Private equity house Palamon Capital and fund G Square have bought a stake in Grupo SAR, the third biggest Spanish care home chain. This is one of the largest recent private equity investments in the sector to date.

Palamon also owns PS Holdings, a German company which specialises in procuring goods at low prices for German hospitals. The company is a growth capital investor in service-based midmarket companies across Western Europe.

It refused to reveal the price it paid, or the size of its stake, but said that SAR sales will come to around €150m in 2009, and that the company, including debt and equity, had an enterprise value in excess of €200m, 6,350 employees and just over 5,000 beds.

Palamon principal Jaime-Henrique Hugas denied that the sale was distressed: "This is one of the few care home groups in Spain which makes a profit, and it has a strong management team under president Higinio Raventos.

"Management simply wanted to replace a shareholder they had bought out 18 months ago, and sought a strong financial partner to capitalise on the market opportunity."

Hugas said that the Spanish care home market is still deeply fragmented; he puts the total market at €3.5bn, with the top ten together holding just 20% of the market with sales of around €700m.

The largest player is Ballesol, followed by Sanitas, owned by insurer BUPA with SAR in third place. Other big players include Mapfre, Amma, Clece and Sanyres. Hugas says that the top ten are owned by banks, insurers or families.

The degree of fragmentation is shown by the fact that Ballesol has just 6,500 beds, compared to 20,000 apiece for French market leaders Korian and Orpea, and 37,500 for UK leader Southern Cross.

Hugas added: "You find mom’n’pop outfits caring for the elderly from a couple of flats. The property boom has meant that many property developers, banks and insurers have entered the market in the last few years.

"Typically, they will have bartered a deal with a local authority, whereby they build a small care home in exchange for planning gain elsewhere."

Today he says that many of these developers can no longer afford to pay the mortgage or sometimes complete the building of a care home. He also says that many of the large groups are not well run, are loss-making and are run by financial groups with a limited understanding of the care sector.

He says that SAR's president, Higinio Raventos, who entered the market with SAR in the early 1990s, is one of the few really intelligent operators: "Early on, he set up a sort of think tank or industry association, called Edad y Vida (Age and Life). This has worked hard to ensure that the private operators can work in genuine partnership with the public sector, and that all parties have a shared roadmap as to where the industry is heading.

"Today the public sector accepts that it cannot solve the demographic timebomb without private sector involvement." Some 55% of SAR beds are dedicated to the public sector.

SAR has focused on highly profitable niche markets needing higher levels of care, with a third of beds dedicated to patients with high dependency needs, such as Alzheimers.

It is also focused on end-of-life care, where it takes patients out of expensive acute hospital beds and cares for them in its specialist homes.

Hugas says SAR has new care homes in the pipeline, with openings across Spain in the next 18 months. Subsequently, it will be looking at acquisitions, an area where it can afford to be picky.