| Most Favored Sector by PE in 2012 |
| Source: Venture Intelligence |
Healthcare is one of the most underserved sector in India. Currently, only 0.9 bed per 1,000 population is available against the global average of five beds per thousand. This is such a huge gulf between the supply and demand that we need to spend close to $50 billion every year for the next 10 years to make up this healthcare infrastructure deficit.
Due to burgeoning fiscal deficit, the government is not in a position to earmark funds for healthcare and thus, majority of investments are happening in the private sector. Broader Indian healthcare sector, consisting of hospitals, clinics, diagnostics, pharma and medical devices, is growing at 16 per cent CAGR and poised to grow with a double digit rate in the next decade. A confluence of strong demographic and economic enablers is driving this fast-paced growth and would continue to do so in the coming time.
This booming healthcare industry is attracting wide interest from private equity (PE) players and they are pouring a lot of money into it. As per Venture Intelligence database, in the healthcare space 18 deals worth $581 million are already done in the first half of 2012 against 22 deals worth $207 million and even average ticket size has risen more than three times to $31 million in a year.
There is a widespread belief that the healthcare sector is recession proof and the last five years of slowdown in economy has brought investors including PE closer to the healthcare sector as it has a comparatively lesser business risk, and thus investors are using healthcare to diversify their portfolio. As per the survey conducted by Venture Intelligence of top PE fund managers, healthcare is the most favoured sector for investments by fair margin in 2012.
The frenetic PE/VC activity in healthcare space over the last couple of years reinforces the attractiveness of this sector for global and domestic investors, and slew of investments have been made by PE players across various levels of the healthcare delivery value chain.
PE investments in healthcare and life sciences industry this year is 31 per cent of total PE deal value across 16 investments, which is 16 per cent of PE investment volume across sectors. Lack of momentum in the stock market has turned promoters to the PE investments in fund their expansion plans. Three of the six big ticket investment (> $100 million) were made in hospitals and clinics segment, thus showing immense interest by PE. As per the survey conducted by Venture Intelligence of top PE fund managers, the healthcare sector is the most favoured for investments by fair margin in 2012.
Private equity investment process
PE funds are always on the lookout for companies which can give them high returns during investment horizon and spend considerable amount of time evaluating them. As shown, there are different stages involved in this evaluation process and less than five per cent of companies go to the level of non-binding offer (NBOs) and finally measly one per cent receives funding. Success of such investments depends upon the careful selection of firm which has a potential to grow fast, is scalable, and has a strong management team.
| MEGA HEALTHCARE PE Deals – 2012 | |||
| Company | Sector | Amount ( Mn USD) | PE Investors |
| CARE Hospitals | Multi-Specialty | 110 | Advent International |
| DM Healthcare | Multi-Specialty | 100 | Olympus Capital |
| Vasan Eye Care | Eye Care | 100 | Singapore GIC |
| Specialty Hospital | Super Specialty | 77 | Halcyon |
| Super Religare | Pathology | 66 | IFC, NYLIM |
Following are some the parameters used by PEs for selecting investee companies:
- Executable growth plan
- Healthy financial indicators
- Sustainable and scalable business model
- USP – Differentiated value proposition.
- Sizable market opportunity
- Management Team – A team that is prepared to learn and adapt as they progress
- Available exit options in future
PE’s expected return also depends partly on the sector in which the portfolio company operates. Investment in companies operating in high beta industries like IT/ITES, E-Commerce, annualised return may be in the range of 40–45 per cent but healthcare being a defensive sector, expectations are lower. The rate of return at the time of exit is also governed by many systemic and un-controllable factors like global financial crisis of 2008-09 which narrowed down the exit opportunities and returns of all firms.
Life span of a fund is around 10 years and in this time fund manager has to perform four tasks – finding target company, invest, hold, and exit in the same chronological order. So, on an average PEs remain invested for a period of five to six years that is the timeframe for them to make a transformational impact to the organisation to earn unusual returns.
Understanding the dynamics of PE funding in healthcare is of utmost importance before making a foray. Value creation takes longer in healthcare, but once created, it is sustainable. So, while PE firms in other sector can exist within four to five years, in healthcare, the PE firms need to wait for six to eight years to get the right value for money.
PE firms also need to conduct a proper legal, operational and commercial due diligence, which includes checking capabilities of the management team, financial performance over the years, taxation and auditing of the company before going ahead with the investment.
| PE investments made in hospitals in Tier-II and Tier-III cities | |||
| Company | Year | Amount ( in Mn USD) | PE Investors |
| Care Hospitals | 2012 | 110 | Advent Intl’ |
| Advent Intl’ | 2007 | 22.8 | Ashmore |
| Glocal Healthcare | 2011 | 3.36 | Sequoia Capital & Elevar Equity |
| Vatsalya Healthcare | 2011 | 10 | Aquarius Fund |
| Aquarius Fund | 2010 | 4.5 | SeedFund, Oasis fund |
| SeedFund, Oasis fund | 2005 | 3.0 | Aavishakaar India, SeedFund |
| BSR Hospitals | 2010 | 10 | Aureos Capital |
| Jeevanthi Healthcare | 2011 | 2 | Seed Fund |
PE investment themes in healthcare delivery
Tertiary care hospital chains
| PE Investment in Healthcare |
Big hospitals chains like Apollo, Max, Manipal have received funding for PE at some stage. In September 2007, Apax Partners invested $104 million in Apollo Hospitals for a stake of 11 per cent. Similarly, Manipal and Max Healthcare had been recipient of PE funding from IDFC and Warburg Pincus respectively. Lately, interest of PE in large stand-alone tertiary care format has waned to some extent due to fundamental constraints like big ticket size investment requirement, long gestation period to get unusual returns and saturation of demand in upscale urban consumer segment which are being catered by these chains.
