern businesses, or even releasing cash back into the business. Specialist advisers are required but this method certainly has been used in the social care sector and day nurseries to release cash.

Sale and lease back

Similar to the sale of ground rents, although in these circumstances, the entire freehold asset is sold and leased back on a long-term basis by property funds such as REITs etc. The properties will need to be of a high quality to interest the investors, but it can help operators expand their businesses fairly quickly.

Social impact funds

A large amount of capital is being raised by the social impact funds who wish to invest not only to generate returns for their investors, but to benefit society in general. A number of such funds are seeking opportunities to lend money and/or invest in equity within healthcare businesses.