Going to the vet: what happens when private equity invests in a cottage industry

On August 22, 2019, an Irish farmer sought urgent treatment for a calf with a broken leg. He hauled it to Donegal Animal Hospital, which served thousands of animal owners around the town of Letterkenny. 

But treatment was not forthcoming there. The practice had been abruptly shut down that day by its owners, private equity-backed UK veterinary care company IVC Evidensia. According to three witnesses and documents from the practice, although some vets were still present, the man was told to seek help elsewhere — which the farmer eventually did.

“The cow was in serious pain,” says Robert Gilchrist, a farmer who was trying to collect medicine at the time and who says he was shocked at the delay in providing pain relief. “The man that owned the calf said ‘What kind of business are you running?’ The vets there . . . told them to go away.”

IVC says the animal was seen that day by a different practice, while another surgery had immediately taken over farm animal cases and medical records. It says the matter was handled properly and the closure of the practice “had no impact on the treatment of the animal”.

Yet the abrupt closure of the practice, after 22 years of providing veterinary care in the area, created political waves. The Donegal business was one of more than 300 taken over by IVC that financial year as part of a wider consolidation of independent surgeries around Europe, driven by its owners, Swedish private equity group EQT. 

IVC’s acquisition spree is a test case of what happens when the private equity model is applied to the modern version of a cottage industry — historically, vets have tended to be small, locally-owned businesses.

The company believes its greater scale can bring better management to the booming vetcare sector and introduce new technology and training that will help with both administration and animal care. Its supporters say that in an industry traditionally dominated by men, it offers a career path more suited to younger women juggling families with careers.

“Our decentralised model promotes innovation and clinical independence for our vets, balanced with integrated support functions such as procurement, veterinary advisers and clinical boards,” says IVC.

But the episode in Donegal has helped galvanise some opposition to IVC. Some critics say that, in an industry that straddles business and public service, the private equity approach tips the scales too far towards profits. 

The political backlash has been particularly strong in Ireland. Irish lawmaker Jackie Cahill has brought forward a private members’ bill aiming to bar corporates from running veterinary practices — something that was only permitted four years ago. 

He says the closure of the practice left some farmers without access to 24-hour service. “The corporate structure . . . has failed in the UK,” where it is more common, having begun more than two decades ago, Cahill says. “What happened in Donegal, we don’t want to see that happening again.”

Vets, like doctors, often step in to treat emergencies even in tough circumstances, and UK and Irish professional bodies say animal welfare should be their priority. 

Other animal owners were affected by the Donegal closure, which IVC says was for regulatory and staffing reasons. “Farmers were left without access to veterinary services and it even caused difficulties for neighbouring practices who simply weren’t in a position to take over the workload,” says Finbarr Murphy, chief executive of industry group Veterinary Ireland. 

Buying up clinics

The rise of IVC illustrates the rapid transformation that private equity can bring when it sweeps through an industry. 

The company has been on a debt-fuelled expansion in recent years. Since EQT bought IVC in 2016 and merged it with Swedish group Evidensia in 2017, it has been on a clinic-buying spree, snapping up independent practices and small chains and rolling them into what is now Europe’s largest vetcare provider with 1,500 sites.

“It’s a giant acquisition machine,” says a former employee. “IVC was just minting millionaires across the UK.” A vet who sold his practice to the group says he “almost fell off his chair” on hearing how much it was offering. The vet, who requested anonymity, says IVC mistook his shock for hesitation — and increased its offer. 

To the outside world, the transformation of hundreds of vet practices has been largely invisible. Some of its surgeries emphasise their longstanding local connections and family-run approach and IVC avoids rebranding them when it takes over. “People like to take their dog to the local vets and not feel like it’s a corporate machine,” one adviser close to the company said. 

The IVC deal stands to be lucrative for its owners. It had been preparing to float in London this year until a last-minute change of course. Instead, in a February deal, Nestlé and California-based private equity group Silver Lake agreed to lead a €3.5bn investment at a valuation of €12.3bn. At the same time, the original EQT fund that bought the company sold most of its stake and a newer EQT fund bought in.