Affordable healthcare
| Tertiary care hospital chains | |||
| Company | Year | Amount (in Mn USD) | PE Investors |
| Global Hospitals | 2007 | 116 | Samsara Capital |
| Apollo Hospitals | 2007 | 104 | Apax Partners |
| Narayana Hrudayalaya | 2008 | 108 | JP Morgan |
| Max Healthacre | 2009 | 115 | Goldman Sachs |
| Seven Hills Hospital | 2009 | 72 | JP Morgan |
| Vikram Hospitals | 2008 | 24 | I-Ven Medicare |
| Manipal Hospitals | 2006 | 20 | IDFC PE |
| Sterling Hospitals | 2006 | 16 | Actis |
| Rockland Hospitals | 2008 | 12 | IFC |
In the last decade, most corporate healthcare models were developed with metro markets in mind and most of the capacity addition has happened at high-end price points. Thus, there is a severe dearth of quality healthcare infrastructure in Tier-II and Tier-III cities and companies like Care Hospitals and Vatsalya Healthcare are tapping on this business opportunity by coming up with innovative models to bring down the cost structure. This sector has caught the attention of PE investors and has seen slew of investments – Advent International has invested in Care Hospitals while Vatsalya Healthcare has till now raised a total of $17.5 million in PE capital since inception. These low capital intensive model suits the requirements of financial investors with respect to gestation period and risk-return profile.
Day Care
De-centralised healthcare delivery models are the flavour of the season among PE investors and day care is one such de-centralised model which has seen lot of PE/VC activity in recent times. Day care delivery model has lower initial investment requirements, shorter payback periods, and a wider geographic reach, all of which minimises the inherent business risk. As per estimates, 70 per cent of the surgeries can be performed in a day care format; wherein the patient is not required to stay in a hospital overnight. Day care format has been hugely successful in the US and other developed markets and the same format is being tried to be replicated in India by players like Nova Medical Centre. Nova, itself being a brain child of GTI LLC, a New York-based PE fund, opened its first centre at Koramangala, Bangalore in May 2009, and is seen as a leader in the day-care format. One year later, another PE firm, NEA also invested $16 million in Nova Medical Centre. Beams Hospital having day care centres dedicated for Minimally Access Surgery (MAS) in Mumbai and Bangalore, have received funding from Ambit Pragma Ventures.
Single Specialty
| Companies looking at option of PE for Capital Raising |
| Private Equity Investment |
There are a number of healthcare players which are single-specialty focused, and such models focusing on specialties like eye-care, oncology, dental, kidney care, women care etc are PE -friendly models as they do not require high capex like that of tertiary care hospitals, break even within 24 months and exit is possible in a much shorter time frame. The exit period for PE funds is the main differentiator for single specialty chains like Cloudnine, Nrivate Eephrolife, Vasan eyecare. Scalability is another factor which makes this single specialty attractive to PE.
Advantages of PE for healthcare players
PE provides much needed capital required for testing innovative but risky healthcare business models. PE has given a new avenue to entrepreneurs to try and come up with the new models which can meet healthcare requirements of masses and also support their entrepreneurial ambitious aspirations. Apart from providing much needed equity funds, the role of PE investors now includes helping companies to become more professional, inculcating higher corporate governance standards, helping in installation of more resilient systems and processes to enhance operational performance, assisting in raising new rounds of capital and providing access to their own business networks. PE investors also at times play a role in helping companies bring in senior management personnel at key operational level to manage growth. This comprehensive approach is often called as PE plus approach. Hospitals also get benefit from the global linkages of the PE funds, sourcing of good clinical talent from abroad and maintaining the financial discipline, especially in the initial phases of when cash flow is a constraint.
Investment in a hospital by PE investor is in a sense an acknowledgement of the company’s strong value proposition and confidence reposed on the entrepreneur’s ability. A hospital funded by a PE investor can get comparatively easy terms from banks for debt and even get second round of equity funding very easily.
