THE IMPACT OF GERMAN LEGISLATION ON M&A ACTIVITY IN THE PRIVATE-EQUITY

To some, the anecdote ‘German bureaucracy’ brings with it vivid connotations of red-tape, paper-pushing, and headaches. However, this anecdote is ringing true for certain Private Equity healthcare assets within Germany. German legislation is causing issues in the M&A space, both from an execution perspective, as well as from a hiring perspective.

For some time there has been concern in Germany that ambulatory care centres (Medizinisches Versorgungszentrenor MVZs) that find themselves under Private Equity ownership are prioritising profitability over efficiency and quality. An extensive study published byFinanzwendein May of 2023 on MVZs fundamentally questioned investorsGewinnorientierung(win mindset) and whether these were having negative effects on patients. The report concluded that private equity ownership can lead to excessive debts being piled onto practices, as well as a negative impact on the quality of medical treatment. Furthermore, it pointed to conflicts of interest in these ‘monopoly structures’, one particular concern of the study related to the buy-and-build model some private equity assets employ. It claimed that some dentists were reportedly asked to sell as many expensive additional services as possible, even when they were not necessary and that getting second opinions on operations was proving more difficult if the majority of MVZs in a certain area belonged to one investor.

It was beliefs such as these that caused the Health Minister, Prof. Dr. Karl Lauterbach, to publicly state to theBild am Sonntagthat he is “putting a stop to investors buying up doctors’ practices” promising to introduce a bill “to stop these locusts from entering medical practices.” Germany’s two-tier healthcare system – health insurance being mandatory and its funding being split between employee and employer – is worth several hundred billion euros annually. Ninety percent of Germans are covered by insurers who are not allowed to refuse anyone insurance; with the other ten opting for private insurance, more expensive but more cover. Which leads to one of the main issues explored in the study: that investor-owned practices are turning away less insured patients to focus on those who can make them more of a profit. However, doctors have widely hit back at such public denigration of their independence. Furthermore, a report by theFrankfurter Allgemeine,suitably titled ‘Even Doctors Want to go on Holiday,’stated that fewer and fewer doctors actually want to own their own practice – one possible law being considered is that MVZ owners have to be a doctor – leading to a troublesome dichotomy of the state wanting to support entrepreneurial doctors, and doctors not wanting to own their own practices.

On the back of this potential legislation aimed at loosening private equity's grip on German ambulatory healthcare centres, we have begun to see a few trends when helping clients building out M&A functions in this space:

1. Smaller candidate pools

One immediate ramification from a hiring perspective is that candidate pools have shrunk. Both from a candidate's perspective, those who haven’t had exposure to the legislative environment are hesitant to make the step across. As well as from a client's, candidates who aren’t familiar with legislation both current and possibly incoming, will take longer to onboard. It is becoming apparent that industry experience is proving increasingly necessary in navigating the complexities of regulatory environment.

2. Legislation casting deal-flow in doubt

Another recurring ramification is that top M&A talent can shy away from moving into certain areas of healthcare owing to the fact that there is no guarantee of a strong deal-flow, especially should more stringent measures come into law in future. As a result, candidates may gravitate towards industries facing less regulatory scrutiny, where deal-flow remains more predictable and stable. This reluctance to engage with certain healthcare M&A stems from the apprehension of investing time and effort into pipelines that could potentially face regulatory hurdles or stagnation. Consequently, the allure of verticals and sectors offering a more assured deal-flow becomes increasingly appealing to M&A professionals seeking a secure career path.

3. Heightened desire for more international platforms

Even if candidates aren’t shy of staying in or moving into certain areas of the healthcare industry, candidates have an increased appetite in joining companies that have broader geographies than just Germany. Organisations offering pan-European M&A opportunities are particularly attractive, as they provide a buffer against the impact of localised regulations. By diversifying their M&A activities across multiple regions, candidates seek to mitigate the risks associated with potential regulatory changes that could impede deal-making within a single jurisdiction.

With M&A already being a specialist skillset, and often a huge part of a company's journey and success, finding the right candidates is becoming more difficult as the struggle for top talent increases. With that being said, Altus Partners and the wider The LCap Group, remain prepared as ever to leverage our network, capabilities, and experience to support our clients and their portfolio companies in making sure that the right talent is found to ensure the longevity and success of these critical investments.

To discuss any of the topics in this article further then feel free to reach out to george.elborne@altus-partners.com