Last year, India’s economic turmoil, did not bode well for private equity (PE) investments flowing into various Indian industrial sectors. The depreciating value of rupee, coupled with the dipped growth rate, led to increased uncertainty and negative sentiments about India among global investors. According to an analysis report published by Venture Intelligence, a research service focused on private company financials, transactions and valuations, in 2013 PE investment numbers, were down by 18.5 per cent compared to the $9.2 billion (across 484 deals) invested in 2012. However, the healthcare and pharma sectors were still attractive to investors. “PE funding is giving Indian healthcare the much-needed boost and would help increase the beds-to-people ratio, making healthcare more affordable and accessible. It not only brings in money, but also offers high-quality corporate governance and strategic guidance to a company for further gro0wth,” says Dr E Saneesh, Research Analyst, Business & Financial Services – Healthcare, Frost & Sullivan.
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“We should watch out for some interesting PE exits. There have been big ticket investments made by PE players like GIC, Advent, TA Associates, Warburg, Olympus Capital etc and their eventual exits will make for some exciting deal activity in the coming few years.” Examining the PE activities in healthcare and monitoring investors’ approach, Ashish Bansal, Director, Transaction Services, Healthcare Practice, KPMG opines, “We are seeing a set of very discerning PE players in the sector, who are not passive in their approach and actually spend a lot of time in operations, execute new initiatives and bring in new ideas from their healthcare investments outside India. Most of these funds have industry experts in-house or on their panel and they get them fully involved in their portfolio companies. An area I think PEs add immense value is in evaluating growth opportunities for their healthcare investee companies – greenfield or brownfield, and not just from a financial viability perspective but also from a long term strategy point of view. Plus PEs do inculcate financial discipline, cost efficiency (not reduction) measures and ROI driven decision making. So it’s not just access to financial capital which is in store for healthcare players if they partner with the right PE fund – it’s a win-win for the healthcare industry”.
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“Post general elections, a decisive mandate will lift the veil of uncertainty and encourage investments from both domestic and international investors, who have been conspicious by their absence.”Adding to this, Chandra Sekhar, Executive Director (Marketing), Global Hospitals, elaborates, “PE funding is changing the way private healthcare is growing in the country. Both large chains and standalone entities have benefitted from PE funding and this has fuelled expansion and growth. The growth is also now moving into tier II locations. Rural models essentially focussed on primary and secondary care, standalone dialysis centres, day care and urban primary care, speciality care such as cosmetic, eye, dental or single super speciality such as kidney, heart etc., are also benefiting from this access to PE funding besides large format tertiary care hospitals. However, intrinsically healthcare, especially tertiary care, is a long gestation, capital intensive and manpower intensive industry and the gains are good in the long term, though windfalls may not be expected in terms of returns. Returns are steady and peak in five to seven year timeframe, and in some cases, longer periods. This uniqueness of the industry’s long gestation vs the finite life of PE funds as well as their expectations of high returns in the short term is an area which is evolving. Both sides are trying to find a meaningful way of addressing these contradictions and coming up with a mutually acceptable and beneficial formula.”
Recap 2013
In the year 2013, while the other sectors were trying to revive PE investments, the healthcare sector in India proved to be a defensive bet for PE investors. Investments in healthcare bucked up PE funding activity in the last financial year despite the overall slowdown in deal making within the country. Growth opportunities for the sector were due to the increasing demand for quality healthcare at affordable rates as well as growing number of tertiary care hospitals and single speciality care centres in metros, tier II and tier III cities. Moreover, the healthcare is a priority service industry which is rarely affected by economy downturn and investors can easily capitalise on the money invested.
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“The $70 billion Indian healthcare industry is at an inflection point. It is posting double digit growth and offers attractive investment opportunities as well as a decent exit to PE investors without any regulatory bottlenecks.” As reported by research analysts, total foreign investments within the Indian healthcare sector have tripled in the past three years. In 2013 too, Indian healthcare remained an attractive investment destination for global PE and VC investors, with 73 deals totalling about $1.2 billion, up from just over $300 million in 2011, according to data from VCCEdge. This amounts to 10 per cent of all PE/VC money that flowed into India in 2013. According to Bansal, “As with the last five years, PE interest in the healthcare segment continued to be strong in 2013. Except in 2009, the healthcare sector has seen PE investments of more than $300 million annually over the last five years, touching a high of more than $800 million in 2012. In 2013, PE investments crossed $700 million and were across different verticals – tertiary care hospitals, medical devices, diagnostics and single speciality chains. “I believe the $70 billion Indian healthcare industry is at an inflection point. This consumer-centric sector is posting double digit growth and offers attractive investment opportunities as well as a decent exit to PE investors without any regulatory bottlenecks. Investors, especially from the US, remain bullish, with prominent hospital chains and super-speciality centres getting significant funding. Healthcare infrastructure is still thinly spread across India, with a very low per capita spend and just about 10 beds for 10,000 people. It thus offers immense scope for future growth and is not prone to a slow-down,” adds Suresh Soni, Chairman and CEO, Nova Medical Centers.
