One made his fortune in the beef industry. The other in telecoms. And, as their wealth amassed, two of Ireland’s richest men both moved into private healthcare.

Larry Goodman was initially an investor in the Blackrock Clinic. However, after an epic legal battle in a shareholder tussle, he emerged as the full owner of the south Dublin hospital.

Denis O’Brien, meanwhile, took control of the Beacon Hospital in Sandyford in 2014 after acquiring about €100 million owed to Ulster Bank.

So, what was the investment rationale for two wealthy tycoons to invest in private healthcare?

Both hospitals have filed their accounts for 2021 in recent days. They shine a light on the performance of the hospitals, while commentary provided by the directors also reveals a number of looming issues in the private healthcare industry.

In addition to looking at just last year, I have also collated the numbers for the preceding three years. There is an important caveat, however: Covid.

In 2020, the state effectively took control of the private sector for three months to secure additional healthcare capacity. During that period, the hospitals were run on a not-for-profit basis: costs were covered, but no one profited. So, that year, there was a drop in profitability.

Let’s start with turnover.

As the chart shows, the Beacon is in high-growth mode. Both hospitals had roughly the same revenues in 2018. But the Beacon has pulled ahead on this metric. Last year, the Beacon had revenues of €188.4 million, while Blackrock had revenues of €158.4 million.

However, there is a different story on the pre-tax figure. As I said, 2020 was impacted by Covid so both hospitals are down on their 2019 performance. However, over the period, Blackrock has been much more profitable.

There are a host of potential reasons for this. Beacon is in high-growth mode – it is also investing in its capital programme, an outlay of €95 million over the past five years. The contribution in 2021 was €15 million. Blackrock said that “capital expenditure for the year amounted to €5.8 million with a further €5.4 million in capital expenditure being committed at the year-end”.

There is another caveat to the Beacon’s number for 2021. The group benefitted from a deferred tax asset of €8.2 million during the year as a result of historic losses. So, its actual after-tax profit was €12.4 million for the year. Interestingly, it has a further €65.9 million in unused tax assets going forward as a result of losses.

And you can see those losses clearly on the balance sheet.

By the end of 2021, the Blackrock Clinic was sitting on retained profits of €90.5 million. The Beacon Hospital, meanwhile, had retained losses of €102.5 million.

Despite the built-up losses, it still had positive equity at the end of the year of €33.3 million. it had been supported over the years by its shareholder O’Brien and it has plenty of assets.

However, it is also carrying a lot of debt.

As you can see, Blackrock is virtually debt-free. Goodman cut it a cheque for €38.6 million on December 18, 2020. The money was used to pay the group’s bank debt in its entirety. By fully eradicating its €34.4 million bank borrowings, the injection by Goodman reduced the hospital’s interest repayments by around €650,000 a year. Coupled with a revaluation of assets, it helped bolster the equity position that year, something Ian wrote about at the time.

The Beacon has long-term debt – due between in the next two to five years – of €171.7 million. The debt level has increased over the four-year window under review.

During 2021, the composition of its debt changed. It drew down an additional €36.8 million from its banking facility at a rate of 2.75 per cent. This was used to repay its parent companies: Beacon Medical Holdings and another entity called Sayum Holdings. That left them due €95.4 million, debt that is interest-free.

I have written before about the debt level at Beacon. It is high by industry standards, but the group has decided to go for growth mode, and its shareholder is clearly supportive. For example, it is planning a 70-bed expansion.

So, what is the outlook?

In a note in its accounts, the directors of the Blackrock Clinic point to medical inflation and the legacy of Covid.

“Although the hospital continues to increase activity, the cost of providing healthcare remains a concern as medical inflation is not being matched by price increases received from health insurers. Medical inflation, driven by the adoption of new technologies and techniques, together with the use of more expensive consumables and drugs, poses a significant challenge for healthcare providers. In addition to medical inflation, the Covid-19 pandemic has also significantly increased the cost of providing healthcare, which is likely to remain a challenge for the foreseeable future,” the company said.

Private healthcare tends to draw wealthy investors looking to balance their portfolio: American hospital groups, global private equity funds, billionaires, and private investors all have skin in the game here.

I have written about it before and it is an area we will be coming back to shortly.