08 Jun 16 Deluge of investment in healthcare?

Private equity investment in healthcare will continue to see high growth due to strong industry drivers and a track record of successful exits. This is likely to drive up valuations.

Over the last few years, the healthcare sector has seen an increase in investments from private equity firms. From around $500 million in 2011, investments touched a record high of close to $1600 million in 2015. The average size of deals has also gone up over the years. In 2015, six investments of more than $100 million were made. Hospitals and clinics attracted over half of this, followed by pharmaceuticals and diagnostics.

Virtually all PE funds have identified healthcare as a key target sector in their portfolio. Interestingly, domestic funds have accounted for the majority of the investment in healthcare so far.  Key Indian PE investors include GTI, ICICI Venture, GIC Special Investments, Kotak PE, IDFC, Milestone Religare, India Value Fund, Kalpathi Investments, etc.

Global funds investing in healthcare in India include New Enterprise Associates, Bain Capital, KKR, Carlyle Growth Fund, Sequoia Capital, Warburg Pincus, TPG capital, Helion, Capital International, Temasek, GIC Special Investments, Asian Healthcare Fund and Matrix Partners among others.

Why healthcare?

It is not difficult to understand why healthcare has attracted so much interest.  While the Indian pharma industry has established itself locally as well as internationally over the past few decades, the delivery of healthcare services has been inadequate, unorganised and fragmented.

There is a huge under-met demand in healthcare services in terms of the number of beds and diagnostic services available to patients. The private sector provides far better services than the government, and is likely to remain the key driver of growth going forward. In the last fifteen years, the number of hospital beds in the private sector has more than quadrupled. The sector is not only successfully addressing the needs of the top-end of the market with state-of-the-art facilities, but it is also targeting the mass low-cost market. Going forward, penetration into tier II and tier III towns offers a huge potential for growth.

Healthcare is a safe investment as it is recession-proof. With rising incomes/consumption and increasing penetration of medical insurance, the market will most certainly keep growing in the foreseeable future.  Further the regulatory environment is relatively non-restrictive and easy to work in.

Successful exits

In addition to favourable macro factors, the big boost for PE investment is the track record of successful exits in the recent past.

During 2012 – 2014 most of the exits were through secondary sales. Some of the notable ones included

• Apax Partners’ exit from Apollo Hospitals for $360 million, three times its initial investment in 2007;
• Avenue Capital’s exit from Medanta for $155 million, more than four times its initial investment in 2006;
• Actis and Sequoia Capital’s exit from Paras Pharmaceuticals with a return of 3.2x and 6.8x, respectively;
• ePlanet Ventures and Headland Capital sold Trivitron;
• and ICICI Venture exited from Arch Pharmalabs and Sahyadri Hospitals.

In 2015 the two large secondary exits included ChrysCapital’s exit from Makind Pharma at 13.3x and Everstone’s exit from Global Hospitals earning $80 million.

In recent months, four successful IPOs awarded exit opportunities to their respective PE investors. All the issues were oversubscribed and in three out of four cases, the share prices have gone up significantly in a very short time.

Ultimately, a successful exit is what all PE funds look for. The returns earned by PE investors so far are bound to attract further investment in the sector, particularly as the industry drivers are strong. We are also likely to see many more healthcare IPOs as the stock market has started becoming buoyant.

Whether there will be enough good quality targets to support the expected deluge of investment, or if it will lead to overvaluation in the sector, remains to be seen.