The relationship between entrepreneur and private equity investor is successful only if there is a cultural synergy between two and it is often observed that investee companies resist the suggestion made by PE firms. This is more often when there is no distinction between management and promoters of a hospital.
| PE investments made in the single specialty space in last few years | ||||
| Company | Year | Segment | Amount ( in Mn USD) | PE Investors |
| Vasan Eye Care | 2012 | Eye Care | 100 | Singapore GIC |
| HCG | 2006 | Oncology | 10.8 | IDFC |
| 2008 | 20 | Premji Invest | ||
| 2009 | 6.85 | Milestone | ||
| 2009 | 6 | Evolvence | ||
| Nephrolife | Nephrolife | Kidney Care | 25 | Da Vita, NEA |
| Nephroplus | 2009 | Kidney care | NA | Bessemer |
| EyeQ Hospital | 2009 | Eye Care | NA | Helion, Nexus, song |
| Centre for Sight | 2010 | Eye Care | 10 | Matrix Partners |
| Alliance Medicorp | JV between Apollo and GSK Velu ( founder & MD of Trivitron) | |||
| Medfort Hospitals | NA | Diabetes, eye care | 13.3 | ePlanet, TVS Shriram |
| Cloud Nine | 2011 | Woman Care | 9 | Matrix Partners |
Type of EXIT for PE Funds:
- Secondary Sale ( to financial Investor)
- Open Market
- IPO
- M&A (Sale to Strategic Investor)
- Buy back
Open market
The most common type of exit in India is the open market sale. Open market exits accounted for nearly 38 per cent of total PE exit volume over the period January 2005-September 2011. This can be attributed to the fact that once a company is listed on a stock exchange, it is fairly easy for a PE investor to sell off in one shot or dribble its stake, depending on the liquidity in the company’s stock.
IPO
It is a traditionally preferred route of exit by a PE fund as it gives the maximum valuation to the PE’s stake in a hospital but on the flip side successful IPO is heavily dependent upon the favourable market conditions. Further, an IPO involves considerable transaction costs and can go from 6 to 7 per cent for a small IPO (<Rs 100 crore). It also involves careful planning and the process may take a few months to a year and drastic changes in market may warrant abandonment or with-holding of listing process. Additionally, PE investors rarely get complete exit from company in an IPO as public investors perceive this as lack of confidence by current investors in company and put downward pressure on the valuation. The other than two healthcare chains, Apollo and Fortis, there are few other single facility healthcare players like Kovai Medical Centre, Regency Hospital which are listed. But going forward, there may be listing of few other bigger names in healthcare.
Secondary sale
Under secondary sale, PE investors may sell their stake to some other PE investors. PE firms investment horizon is five to six years and to stick to this timeline, one investor may sell its stake to other PE player, who is ready to take exposure in a healthcare asset. These PE to PE deals are largely driven by the need to exit investments and not valuation. In addition to buying existing stake, new PE player may also infuse fresh funds into the company. In this year itself, the broader healthcare sector has seen at least three such deals of exit through secondary sale –
- IDFC has acquired I-Ven Medicare’s stake in Pune-based Sahyadri Hospital
- Goldman has acquired 6.7 per cent stake of Max India from Warburg Pincus
- TA associates have bought 15 per cent stake of Dr Lal Pathlabs from Sequoia Capital
| Comparison table between healthcare investment themes | ||
| Feature | Day Care/ Single Specialty /Affordable | Stand-alone Tertiary care |
| Scalability of Model | Highly scalable | Scalable |
| Geographical Diversification | Yes | No |
| Capital Requirement | Low to Medium | High |
| ROCE | Medium | Low to Medium |
| Payback | Medium( 4 – 5 yrs) | Long ( upward 8 yrs) |
| Risk of business failure | Medium | Low |
| Predictability of cash flows | Medium | High |
| IRR | High | Medium |
| Ideal PE Partner | Growth Fund | Infrastructure Fund |
Strategic sale/ merger
Merger of a firm also with other comparable or leading player in the industry provide gateway for possible exit to PE firms. Unlike financial investors like PE firms, these strategic investors have an appetite for longer period stay in ventures, and thus they don’t mind paying premium in valuations as they know that extra price paid can be recovered by un-locking of merger synergies over a period of time. Further, this type of sale provides a payment in cash and clean and complete exit for PE players. However, company promoters or management may resist takeover by competitors as it may dilute their independence in company matters. In the healthcare sector, big brands have been acquisitive, thus stake sale to strategic investors is going to be the main exit route for PE players.
Buyback
PE investors could agree to exit by selling their stake to the management or promoters at mutually agreed price. This buy back is to be made pro-rata to all the stake holders which some time acts as a deterrent for complete exit to PE investors. This mode of exit is not very conventional and least preferred by PE players as it does not offer attractive valuation, and is executed if they feel that enterprise has not gained significantly in value and there is no prospect of an alternative exit but the company has generated sufficient profit to fund the buy-back. Promoters cite the rationale for buyback as a way of maintaining control over the enterprise and uncertainty in the IPO market. Obliviously, PE investors use this as a last resort as they do not get them very good valuation for their stake.
Max India (parent company of Max Healthcare) brought back 16.7 per cent stake from Warburg Pincus for Rs 140 crore in 2011. Warburg Pincus had invested Rs 140 crore For 23 per cent stake in 2004.
Spectra Management Consultancy (SMCPL) is a business consulting and internal audit firm specialising in providing solutions in risk management, compliance and governance. It operates through its office at Pune and serve a client base across the globe with state-of-the-art office infrastructure and work environment.
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(The authors can be reached at ketul.patel@smcpl.co.in and vivek.yadav@smcpl.co.in)