Podcast Interview with Diarmuid McNamee, Towerview: International Investment in Irish Healthcare

Introduction and Podcast

HCI recently chatted to Diarmuid McNamee, Director at TowerView Investments on international investment in the healthcare market from a global and Irish perspective. This discussion is available to listen to in a podcast format and can be accessed on Soundcloud, Spotify and Apple Podcasts.

Transcript from Interview with Diarmuid McNamee

Hello and welcome to another episode of HCI’s Regulation, Quality and Safety of Care Podcast. I’m Caroline McAndrew, Director of Corporate Services with HCI. I’m delighted to have Diarmuid McNamee, Director of TowerView Investments with me here today to discuss international investment in Irish healthcare. Diarmuid thanks for joining us.

Diarmuid: Thanks Caroline.

Caroline: Diarmuid we might start by looking at what is happening at the moment in Ireland with the international investment in healthcare.

Diarmuid: Sure, so I think over the course of the last three to four years in particular, particularly post the recession we’ve seen a very significant step up in international investment interests in health care in Ireland and that’s coming from a number of different sources. It’s coming from private equity funds that are interested in the Irish market and interested in the sector. Also, other types of funds such as long-term infrastructure funds and pension funds see Ireland as an attractive location for investment and see healthcare in Ireland as particularly attractive. So, there’s been a significant step up buoyed by that sort of positive sentiment that Irish healthcare is a good opportunity to invest.

Caroline: Ok and what types of deals would TowerView have been involved in?

Diarmuid: So our firm advises clients in all areas of care services in Ireland. So, we have a particular focus on four key areas of healthcare services, the acute healthcare sector, that’s the hospital sector, it is a big area for us. We also focus on elderly care in nursing homes, primary care is particularly relevant, and then finally what we call specialist care which includes a number of different areas of behavioural care, children services, mental health etc. So we’ve been involved in deals across all of those areas and all of them are attractive for different subsector reasons, but we’ve seen a particular interest in the last 12 to 18 months in areas of specialist care.

Caroline: Ok, so what then is making, you know, the Irish market so attractive for international investment?

Diarmuid: Sure, so there is probably three to four key reasons for that. No. 1 I would say obviously the fundamentals are very strong, the economy is stable and growing, the demographics are headed the right direction from an investment perspective. I would say secondly one of the things that investors in healthcare look for is funding streams. So where is the funding coming from? In terms of supporting the healthcare company, is it from the state, is it from health insurance or from private pay? So, there’s a stable and growing funding stream that supporting health care delivery. Private ownership and private sector involvement in healthcare is very well developed in Ireland and you know that is for a number of reasons we’ve had obviously private health insurance through the Vhi in Ireland for over 50 years. In the acute hospital sector, the private sector has played a very significant role both in investment and provision, so about 30% of all private sector investment, or overall investment is coming from the private sector. So, it seen as systemically important. And then I’d say the other key reason why Ireland is attractive is that there’s a clear infrastructural deficit in healthcare. So I think it’s generally accepted that there’s a need for investment across most areas of healthcare in Ireland.  That requires significant capital and that capital can’t all be sourced within Ireland. So therefore, there is a need to look internationally and therefore international investors see that opportunity to invest in growing the healthcare infrastructure in the state and thereby offering an opportunity for them to generate a return on the back of that.

Caroline: Ok very good. So, there is a lot happening in the Irish healthcare market at the moment. There is a lot happening in the healthcare sector and in terms of the need for more beds there’s a lot of people presenting with a lot more complex you know health care issues, do you see this as kind of a driver behind international investment?

Diarmuid: Very much so, very much so, I think you know the one very clear issue is the infrastructure deficit that we have, the service deficit, that’s clearly arising as a result of the recession but it’s a very clear issue, it’s a very topical issue, and the practical examples of that obviously are from the point of view of acute hospital beds. There’s a general acceptance that you know in the next 10 years a further 2,500 to 3,000 beds are required. That’s three billion of capital that needs to be sourced in order to deliver that which isn’t all available from public finances. In the case of the nursing home sector, you know again generally accepted that about 10,000 beds are required over the next 10 years, about 1,000 a year so that’s you know another billion of investments. So they’re very very big numbers that are required in order to invest in healthcare infrastructure and those trends are important and key and I think you know there’s a recognition that Ireland and Irish healthcare needs to be able to attract international investment in order to be able to play a part in part financing in that deficit that’s there.