Additionally, a large number of smaller sized deals happened in 2013, especially in alternative formats like primary care, dental care and mother and child among others. Sectors like single speciality care centres, diagnostics and mid-sized hospital chains saw most of the action.
Pharma and lifesciences, on the other hand, again saw a different trend with lower number of transactions but of higher value, partly due to the $200 million investment by KKR in drug maker Gland Pharma.
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“Though there was no great increase in the overall PE exit climate for 2013 in India, the PE backed exits increased in healthcare sector. The increase in exits implies that the investor was able to realise the value created over the period of their ownership.” While most of the analysts and industry experts felt that the healthcare sector was a promising bet for investors in 2013, Dr Saneesh is of a different opinion. He feels that in 2013 fund flows decreased as investors lost their appetite for risk. He says, “The year 2013 was not a great year for PE investments and VC funding in the Indian healthcare sector. The sector witnessed a decline in both deal volume and deal value compared to 2012. There was a 46 per cent increase in deal volume between 2011 and 2012; however there was a nine per cent decrease in deal volume between 2012 and 2013. Moreover, the sector witnessed a sharp decrease in deal value to almost 50 per cent between 2012 and 2013. An analysis reveals that most of the deals happened in Q1 and the least number of deals happened in Q4, however in terms of deal value, the deals in Q4 had higher average deal value.” He further states that the average deal value of top ten deals in 2013 was $33.0 million which is significantly low compared to the average value of 2012 which was $75.9 million.
Well as the industry battle with difference in opinion, there were some interesting deals that pumped in considerable amount of funds into the healthcare and pharma sectors.
Deal making in 2013
The sector saw a fair amount of investments in unique healthcare service models last year. The year also saw traction in the medical device and pharma segments. In both these segments the underlying fundamentals remain strong in spite of the regulatory tug-of-war faced by the sectors.
Some significant PE deals this year were KKR’s investment in Gland Pharma; Carlyle buying out Avenue Capital while also putting some fresh money in Global Health, which runs Medanta; Bain Capital buying Blackstone’s stake in Emcure Pharma and IFC investing in Fortis Healthcare.
| Major deals above $15 million | ||
| Investee company | Investor name | Amount $ million |
| Global Health Private Limited (Medanta) | Carlyle | 156 |
| Medica Synergie | Quadria Capital, DEG, Swedfund | 65 |
| Fortis Healthcare | IFC | 100 |
| Stanchart PE | 50 (est) | |
| HCG | Temasek holdings | 26 |
| Rainbow Hospitals | CDC Group, Abraaj Capital | 17.5 |
| Vikram hospital | Multiples Asset Management | 30 |
| Source: PwC report | ||
PE exits in 2013
2013 also saw some good PE exits that boosted the investors’ confidence. “Though there was no great increase in the overall PE exit climate for 2013 in India, the PE backed exits increased in healthcare sector. The increase in exits implies that the investor was able to realise the value created over the period of their ownership. This will attract the investors to invest in healthcare sector,” explains Dr Saneesh speaking about the PE exits scenario for last year. He goes on to say, “The sector witnessed an increase in exits during 2013 as compared to 2012. In 2012, there were only three exits but 2013 witnessed around nine exits, of which two transactions are yet to be closed. The two transactions include IPO filing of draft prospectus by Emcure Pharmaceuticals and Intas Pharmaceuticals. Emcure Pharmaceuticals planned to raise $98.8 million in the IPO when it filed the draft prospectus in June 2013. In December 2013, The Blackstone Group, PE investor in Emcure sold its stake to Bain Capital, LLC for $112.63 million.”
Some of the other major PE exits in 2013 were Apax Partners exiting Apollo with 3x returns after an investment period of six years for ~ $360 million, Avenue Capital which exited its stake in Medanta after a period of seven years for ~ $155 million with more than 4x returns. ICICI Venture exited its stakes in Quadria Capital for ~$26 million and Vikram hospitals for ~$15 million.
| The top deals of 2013 | ||
| Target | Deal Value ($ Million) | Investor |
| Fortis Healthcare Limited (BSE:532843) | 55.0 | International Finance Corporation |
| Symbiotec Pharmalab Limited | 47.85 | Actis Capital, LLP |
| Dr. LalPathLabs Pvt. Ltd. | 44.0 | TA Associates Management, L.P.; KPCB China; WestBridge Capital |
| Global Hospitals Private Ltd. | 41.4 | International Finance Corporation; Sabre Partners |
| HealthCare Global Enterprises Limited | 25.73 | Temasek Holdings (Private) Limited |
| Trivitron Healthcare Private Limited | 24.57 | India Value Fund Advisors Private Ltd |
| Lotus Surgicals Private Limited | 24.0 | Samara Capital |
| BPL Medical Technologies Private Limited | 20.1 | Goldman Sachs (Asia) L.L.C. |
| Rainbow Hospitals Limited | 17.52 | CDC Group plc; Abraaj Capita |
| Source: Frost & Sullivan | ||
What’s in store for 2014?
