New tricks
Why private equity is drawn to pet health’s investment pedigree
Following the pandemic-era boom in pet ownership, private equity investment in pet health businesses has surged. Longer lifespans, improvements in diagnostic capabilities, and owners’ keen interest in the health and wellness of their animal companions are just some of the secular tailwinds that have sharpened private equity interest in this niche vertical of healthcare. More recently, the emergence of trends such as pet humanisation – where owners treat their animals as family members – and premiumisation have added to the growth prospects for the sector.
Recent deal activity illustrates investor interest. EQT’s investment in Dechra Pharmaceuticals was one of European private equity’s most notable – and expensive – healthcare buyouts of 2023, valuing the company at £4.5bn. It followed the GP’s previous investments in veterinary service provider IVC Evidensia, and insurer ManyPets.
Other notable deals include Inflexion’s investment in Ireland-based Village Vets, Eurazeo’s investment in French veterinary group Sevetys, CVC’s acquisition of Medivet, Exponent’s investment in Chanelle Pharma, and Motion Equity Partners’ buyout of French pet pharma developer Axience.
All of these underscore the evolution of a distinct trend: pet ownership – and associated spending – is rising, creating an attractive long-term prospect for private equity firms, according to Tom Gladstone, a partner at professional services firm OC&C Strategy Consultants.
“The structural market tailwinds in pet ownership provide long-term growth and proven resilience through economic cycles,” he tells Real Deals. “Further, many segments in this market such as ‘pet-tech’, supplements and vet chains are at an early stage of consolidation in European countries such as Germany, France, Spain and Italy. The sector also presents opportunities to stretch into adjacent areas, driving diverse pricing and potential yield. Therefore, we see high levels of growth headroom for PE owners to tap into, supported by the sustained excitement about the pet sector from strategy firms and large-cap PE houses who can provide an exit route for scaled businesses.”
According to James Gunton, a partner at Exponent, the overall animal health market benefits from both stable and a growing end-market demand.
“There has been significant private equity investment in businesses that provide services to the pharmaceutical industry over the years," says Gunton. "In addition to the underlying end-market growth, this sector has benefited from a long-term trend of large pharmaceuticals outsourcing elements of their workflow as they focus on their core competencies. In addition to this, the pharma industry is heavily regulated, which provides a strong barrier to entry and, as a result, healthy margins. The market is at an earlier stage in its evolution which, we believe, makes it an attractive time to be investing.”
This sector has benefited from a long-term trend of large pharmaceuticals outsourcing elements of their workflow
According to data by Statista, an estimated 91 million European households owned at least one pet in 2022, up by approximately 20 million during the last decade alone, representing a massive opportunity for investment as well as consolidation.
New avenues have also opened up within the sector during that period. According to a recent report by investment bank Capstone Partners, pet humanisation trends have increased demand for accessories and health supplements, encouraging new sector players and drawing buyer interest. Sector participants have experienced heightened revenue visibility and, as a result, are drawing attention from potential acquirers as pet owner demand for quality products proves to be inelastic.
In Gladstone’s view, Europe will continue to see rising levels of spending per pet on health
“A major driving force is increased curative spend, where we see a greater offering of more expensive treatments coupled with the willingness of pet owners to pay outright or through premium insurance coverage. Opportunities are present here for pet businesses through either consolidation or growth of vet chains, especially in countries at an early stage of consolidation,” he says.
“Secondly, there is increasing demand and spend on preventative treatments. Vets are delivering preventative treatments and services through pet plans, and new product categories such as supplements are keeping pets healthier for longer. Opportunities also arise for disruptive ‘pet tech’ propositions, which can help serve pet health needs more efficiently through tracking and monitoring, creating new positions with increased needs in the market,” Gladstone adds.
For Exponent, which invested in Chanelle Pharma four months ago, the business’ track record of year-on-year growth since inception, longstanding customer relationships, and notable recent customer wins formed the rationale for its investment in the Irish company. The PE firm sees “tremendous” opportunity in the company’s development pipeline and will continue to invest in research and development.
Gunton says that Chanelle Pharma is in a “slightly different” place to branded pharma as it focuses solely on generic pharmaceuticals rather than novel products.
“We believe this is an area which, over time, will see strong growth driven by the increasing adoption of generic products post patent expiry – a trend that we’ve been observing over the last few years. The key challenge for Chanelle, therefore, is to invest in its R&D programme to be early to market with generic alternatives once the products move off patent,” he says, highlighting how investment firms like Exponent are capitalising on trends against the wider positive backdrop of animal health pharmaceuticals.
During the past two years, private equity firms have gravitated towards more defensive sectors and sub-sectors in response to tougher macro and dealmaking conditions. It helps explain why firms are setting their sights on scooping up businesses in the pet care sector given that trends in the vertical extend across categories beyond just pet food, and into areas such as pet consumables, durables, and services, all of which are comparatively resilient across the economic cycle.
The rapid growth in the sector has, however, attracted the attention of some regulators and other stakeholders.
In March this year, the UK’s Competition and Markets Authority (CMA) launched an investigation into the country’s veterinary market, citing concerns that pet owners may be overpaying for medicines and prescriptions.
According to the CMA’s chief executive Sarah Cardell, pet owners are finding it difficult to access basic information like price lists and prescription costs. The regulator says it is also concerned about weak competition in some areas, driven in part by sector consolidation.
While the probe is not directly aimed at private equity groups, any regulatory follow-up may have implications. Following the conclusion of the four-week consultation, the CMA said it would “consider the responses received and a decision will be made on how to proceed.”
Another challenge concerning those eyeing investments in this space is the number of vets. According to OC&C’s Gladstone, a combination of the Covid-era uptick in the pet population, increasing labour costs and the time required to train new vets has triggered a shortage of practitioners in some European countries, contributing to increases in costs and pricing.
Nevertheless, PE investors remain upbeat.
“Whilst the animal health market size is much smaller than human health, we believe there are significant growth opportunities, both organically and through M&A, for the second tier of animal health pharma companies to grow and compete against the current market leaders,” Exponent’s Gunton says.
Yes, I expect it to increase
No, I expect my allocation to remain the same
Yes, I expect it to decrease