Caroline: Right ok so it’s probably not something that can be dealt with just by the Irish, through the Irish taxpayer system, or funded by you know the government, you reckon it does need outside investment?

Diarmuid: I think that’s right. I think the numbers are just so significant and I think that you know when you look at, you know the program for government you look at as Sláintecare, you look at the plans in terms of investment in healthcare from a government perspective out to 2040, there is a clear recognition that the private sector needs to play a part in that, there is a deficit and there isn’t enough funding available and therefore as a result particularly given that you know large amounts of capital are available internationally for healthcare, it is a good and positive thing that Ireland is able to punch well above its weight in terms of attracting that investment interest into you know strong Irish healthcare companies.

Caroline: So what sort of trends would you see at the moment in international investment?

Diarmuid: So, what’s happening is a number of different types of investors are coming through as investors in healthcare. So, there is private equity funds that are growing in their size, have more capital coming into them and have a growing interest in healthcare. There is also what we call infrastructure funds who typically in the past may have focused on hard infrastructure investments like roads and railways and airports, are now interested in social infrastructure which includes hospitals, healthcare and education. So that’s a very definitive trend and those types of investors are becoming owners of healthcare businesses across Europe and indeed across the world. And then the third trend that we’re seeing is social responsibility is becoming much more important in terms of the investment mandate that these types of funds have. So pension funds and wealth management funds that are investing in all of these types of investment managers are looking for more than a return, they are also looking for socially responsible investing and therefore they’re pushing those investment managers to lookout for opportunities that have a positive impact on society, have a positive role to play from a social progress perspective and therefore health care and education are becoming much more relevant and much more attractive, and that’s a trend that I would to see continuing. I think it’s going to continue to grow as the performance of those healthcare companies that have sourced those investment comes through and that performance is positive it will attract more interest as a result into the sector.

Caroline: OK so given all the things we’ve discussed there you know about the Irish healthcare market, you know the aging demographic, the complex health problems that people have, the infrastructure deficit all of those types of things, the need for more beds, would investment in healthcare in Ireland be considered quiet a safe bet at the moment?

Diarmuid: I think generally positive would be the view that most investors would have, I think for the reasons that I outlined. I think one of the other things that make Ireland seem as a safe place to invest in terms of Irish healthcare is government policy as well. So you know we talked about you know an acceptance of private ownership and it’s been around for a long time but government policy and more recent cross party support for Sláintecare is a very positive undercurrent even though Sláintecare is still at a very early stage of its evolution, what it’s saying to international investors is irrespective of who might be in government there is there an agreed direction of travel in terms of what the Irish healthcare system needs to look like over the course of the next 10 to 15 years and those trends are positive and it gives good clarity to international investors who are always looking at the political system, to see you know our governments positively disposed to our investment in Ireland or not. So, I would call that out or something that is you know is always look for and is certainly a positive undercurrent even though it’s still early days.

Caroline: Ok,  I suppose with any health care organisation acute care, elderly care or anything like that, there is a huge social responsibility, you know with running that organisation and being involved in that organisation providing care to people that are vulnerable and that need it and providing good quality care in in a timely fashion, can you talk to me about what happens in terms of investment in healthcare organisation, what is the impact on direct care?

