'Focused funding has increased the attractiveness of the health-care sector'

Amit Mookim, Partner and Head of Healthcare, KPMG in India tells Sarika Malhotra that there have been big ticket investments in health care by PE players like GIC, Advent, TA Associates, Warburg and Olympus Capital. Their eventual exits will make for some exciting deal activity in the coming few years, he says.

Q. What are the reasons for the growing private equity (PE) interest in health care?
A. The recession proof nature of the health-care industry undoubtedly puts it in a more favourable position as far as investments are concerned. Further the emergence of new health-care delivery models have strengthened health care proposition in the country. The year 2013 witnessed 72 PE deals worth $1.16 billion. 2012 saw PE investment of $1.07 billion spread across 65 deals. Another positive development is the launch of various health-care dedicated funds in the country. Focused funding in the sector has increased the attractiveness of the sector and created an entrepreneurial environment. Risk capital funds, including Anand Burman's Asian Healthcare Fund and Singapore and New Delhi-based Quadria Capital, are raising more money to invest in health-care companies as demand for quality medical care increases across the country.

Health care has a huge addressable market. As a country, our healthcare sector has witnessed a rather steep growth trajectory only in the last decade with the advent of the private sector. While tertiary health-care set-ups are largely capital intensive, the foray of newer, light asset models has infused new blood in the sector. The influence of technology, too, has been an important growth driver, with health-care models based on IT intervention now becoming a reality (telemedicine, telediagnostics etc); the accessibility of health care today is more than it ever was. Consequently increasing the opportunity. Emergence of new delivery models which are scalable, less capital intensive and that promise better EBITDA (earnings before interest, taxes, depreciation, and amortization) returns is one of the major reasons the healthcare sector has lured increasing PE interest. Diagnostic chains, single specialty clinics, wellness centres, refined primary care set-ups etc are all emerging models of health care.

Q. Within health care which segments are drawing more traction? Which is the fastest growing segment in health care from an investor's perspective?
A. PE funds are being increasingly directed towards frontline providers and health-care delivery services. While the deals in the sector are high valued and hence noteworthy, there have also been a number of investments in emerging models of health care. These models which include single speciality clinics, newer primary health-care set-ups, diagnostic labs etc score in terms of lucrativeness as they involve low investments, higher stakes and lesser realisation periods which translate to relatively high value multiples. Consequently, 2013 also witnessed a large number of angel and VC investments in the healthcare domain.
Diagnostic chains, specialised clinical chains, medical devices, affordable health care and personal care products are the main segments in health care which are favoured by the investors. PE investors are also interested in other segments like health-care supplies, outsourced hospital management, health-care BPOs (focusing on the US market), electronic medical records (EMR) and hospital-insurance link platforms.

Q. Going ahead how do you see the healthcare investment space unfolding in India?
A. India's health-care sector, which stood at $45 billion in 2008, grew at a CAGR (compound annual growth rate ) of 15 per cent to reach $78.6 billion in 2012 and is poised to grow to $158.2 billion by 2017. The market is highly fragmented with the unorganised component accounting for some 90% of the private market. Moreover, 93 per cent of hospitals in tertiary /quaternary care are operated by private sector players and it is likely that growth in the hospital sector is expected to come mainly from private sector.

Health-care expenditure is expected to increase in the next few years, driven by a changing demographic profile, increase in consumer awareness and rise in chronic and lifestyle-related diseases. The country has been witnessing a rise in the per capita income, which is likely to pull the demand for health-care services. According to estimates, the per capita income of India is expected to grow from an estimated $78.20 in 2013 to $137.0 in 2017. The increase in the literacy rates too has led to increased health awareness among the population creating the demand for healthcare. On the specialization side, the number of people over 60 years is expected to reach 300 million by 2030, necessitating a rise in the health-care services and focus on geriatric care and other focused services

Q. Given the muted exit scenario in the last couple of years and IPOs not happening, how is the health-care exit market looking like?

A. On account of virtual shut down of the primary capital market and sharply depreciating Indian currency, PE exits in the year 2013 got tougher for country as a whole. However, the health-care sector saw an increase in the PE backed exits in the same year, indicative of the realisation of the value created by investors. The number of exits in the sector increased from 3 in 2012 to 9 in 2013. Creation of exits and improvement of operational performance of existing portfolio is now being recognised as the top priority of PE investors. The sector maintains a positive outlook in terms of exits. We believe that the sector will witness 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.

Q. What is the average size of investment by funds in healthcare?
A. In terms of average size of investments the increase from 2011 to 2012 was a record high with the average ticket size increasing from $9.41 million in the first half of 2011 to $31million in the first half of 2012. However the growth steadied in 2013 as the average ticket size centered in the range of $21 to $23 million.
 
Q. Are more funds opting for majority stake holdings? Given that health care is a very niche segments. Are the fund's representatives also working closely on day to day operations of these funds?

Opting for majority stake holdings has so far not been the trend in the Indian health-care sector. Very few deals of such a nature we recorded, including the investment of Peepul Capital in maternity clinic Rhea healthcare (50 per cent stake). Also the decision of minor/major stake is largely dependent on the philosophy of the fund and its operating model. Working closely on day to day operations may not be possible for fund representatives. Regardless of the niche proposition that the sector carries, funds typically do not have the bandwidth to participate in day to day operations, hence the extensive due diligence that comes with the investment deal. With increasing incidences of frauds, there has been ramping up of vigilance. However this has happened in the form of more robust reporting mechanisms and more frequent leadership updates.