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PE firms pour money into India healthcare

Mumbai, Dec 27, 2012, Reuters:

Private equity funds quadrupled their investment in India's primary healthcare, betting the sick and ailing will stop seeing family doctors in often cramped and dingy quarters and check into modern chains sprouting up across Asia's No 3 economy.

Goldman Sachs Group Inc, Warburg Pincus LLC, Sequoia Capital and the Government of Singapore Investment Corp are among investors that pumped $520 million into India's basic healthcare industry this year, compared with $137 million in 2011, according to Thomson Reuters data. Some analysts predict investment will surpass $1 billion in 2013.

Organised healthcare providers including Apollo Hospitals Enterprise Ltd and Fortis Healthcare Ltd are betting that growing numbers of patients will be willing to pay two or three times more for better-equipped clinics - all under a model that can be replicated fast and offers investors the potential for quick returns.

The opportunity is vast: India's unorganised primary healthcare system is worth $30 billion and is growing at least 25 percent a year. The challenge will be convincing the sick to give up their trusted family doctors.

The country's primary healthcare sector will draw at least $1 billion annually in private equity investment over the next couple of years, said Shantanu Deb Mookerjea, executive director at Mumbai-based advisory firm LSI Financial Services.

"Single-speciality chains and diagnostic laboratories will be the game changer," he said, adding that they are easy to set up and expand to suit demand.

Also, unlike many restrictive Indian industries, from insurance to real estate and telecoms, there are no limits on foreign ownership in healthcare.

Think like restaurants

Healthcare, like restaurant chains, is a play on rising spending power in India, although valuations tend to be lower than the retail sector. Investors pay single-digit multiples on price-to-earnings in primary healthcare, compared with 15 to 18 for food and other consumer chains.

Valuations could improve if private healthcare operators also adopted a restaurant franchise model. Under such a model, a healthcare operator would allow a franchisee to use its brand and provide expertise and support in exchange for a fee. The franchisor would avoid forking out money to set up new clinics - investments that will be borne by the franchisee.

As a result, healthcare has been a rare bright spot for private equity in India, where overall investment fell 17 per cent this year to about to $3.3 billion.

"From small hospital chains and specialised treatment facilities, we are witnessing increased institutionalised activity, which could attract a lot of institutional investment interest," said Vishakha Mulye, CEO of ICICI Venture, the private equity arm of ICICI Bank Ltd.

Last year, Mulye's fund sold its stake in diagnostic chain Metropolis Healthcare to Warburg Pincus for Rs 3.92 billion, a 10-fold return on its 350-million-rupee investment in 2006.

Convincing patients

The biggest challenge will be convincing patients such as Chandrashekhar Khandke, a 30-year-old software professional at IBM in Pune, who said he has visited modern clinics a few times but still prefers his family doctor. Overcoming the draw of a trusted doctor may prove harder than it seems, even in a country where healthcare infrastructure is poor, electronic medical records are rare, and the quality of doctors and other medical professionals is patchy. While fees at modern clinics range from 150 to 600 rupees for treatment of routine illness, sole general practitioners charge patients anything between 50 and 300 rupees per visit.


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