Diarmuid: I think, you know the first thing I would say on that is that the most important thing when a company is looking to source new private investment in, be it international or otherwise, is that it’s the right form of investment, it is the right form of partner. What I mean by that is there is very clear needs that come on board in terms of you know ensuring that you know service delivery is strong and improves over the life of that investment and that there this proper investment in quality. So I would say the most important thing is to ensure that the right shareholders are brought on board that the time horizon of the investment is sufficiently long, that it’s long patient capital, it doesn’t require a short-term liquidity event are dividends or return, that there is a clear mandate to invest in services, both the infrastructure but also improving service delivery in expanding service, service offering and then thirdly investment in quality is critical. So there needs to be a very clear mandate from you know the investor coming in, that investing in quality is absolutely at the forefront of their own mandate and that’s not just playing lip service to that, that there is actually tangible examples of that in terms of investing in quality and systems, in processes, in a real focus from a governance point of view on quality being the most important thing that is discussed at board meetings and on board agendas. So I think those prerequisites are absolutely critical and I think if those are in place and the right shareholders are brought on board and the right sort of governance is put in place, then the impact on service delivery will be positive but it’s very important that that’s where the focus is. If the focus is short term, if the focuses less on investing in services and investing in quality, then it has a negative impact clearly.

Caroline: OK and how important thing is that to an organisation you know that’s considering investing in healthcare? I mean will they look to see that there is a good governance structure in there I suppose to protect their investment if the deal goes ahead or that there is you know good levels of care or that they are compliant with regulations?

Diarmuid: It’s absolutely critical, it’s absolutely critical for investors and I think you know  when things go wrong in a healthcare organisation, it’s much worse than losing the financial investment. It’s much much worse than that. You know patients or residents can be affected and the reputational damage is enormous. So I think that you know that those companies that have the strongest governance, the strongest focus on quality, you know the best HIQA results, where there is tangible examples of the quality, they’re the ones that attract most interest and the bar is pretty high you know in terms of what most investors will look for. They’re absolutely key prerequisites strong management team know very clear evidence of good quality that can be independently verified and you know systems and processes that you know even though they may require further investment to be enhanced that they are sufficiently strong. The reputation of the organisation and you know that it’s clear that there is a strong reputation with residents or with patients or indeed with the pairs, be it the HSE or otherwise, you know it’s a small market, it is easy to diligence you know what’s good and what’s not and you know I think I think these are critical components and those companies that exude these sort of attributes will attract more certainly attract more interest.

Caroline: I know this is probably very different in each scenario but in your experience what typically happens after an healthcare organisation is purchased?

Diarmuid: Ok so usually the first change obviously is at governance level, at board level, in terms of you know knew participation and new shareholders obviously involved in terms of the governance piece. Usually what happens is that there is an agreed strategic or business plan that is already being pre-agreed between the management team or the incumbent shareholders that are already there and the new, so that there’s a clear direction of travel and so that strategic plan gets endorsed and then starts to get implemented. And you know if within that strategic plan there is an investment in new facilities or new services then that starts to come through but it you know I mean I think you know it starts with it starts with governance in terms of the change and a change of ownership or indeed bringing new investors in is disruptive there’s no doubt about that. It takes time for new thinking to bed down and usually there’s a six month process of you know integration of new ideas and new plans and new thinking before things start to move in the direction of travel that everybody wants. So I think you know that period of you know the getting to know you beforehand which may take 6 or 12 months or even longer and 6 to 12 months afterwards is quite disruptive so therefore you know I think anybody looking to invest in a company or indeed to take an investment needs to be cognizant of that that there is a there is a process that needs to be going in eyes wide open in that regard that there is changes but if they’ve attracted the right type of investors and the marriage is the right one that they’ll be changes for the positive.

Caroline: Just to flip that over I mean have you ever seen a scenario where you know there may have been negative effects and negative effects particularly on direct care? What would be if that were the scenario, what would be your advice you know kind of going forward to try and avoid those types of things?

Diarmuid: I think I haven’t seen too many instances of impacts on direct care at all but I have seen certainly where the setup was just not right, you know from the point of view of the type of investor that that has been brought on board, where the time horizon was not sufficiently long, where the investors required returns earlier than you know are naturally available within you know typical health care investments and you know requirement for dividends already etc affect the ability of that organisation to invest in in frontline care. So you know to avoid it I think or to ensure that everything is done to avoid it is obviously in the pre planning beforehand and picking those new investors very very carefully and spending as much diligence time on who those new investors are and what the real mandate is and what is behind it as they are on you and that’s very very important. It’s hard to unring the bell when new investors are brought on board. It’s difficult to unwind if it isn’t working out so the most important thing is to spend as long as possible ensuring that you know the focus on the right stuff is there and that new investor can actually deliver in terms of what is being required in terms of investment in quality and services.