Healthcare seems to be a safe bet for investors as the sector offers reasonable valuations. PE funds will surely continue to flow in, especially in unique healthcare models. Experts sharing their forecast for 2014 are of the opinion that the areas of healthcare which will attract PE funding in 2014 could be mid-sized hospitals aspiring to expand, diagnostic centres, hospitals in the single speciality segment that focus on the ophthalmology, orthopaedic as well as the mother and child space, pharmacy chains and day care clinical services (eye care and dental).
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“The average deal size in the sector is expected to increase going forward as funds with larger ticket size are looking at the healthcare space. Going forward we may see buyouts of companies in the healthcare space by large funds.”Giving an update on the deals and deal values, Rana Mehta, Executive Director- Leader Healthcare, PwC, opines, “The average deal size in the sector is expected to increase going forward as funds with larger ticket size are looking at the healthcare space. Companies which have been funded five or six years ago will see exits happening and also other companies which have been funded in the last two or three years could go in for an additional round of funding. Going forward we may see buyouts of companies in the healthcare space by large funds.” Bansal chips in saying, “We expect the momentum in historical growth rates to sustain in 2014. Consensus growth rates amongst various research reports peg growth at 12- 15 per cent CAGR, which should play out in 2014. From a value perspective, high ticket investments (upwards of $50 million) will continue to be in tertiary care hospitals and diagnostics and to some extent in eyecare chains, as these are scaled up and mature models and can absorb a higher investment. But single speciality chains (like dialysis, diabetes clinics, orthopaedics, paediatrics, eyecare, etc) and medical device players (with manufacturing capabilities and IP) should see higher volume of investments albeit at a lower ticket size. In addition to this, we should watch out for some interesting PE exits – the timing is always uncertain, but there have been big ticket investments made by PE players like GIC, Advent, TA Associates, Warburg, Olympus capital and many more and their eventual exits will make for some exciting deal activity in the coming few years.”
Going forward
Well, the forecast for 2014 looks quite promising, but it’s important to note that the Indian economy is yet to revive from the economic slowdown. Currently, India’s economy condition depends a lot on the political stability within the country. However, India’s political arena at present seems to be in an upheaval. With the Lok Sabha elections on the anvil, India’s political and economic position is set for a big change. So, will the forthcoming elections make or break PE inflow into healthcare? Will investors still play their safe bet on healthcare? Or will they wait and watch?
Answering some of these questions, Dr Saneesh replies, “The elections expected in April 2014 will definitively impact the PE investors, as it has created a sense of uncertainty. The uncertainty is primarily because of the new regulatory reforms expected to be introduced by the new government. Healthcare being a sector prone to regulations, the investor confidence is not very easy to boost up. Moreover, if the election results are not very favourable for a stable government, more policies to cut the prices of drugs and healthcare services can be expected, resulting in a slowdown in healthcare sector”.
Analysing this scenario, Sekhar answers, “2014 would be a two-track or a two-half story, with the first half in a pre-election environment witnessing optimism on the back of a much-awaited wave of economic reforms implemented in the latter half of 2013 with foreign direct investment (FDI) in multi-brand retail, civil aviation, broadcasting, insurance and pension sectors. The fate of the second half would be determined by the outcome of the general election, undoubtedly the single most defining event of 2014. A decisive mandate will lift the veil of uncertainty and encourage investments from both domestic and international investors, who have been conspicious by their absence. The euphoria among market participants would precede the real action on ground, driven largely by the expectations from a new government to kick start stalled projects, de-bottleneck investments and let go of a policy paralysis, setting the stage for putting India on a multi-year growth trajectory. Instead, if we were to be confronted with a fractured electoral mandate, the overriding positive sentiment prevailing currently would turn bearish, in a short to medium term, thereby temporarily impacting the overall growth prospects.”
While Dr Saneesh and Sekhar are of the opinion that the coming elections will certainly have some impact on the PE scenario in healthcare. Bansal and Soni have a different view. Bansal feels that the investors may not get affected by the political scenario in the country. He feels, “The demand for healthcare is somewhat inelastic and with the current dearth of supply, we should continue to see an interest in the sector. It’s one of the few sectors which doesn’t have a FDI limit, there are tax exemptions available for new hospitals in certain classes of towns and service tax is exempt on healthcare services – so those are positives from the government side. Any new measures to augment growth and investment in the sector post elections will always be welcome.” Soni adds, “I think the Indian healthcare sector has got delinked from the vagaries of the country’s political system as it offers a tremendous value proposition to investors in terms of growth prospects, easy exit and afavourable investment climate. If a stable government following pro-market policies is formed after the Lok Sabha elections, it will improve the overall sentiment about the Indian economy and the PE funding inflow may actually increase. An improving economy will increase the risk appetite of investors.”
Finally, India’s political fate is yet to be decided. Till then, we can only hope that investors continue to bet on India’s healthcare sector bringing in the much needed funds to grow.