The valuation is four times higher than just two years ago, and more than 32 times IVC’s earnings in the year to March — far higher than the levels at which buyout groups typically buy businesses, with the 2020 average in Europe being 12.6 times earnings according to a Bain & Co report. It is a “stratospheric valuation compared with those typically seen in leveraged finance”, according to a report published in April by data provider 9Fin.

Such a valuation stands to make a big contribution to the pool of so-called “carried interest” bonus payments available to EQT executives, under standard private equity pay structures.

On buying a practice, IVC centralises procurement and finance, and appoints business support managers to oversee practices. IVC sets financial targets for practices that several vets described as challenging. It recommends drug prices centrally, but says local practice management ultimately decides what to charge. However, the effort to meet targets can lead to steep price increases.

One vet in southern England says the price of Metacam, a widely dispensed anti-inflammatory painkiller, rose at their practice by 28 per cent to £82.79 for a 100ml bottle after IVC took over. The price of ProZinc, an insulin for diabetic cats, rose 39 per cent to £99.34, the vet says, and Fortekor, a heart medication, rose more than 78 per cent to £76.85.

“We probably were undercharging before, but it’s difficult when the client comes in and this has gone up by 30 per cent, that by 40 per cent,” says the vet, who asked not to be named. IVC says drug price increases recommended by head office have been more modest, with Metacam rising by 5.6 per cent on average, ProZinc 6.8 per cent and Fortekor 9.9 per cent between October 2019 and December 2020. 

The surgeries run by IVC have also stripped back an informal practice of discounting fees for struggling patients, says another former practice owner, who sold to IVC.

“Vets are terrible. We all discount our fees massively to clients to help them, we do payment plans and all that sort of thing. [Corporates are] very much less flexible,” the vet says. IVC says it has a £1m hardship fund for clients in need, while clinical directors have discretion on pricing for “hardship cases”.

While IVC says it has less than 20 per cent market share across the UK, it has established a considerable presence in some areas. As of 2020, the latest figures available, there were 29 local areas of the UK — defined using administrative boundaries which in most cases correspond to local government districts — that had five or more vet practices of which IVC operated at least half, according to research by Aldwych Partners, an advisory firm, out of 400 areas in total.

That included 17 of the 32 vet practices in Birmingham, five of seven in Torfaen, south Wales, and four of five in Lancashire’s Ribble Valley, according to Aldwych. The figures cover a different metric than that typically used by competition authorities, which tend to study the distance travelled by customers, since pet owners may travel outside those boundaries to seek treatment. The company says those local areas in isolation don’t indicate competition concerns and that there is sufficient choice and competition.

If several local practices raise prices under a recommendation from IVC, customers may not realise the hikes are connected, says Andrew Taylor, co-founder of the consultancy.

“I bet there are a load of people out there who have no idea that [many of] the practices in their local area are owned by the same company,” says Taylor, a former senior director at the UK Competition Commission, the precursor to the Competition and Markets Authority. “At some point [the industry] is likely to be a candidate for the CMA to investigate.” 

The figures, which exclude equine and farm animal practices, were derived from a practice-finder tool on the company’s website in February 2020.

One Northern Irish customer says she took her two-year-old cat to the vet without realising the practice had been taken over. “They were bought by IVC in recent years — but continue to operate under their original name, so I had no idea really,” she says. “What struck me most of all was the turnover in vets and nurses, a new one each day, and each day I had to brief them on my cat’s needs.”

IVC says it uses practices’ websites, adverts, posters and stationery to inform customers it owns a practice. While it provides continuity of care for appointments booked in advance, clients needing emergency treatment see a vet on a duty rota.

IVC adds: “As Europe’s largest veterinary care provider, we provide the highest quality care to our patients, and operate in a very competitive market which has six large national groups and thousands of independents.”

Vetcare boom

EQT — the owner of IVC — is one of several large businesses to have rushed into vetcare in recent years. Rival vet groups include Aim-listed CVS; Vets4Pets, owned by retailer Pets at Home; private equity-backed Medivet; private equity-owned VetPartners; and Linnaeus, owned by US confectionery giant Mars. In 2019, the Royal College of Veterinary Surgeons said more than four in 10 UK vets worked either for a corporate or a joint venture with a corporate. 