Caroline: I suppose it’s hard to talk about healthcare without talking about regulation in Ireland, public sector healthcare is pretty heavy regulated in terms of HIQA standards and guidance and regulations. Does this impact the international investment market?

Diarmuid: It’s a huge positive, I mean it’s essential I would say in terms of from most investors looking at the market I think one of the key positives of the Irish market is a strong regulatory system and regulatory standards that are on a par if not better than many other international markets. So, we have a number of international clients that will only invest in subsectors of healthcare that are regulated and won’t invested those that are not regulated. So, in areas where we HIQA are already the regulator be it in nursing homes or in an intellectual disability or in fostering for example where there is already robust standards it’s a key positive. So investors are looking for highly regulated environments, where they know that the checks and balances are already there and that is evidential proof of it, that you can go to HIQA’s website, you can download reports, you can see the ratings of the company and also you can compare across other private providers or the public system and get some sense of how does the organisation compare to others. Is it a top tier, is it in the top quartile and where are the potential areas of deficiency? So, I think I think it’s a key positive and it it’s you know in many cases a prerequisite.

Caroline: Diarmuid overall would you think that you know international investment in Irish healthcare improves it? I mean you know you mentioned you know maybe you don’t have a view on the direct care side of things but certainly from a governance side of things from bringing new ideas, new processes, new systems, new technologies, do you think it’s good to have those kind of outside people come in and examine your business like that?

Diarmuid: I think very much so. I think in the vast majority of cases the experience has been a positive experience and I think with the right type of international investors on board I think we’re starting to see the evidence. I mean there’s been obviously international investors and healthcare for many years but it’s stepped up significantly in the last three years and I think as we start to look at just that experience over the last three years in terms of what is happened, you know we can see obviously through HIQA ratings  what the direction of travel is from a quality perspective. We can see you know new investment in services, new facilities been built, so there is certainly a step up in terms of addressing that infrastructure deficit and few examples so far of where it’s gone badly wrong but I think there are always examples of where it’s gone wrong in other markets so I think it’s important to continue to be vigilant to you know ensure that the right type of investors are being brought on board and that they recognise that healthcare and this isn’t exclusive to Ireland is a long-term game, you know there isn’t there isn’t a quick return, there is a need to invest in essential services to maintain standards and this need to invest to improve standards. And I think if those type of fundamentals are there then the experience will continue to be positive but I would certainly say over the last 36 months we would be very positive in terms of the experience that international investment has had on the market. I think the other thing that also is relevant where there’s you know the bringing in of new innovation and new technologies and new ways of thinking, it’s naturally going to assistant in developing the market here as well. So when we think for example about elderly care where there’s obviously numerous different areas or settings of care that have developed but continue to need to develop so we’ve got a very strong nursing home system, we’ve got a strong and growing home care system, we need more investment in stepdown facilities, we need more investment in rehabilitation, so there are settings of care in Ireland that don’t exist or are very very early in their evolution but are very well developed in other countries. And I think if investors are coming aboard that have that experience, that are prepared to be patient to create a new setting of care than that clearly has a very positive impact on the overall Irish healthcare market.

Caroline: Ok so it seems like it is something that could very possibly have a huge impact on the shape of our health system, you know as well as care delivery?

Diarmuid: I think so, I think so. I think those areas that we are deficient in, in terms of settings, ambulatory care is another example where you know in terms of the acute hospital system we have and we continue to have, a lot of care delivered in acute hospitals that can be done in lower acuity settings. So, these like standalone surgical centres or community based in large centres that can look after a lot of day-to-day illnesses, there’s clearly a double benefit there. I mean that is a setting that is more appropriate for the patient’s needs, where the patient does not have to go to a large acute hospital for a cataract or you know an excision of lesion or you know a routine surgical procedures that they can be undertaken in a community based setting and that’s obviously from a funding perspective, a cheaper setting to fund as well but also much more appropriate and it helps to alleviate some of the overcrowding in the acute hospital system. So yeah those forms of new settings are well developed elsewhere, I think Ireland needs them, I think it would be positive direction of travel and you know using that international experience of what has worked and what hasn’t worked and picking the best bits and applying them to the Irish market with appropriate investment will only be positive in terms of filling out those sort of deficits that don’t really exist in terms of the overall healthcare spectrum but need to exist.

