It’s impossible to avoid painful puns when talking about the animal health sector so let’s get one out of the way immediately.
August Equity has an amazing pedigree in investing in animal health. Successfully-exited investments have included Independent Vetcare (IVC), the veterinary clinic consolidator that was founded by August in 2011 and was sold first to Summit Partners, and Scandinavian behemoth EQT, who have themselves recently sold a minority interest to Nestle (in the US, Mars are a major veterinary clinics operator as well as owning pet food, diagnostics and dog genomics businesses). Then there’s VetPartners, which we exited to BC Partners in 2019 in a £700m EV transaction, and Origin, a consolidation in the food-production sector that was sold in 2018.
We still hold two assets. The first is Pet Cremation Services (PCS), the UK’s largest pet cremation and clinical waste disposal operator. The latest investment was Hallmarq, a global provider of advanced veterinary imaging solutions, in December 2018.
One of the major roles of lower mid-market private equity firms like August is to identify sectors that are facing pressures (regulatory, financial, demographic) to consolidate and to create, buy and build strategies that grow companies large enough to be attractive to trade, larger PE or for IPO in certain circumstances.
Recognising market trends
Early on at August, we recognised two fundamental shifts in the small animal veterinary sector – namely the humanisation of pets and the decline in appetite for younger vets to want to buy out retiring older vets. By humanisation of pets, we mean the propensity of people to treat their pets emotionally like members of the family, rather than working animals. This means that they look on their pets as individual personalities that deserve to live long, healthy and happy lives. In conjunction with rapid advances in preventative healthcare, diagnostics and treatment, the veterinary services sector has benefited from above inflation growth for a number of years and has also been recession resilient.
The nature of the UK veterinary sector – populated by small businesses facing increasing regulatory requirements around employment, health and safety, and environmental legislation – meant that veterinary surgeon owners wistfully thought of the days when they could just spend their time doing what they loved: caring for animals.
Consolidation enabled these vendors the option to realise value for the businesses that they’d created and to get back to the operating table, rather than spending days at the computer table doing admin. The professionalisation of clinics allows for better working environments with less working hours, and more chance of managed career development for younger vets. In creating IVC and the VetPartners, August recognised both the initial opportunity to consolidate the market and then the continued depth of opportunity to give our own investors strong financial returns.
Identifying potential for growth
This continued humanisation of pets has fed the other strategy used by PE firms in our market segment, which is to identify companies that are family or founder owned and need help to grow (financially or strategically), which also have strong organic growth potential. Both PCS and Hallmarq fit into this category.
Pet owners want their pets to be given the respect and love at the end of their lives that they received during their lives and PCS’s cremation service allows that. Owners also want their pets to receive exactly the standard of clinical diagnostic intervention that they too receive in hospital. Hallmarq’s MRI machines enable vets to get high quality images reliably and quickly, giving veterinary surgeons all the information that they need to make often vital treatment decisions.
Why the humanisation of pets will not go away
We are increasingly recognising the health benefits that pets bring their human carers and this will further drive pet ownership across the world and subsequent need for services and products. At August, we are on the look-out for the next opportunities in this sector, both in the UK and Europe, so that we can play a part in helping animals while, at the same time, making great returns for our investors.