Investors are drawn to the idea that owners are spending ever-larger sums on their animals, from higher quality food and treats, to fashion accessories like quilted dog coats, to more complex surgical procedures when pets or other animals are ill.

Spending on UK veterinary services hit £4.5bn in 2019, a 57 per cent rise since 2015, according to the Office for National Statistics, and is expected to rise after Covid-19 lockdowns boosted pet ownership. 

IVC is among those to have benefited. Its like-for-like sales, excluding the impact of acquisitions, grew 8 per cent in both 2019 and 2020, due to rising demand, its “pricing initiatives” and more complex treatments, a Moody’s report published in April said.

EQT forecasts rapid growth at the company, with earnings before interest, tax, depreciation and amortisation predicted to rise from £248m in the year to September 2020 to £400m the following year and about £500m in 2022, according to people familiar with the company. Its owners expect about two-thirds of its revenue growth to come from buying more practices, with the rest from a growing market, the people say.

While some vets criticise the sort of rapid acquisition that IVC and others have conducted, others point to gains, saying the trend has benefited a younger, female-dominated generation of vets. 

“The old-fashioned way of running a practice, [vets] were mainly men and the practices were mainly small, you worked all the hours God sends and there was no work-life balance and then you got your partnership,” says one vet. 

Several vets contacted by the FT praised IVC’s graduate scheme, which includes two years of professional development and clinical coaching. James Harris, who worked for IVC for two years after it bought the White Cross chain of practices where he was a director, says he supports the IVC model. 

“I don’t think there is anyone better in the industry at acquiring veterinary practices. There has to be a change in the way we provide veterinary services to make businesses successful in the medium to long term. The current business model is not sustainable. IVC is ahead of the curve on that.”

Arbitraging acquisitions

IVC’s race for growth is the latest large example of a model used widely by the private equity industry. Known as a “roll-up”, it involves buying large numbers of smaller or independent businesses using debt, and merging them into a large group that can cut costs with economies of scale. Rival buyout groups have snapped up dental surgeries and petrol stations in a similar way.

The model rests, in part, on a piece of financial engineering known as “multiple arbitrage”, in which buyout groups calculate that the price they pay for a small business, per dollar of its earnings, is lower than the price they can later receive for it as part of a bigger group. 

In the process, the companies typically amass large debts. IVC’s junk-rated net debts and leases total £2bn, or 6.2 times the £322m it earned before interest, tax, depreciation and amortisation in the year to March, according to figures that the company shared with lenders.

The European Central Bank has recommended six times earnings as an upper limit, only to be exceeded in exceptional cases, though the regulation applies to banks and not buyout groups, and many private equity groups use higher levels of leverage than this.

The rating agency Fitch has categorised IVC’s debts as “highly speculative”, meaning that while the company can currently repay them, there is a “material” risk of future default and its ability to repay is “vulnerable to deterioration in the business and economic environment”. 

IVC says its debts are prudent and are expected to fall further as the company grows, and that it is able to invest in the business as it sees fit.

Lenders providing that financing will be reassured that its €12.3bn valuation far outstrips its debt load, says Steven Hunter, chief executive of 9Fin. “Quite a lot has to go wrong before the debt starts to get impaired,” he says.

However, the debt raises the pressure for the business to perform, leaving less room for manoeuvre if revenues fall. “You don’t need to have high levels of debt to consolidate a fragmented industry,” says Peter Morris, associate scholar at Oxford university’s Saïd Business School.

Over the past two years, the company has brought in Kate Swann as chair and Stephen Clarke as chief executive — both former bosses of stationery chain WHSmith. IVC’s owners hope to encourage customers to use a subscription service for vaccinations and routine treatments, creating what the private equity industry refers to as a recurring revenue stream.

It also wants to grow its online operations, to which the involvement of Silver Lake, which focuses on technology-centred deals, is crucial. IVC will expand virtual consultations and its online pharmacy, people familiar with the matter say. 

Some of the business of treating sick and injured animals is less amenable to organic growth, however. “A lot of our work is emergency driven,” says one former IVC vet. “On the non-routine side of vetting, there is very little you can do to drum up work . . . you can’t rustle up a road traffic accident.”