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With the Indian healthcare sector buzzing like never before, investments are trickling in from Private Equity funds to all verticals in this segment. This includes established healthcare chains, but also the diagnostic and medical equipment sector, observes Rita Dutta If the Indian healthcare market is expected to balloon to $79 billion by 2012, one of its growth engines is definitely Private Equity (PE) funds. From 1996 when Schroders ushered in a new trend in healthcare by investing private equity in Indraprastha Apollo Hospital, there has been a robust increase of PE funding in healthcare. For the 12-month period ending December 2006, the Indian healthcare sector attracted $379 million - 6.3 per cent of the total PE investment of $5.93 billion, according to a report from management consulting firm Technopak. Experts predict that access to PE would help the $34 billion domestic healthcare sector grow at 15 per cent year-on-year. In the last year, PE firms which have evinced interest in healthcare (hospitals, diagnostic sector and medical equipment) include ICICI Venture, Global Healthcare Investments and Solutions, Bluewater International Investment, Lightspeed Advisory, Ajay Piramal Group, Groupe Limagrain, Singularity Ventures, ePlanet Ventures, Daninvest, Barings Private Equity Partners India, Reliance Life Sciences, Carlyle, Fidelity International, UK-based CDC Group, Blackstone, IDFC, HSBC, JP Morgan Private Equity Fund, American International Group Inc (AIG), Evolvence India Life Sciences Fund, and George Soros's fund Quantum and Blue Ridge. Not only in India, but also globally, PE houses' interest in healthcare has soared. The growing interest of PE investors in healthcare was affirmed by acquisition of HCA, USA's largest hospital chain for $33 billion making it the largest PE deal in 2006. In the UK, General Healthcare Group (GHG) was sold by BC Partners to a consortium headed by Apax Partners, and the South African hospital Group Netcare for 2.2 billion the largest ever European healthcare deal. In India, big players are already on the path to raise multiple rounds of funding from multiple investors. For instance, Apollo raised funding from Schroders, Apax Partners, One Equity Partners and IFC, while Fortis raised PE investment from Trinity Capital, George Soros and Blue Ridge Capital, and Health Care Global from IDFC, Evolvence and PremjiInvest. Blooming PE Interest Somnath Chakravort y, DirectorOperations, I-ven Medicare, ICICI Ventures has $250 million corpus for healthcare Sudhir Sethi, Chairman & MD, IDG Ventures India, IDG

The rush of PE firms to dedicate a special fund for healthcare is noteworthy. The biggest of all announcements has been US-based Global Healthcare Investments and Solutions (GHIS), which declared a $500-million fund to invest in the booming Indian healthcare sector. Reportedly, the fund will invest in companies providing hospital services, including diagnostics, radiotherapy, wellness, health insurance and loyalty programmes (behavioural modifications).

Ventures India has invested $3 million in Perfint, Engineering Services

Dimple Sanghi, Executive Director, Indivison This is followed by ICICI Ventures' $250 million corpus for I-Ven Medicare India. The Ajay Piramal Group, to which IndiaVenture Advisors is an advisor, India Partners, Indivision has also launched a $200 million PE fund dedicated to healthcare. "Seventyfive per cent of the corpus will be invested in deals with an average size of $15 India Partners has invested in Global Hospitals through million and 25 per cent will be invested in deals with average size of $5 convertibles million," says Vikram Gupta, COO, IndiaVenture Advisors. This fund is targeting three main verticals within the healthcare and life sciences domain. "The first category includes hospitals, speciality clinics, nursing homes, wellness chains and medicity projects. The second is pharma and biotech companies that include companies across various facets of drug discovery, research, clinical development, manufacturing and marketing; and the third is healthcare and life sciences support services that includes a mixed bag of opportunities such as healthcare IT, healthcare outsourcing companies, medical devices, retail pharmacy chains, healthcare education, telemedicine etc," Gupta reveals. Chandrasek ar Kandasamy, Managing Director, ePlanet Ventures ePlanet Ventures has announced an investment of $5.5 million in Trivitron

UK-based PE firm Bluewater International Investment also declared an investment of Rs 500 crore in India to set up a multi-speciality hospital with a medical training centre. Instead of investing in a running firm, it is planning to foray into the sector on its own. Though Bluewater would hold a majority stake in the venture, it will seek equity participation from various international medicine practitioners also.

In 2006, another healthcare-dedicated fund Evolvence India was launched. The Mukesh Ambani-controlled Reliance Life Sciences, too, is looking at starting a similar fund along with MPM Capital that manages world's largest healthcare-dedicated fund. An Even Spread Interestingly, the infusion of funds is not just for established hospital chains in urban areas but also for hospitals in tier II and tier III cities, rural and semi-urban areas, diagnostic centres and medical equipment. Dimple Sanghi, Executive Director, Indivision India Partners a private equity fund of Future Capital Holdings, which invested in Hyderabad-based Global Hospitals through convertibles, sums up, "We are bullish on the healthcare segment including diagnostic chains and medical equipment, and are currently evaluating companies to partner with in this space." Semi-urban areas: In April this year, Seedfund, India's leading early-stage venture capital firm, and Aavishkaar India MVCF, inked a joint equity investment to establish a hospital network in semi-urban areas, offering primary and secondary care services for healthcare group Vaatsalya. Seedfund, which has a corpus of Rs 70 crore, has invested Rs 4 crore in Vaatsalya. Bharati Jacob, Partner, Seedfund, explains, "We don't believe urban hospitals are necessarily safer as the urban consumer has many options which can lead to competitive pressures on price and therefore revenues. With 75 per cent of India residing in rural India, we are creating a low-cost model that will provide high quality healthcare for the masses." Vaatsalya, which currently has three hospitals in the north Karnataka region, will use the funds for opening more hospitals in southern Karnataka and Maharashtra. Similarly, New-York based Acumen Fund and Hindustan Latex (HLL) have formed a JV called LifeSpring Hospitals, which will create a chain of small hospitals (20-25 beds) with widespread access to maternal and child healthcare services for the lower middle income group in semi-urban areas. Even India's largest PE firm ICICI Venture, which floated the Special Purpose Vehicle (SPV) I-Ven Medicare