Caroline: Yeah and a lot of what you’ve detailed there and discussed I mean that is part of the Sláintecare plan as well you know delivering care that you know the first point of contact and you know alleviating that need in acute care and bring it back into the community and providing more of those services closer to peoples’ home.

Diarmuid: Absolutely, absolutely, so I think I Sláintecare is a very positive development for Irish healthcare in terms of outlining direction of travel that just makes sense, that is consistent with international norms. It’s obviously a very slow moving machine because so much needs to be done in order to be able to bring it about. But it is you know it gives the sort of clarity I think that’s needed and it gives the stability that’s needed as well in terms of investors making long-term decisions if they know that look this is the cross party support in terms of where we need to go, we need to focus on you know community medicine, we need to focus on and moving away from all activity being undertaken in the acute system, we need to invest in local services. They’re all positive, very positive developments. So I think it needs to move faster, I think it’s difficult to move an entire health system quickly, you know many people would comment that it isn’t moving fast enough and we can’t see the results yet, I think there’s so much involved that it is going to take time and I don’t think we’re going to see a material change in terms of the hospital system anytime soon. Obviously one of the subsets of Sláintecare is removing private practice from public hospitals, I think that’s the right decision but it’s going to take a lot of time before that that actually can be brought about where the consultant contract status is sufficient in order to be able to bring it but there’s also an amount of private activity that is difficult to move and will naturally stay in the public hospital particularly if it enters through A&E departments or maternity or otherwise. But in overall terms I think it’s positive and there is a real need for investment in community services across all areas we haven’t talked about complex care or mental health services or otherwise but I mean I think there’s so many areas that require the development of services and investment is a critical component in that and when you look at what has been the issues from an Irish healthcare perspective over the last 10 years just lack of investment and lack of funding being available has been one of the key. It’s not that people have not recognised the need it’s not the demand isn’t there, there is relentless demand from patients for these sorts of services but the you know the funding has not been available on a sustainable basis in order to be able to bring it about and that’s essentially. We continue to be under funded and we need obviously the commitment from government to ensure that it is providing the capital to fund that but also we need to be able to attract international funding in order to bring about that change that needs to happen.

Caroline: It’s a very interesting area, it’s an area that’s you know there’s still a lot of growth available there, it certainly seems like an area that can assist Irish healthcare and grow it and develop it and bring new innovation to it. Just to wrap up Diarmuid, how do you see the future of international investment in health care? I suppose in Ireland but even if you have any insights in terms of what’s happening globally as well and what you see happening into the future?

Diarmuid: Sure so I think I think from a global perspective I think the social responsibility mandate that’s there means that there will be more and more capital available for health care in its widest possible definition and I think it will become more and more normal that health care is on is on the agenda. Investment in essential services will continue to become absolutely critical. I think investors recognise that there is key downside protections in that as well and that you know the healthcare sector is generally seen as a resilient sector to economic twists and turns. Not immune but certainly resilient. And as they’re seeking investment I think it it’s growing importance to have it in the portfolio. And I think we’re probably going to see and we’ve seen this already internationally I think it’s going to start to become more prevalent in Ireland is greater focus on complex care and areas of complexity that maybe have been relatively untouched by up to now so areas such as children services, areas such as complex care in the home, mental health services, you know I think as investors become more confident about investing in health care on the performance has been as good, I think they’ll start to move into more complex areas and areas of higher acuity and I think that’s something we’re going to see in Ireland as a result as well.

Caroline: Diarmuid thank you so much for providing that very interesting overview on international investment in Irish healthcare and thanks for joining us today.

Diarmuid: Thanks very much Caroline, thank you.