PRIVATE EQUITY: Holding For Health

By M H Ahssan

They used to think health invariably led to wealth, but private equity (PE) funds that bet big on the enormous potential of the Indian hospital and healthcare sector are now eager to build safety nets around their investments.

“Investing (in healthcare) in India is not easy,” says Alistair Starnack, head-global healthcare, Parthenon Group, a PE consultancy firm. “The low penetration of insurance, along with the high presence of local players, prolongs return prospects. The ticket size is too small, while the gestation period could be anywhere between 7 and 10 years. The biggest issue is affordable delivery of services, given the high internal rate of return (IRR) of 25 per cent expected by investors of PE funds.”

The change in strategy was bound to happen. The majority of PE investments in the healthcare sector are in the unlisted territory, but those in the listed spectrum — Apax Partners in the Apollo Group of Hospitals ($100 million), Trinity Capital in Fortis ($35 million), and Warburg Pincus and IFC in Max Healthcare ($45 million) — have had their market cap decline by 5-25 per cent during May 2008-May 2009, virtually closing all escape routes.

The new preferred model, a holding company structure with multiple hospitals under it, will have exit options like a direct initial public offering (IPO) or sale, secondary stake sale, or listing of individual companies. It is suitable even if the gestation period is over seven years as the ticket size is not limited by confident investors or limited partners. The ticket size for a hospital in smaller cities is Rs 50-100 crore, and a clutch of 15-20 such hospitals can bring in value once they achieve a certain scale. “It is a quick realisation of ground realities,” says V. Krishnakumar, executive director-life sciences, Avendus Capital.

A holding company, which brings in efficiencies in cost, management and performance, and provides a single-window exit, is presently winning the favour of PE funds. It will eventually recast the role of the PE player from that of a mere investor to an owner-manager.

Holding A New Structure
Though funds such as Apax Partners are yet to create a headline company, most of the big players — Sabre Capital with Spring Healthcare, ICICI Venture with Iven Medi-Care, IVFA and Dr Moopen’s Group with DM Healthcare, Warburg Pincus, George Soros’ Quantum Fund, IFC, Actis, AIG — have either set up their holding companies or are actively considering it to play a long innings in this sector.

For instance, having made a total of nine investments, ICICI Venture has set up a holding company, Iven Medicare, to manage hospital investments such as Sahyadri Hospital in Pune ($36 million), Vikram Hospital in Mysore ($24 million), Medica Synergie ($16.25 million) and RG Stone ($10.25 million) in Mumbai.

Others such as Future Capital Holdings, PE investor in Hyderabad-based Global Hospitals, Sequoia in Vasan Eyecare, Actis in Gujarat-based Sterling Hospitals, Apax’s investment in Apollo and AIG’s in Narayana Hrudayalaya are also keen on the holding company model.

Investments under this model are trickling faster into tier-I and tier-II cities where hospital chains and groups are emerging. Recent examples include the Trichy-based KMC Group, which got capital from India Venture Advisors, the PE holding firm owned by Mumbai-based Piramal Group; Vaatsalya Hospitals, a Karnataka-based hospital chain that got funding from the Oasis Fund of Luxembourg; and DM Healthcare’s investment in the Kolhapur-based Aadhar Group. “We will invest in geographical hubs and spoke hospital chains with proven models, green-field projects and national chains,” says a ICICI Venture official who didn’t want to be named.

Spring Healthcare, the fountainhead of Sabre Capital, invested in Oyster & Pearl Hospitals in Pune after the PE fund team persuaded Dr Avinash Phadnis, chairman and CEO of the chain, about the advantages. “They supported us in sourcing doctors,” says Phadnis, who feels that management expertise, global linkage and financial discipline is imperative in scaling-up operations.

The benefits of this model go beyond higher IRR. “A single holding company can achieve economies of scale with respect to procurement, higher ‘top management bandwidth utilisation’, and better financial structuring,” say Shiraz and Gawir of investment consulting firm O3 Capital.

The ability to leverage a brand and attract skilled medical staff makes this model a safer bet. However, the problem of lower average utilisation may persist as different hospitals will be at different stages of evolution, and constant efforts have to be put in to sustain similar quality of service across units.

Doctor-Preneurs
Having set up a structure to hold their investments, PE players are now encouraging ‘doctor entrepreneurs’ with ‘smart’ capital — mostly three-five year old brownfield ventures providing secondary and tertiary care in prime locations across India. “A greenfield project may take more time, though the gestation period can be shortened by the brand equity — especially of a famous doctor,” says Krishnakumar.

Iven Medicare, which acts as an advisor on local acquisitions, says more than 15 hospital entrepreneurs want to be part of it without losing operating control of their businesses.

“Doctors with good management skills can get a higher valuation and 30-40 per cent stake, but will be advised on day-to-day operations by a team of specialists on technology, management, finance, networking and supply-chain management,” says Krishnakumar.

“I have over two decades of experience in hospital management, but the PE firm’s management expertise, drawn from its previous investments, has added tremendous value,” says Dr Jitendra Das Maganti, who is setting up a 1,500-bed hospital in Mumbai. He feels JP Morgan’s involvement in the early stages of his Rs 750-crore venture has encouraged his chain to explore more opportunities in tertiary care.

The economics for PE investments in the healthcare sector continue to be highly favourable (see ‘right and Bright’). The sector is projected to grow at 16 per cent from $21 billion in 2006 to $52 billion by 2012. “The demand for healthcare delivery infrastructure is at an inflection due to change in demographics, increasing affluence, and change in disease profile,” says Rajiv Maliwal, founder and CEO of Sabre Capital.

Experts say, after a $55 million investment by PE funds into healthcare so far this year, more may follow once a better set-up is in place. All may be well and wealthy, after all.