in mid 2007, clearly chose to invest in not so-renowned names in healthcare. It invested $36 million in Sahyadri Hospital, Pune and $24 million in Vikram Hospital, Mysore besides $16.25 million in Medica Synergy, Kolkata and $10.25 million in RG Stone, New Delhi. With several other projects in the pipeline, I-Ven Medicare will soon enhance its corpus to $250 million through induction of an international partner and debt at an appropriate time. Somnath Chakravorty, Director, Operations, I-Ven Medicare, explains, "Choosing established names, and in urban areas does not mean you always create the right value at a right entry cost. The entry cost in developing markets would be less than in mature markets and so it makes sense to invest in tier II and tier III cities." Similarly, PE firm India Value Fund Advisors (IVFA), which has entered into a JV in January this year with Dubai-based Dr Moopen's Group to form DM Healthcare, is keen on tapping tier II and tier III cities for its investment. Medical Technology: PE firms are also eyeing the medical technology segment. In December 2007, IDG Ventures India, a $150 million early-stage technology venture capital fund, invested $3 million in Perfint Engineering Services, a two-year-old start-up that manufactures image-guided medical devices. Perfint intends to use the funds in establishing the products in the global market, and to develop new products in areas of dedicated organ imaging and imaging implementation technology. Says Sudhir Sethi, Chairman and Managing Director, IDG Ventures India, "Our interest in healthcare devices is from an emerging markets perspective where technology has been used to provide healthcare to the masses." He adds that Perfint was an ideal fit for an investor. "India and most emerging countries are the largest cancer banks. Minimally invasive technology will play a major role in diagnostic aspects of cancer treatment. Perfint addresses a growing market with a unique and differentiated product in the area of minimally invasive surgical tools for biopsies; the PIGA product line is the first of its kind in the world with excellent customer feedback during trials," says Sethi. IDG Ventures is looking at over 60 potential healthcare product companies for India at the moment. In November 2007, ePlanet Ventures, a global VC firm headquartered in Silicon Valley, California, announced an investment of $5.5 million in leading medical technology company Trivitron. Says Chandrasekar Kandasamy, Managing Director, ePlanet Ventures, "The medical technology market was worth about $2.7 billion in 2006 and is likely to cross $10 billion by 2012 with a growth rate of over 20 per cent. It is estimated that over 85 per cent of medical devices and equipment are imported and the market is primarily dominated by MNCs. With the Indian software and hardware strengths, India will be a strong source for such products in emerging markets. Most MNCs are currently sourcing their products from China through OEM arrangements, joint ventures or own manufacturing facilities. Given the overall increase in prices in China, India could become a potential alternate sourcing centre for such MNCs." The investment will facilitate Trivitron's manufacturing business plans through acquisitions and JVs and will be used for the infrastructure development for its forthcoming Rs 2.5 billion medical technology park. Neurosynaptic Communications, which in collaboration with the Indian Institute of Technology, Madras has developed a range of medical diagnostic equipment and solutions, has raised seed funding from the Ventureast TeNet fund as well as APIDC Biotech Fund. Diagnostic centres: The PE firms have further opened their arms to diagnostic centres. VC firm Sequoia Capital India has so far invested $10 million in Dr Lal PathLabs for a minority stake. The first investment of $6 million occurred in 2005, followed by another $4 million in 2007. Says Sandeep Singhal, Managing Director, Sequoia Capital India, "We invested in Dr Lal PathLabs because we realised the immense potential that the diagnostic sector holds. Healthcare is a non settling business, where the growth is non-cyclic in nature." Similarly, ICICI Venture had invested Rs 35 crore in Metropolis Health Services in 2006. Hospitals: When it comes to urban areas, it is the hospitals which receive the maximum chunk of funds. In 2006, hospitals attracted 18 per cent of the total Healthcare PE investments. Last month, HealthCare Global Enterprises (HCG), a leader in oncology care in India, received $20 million

from PremjiInvest, a fund sponsored by Azim Premji. This is the third round of funding the hospital has received after the first of Rs 50 crore ($10.8 million) it received from IDFC Private Equity, and the Rs 10 crore from Evolvence. In March 2007, UK-based private equity fund Trinity Capital had increased its stake in Fortis Healthcare from one to four per cent through an additional investment of Rs 87 crore in 6 million equity shares. Earlier, in January 2007, Trinity had made an initial investment of Rs 28 crore for two million equity shares. In 2006, George Soros' fund Quantum and Blue Ridge also bought 10 per cent in Fortis Healthcare. In April this year, Apax reportedly picked up 1.87 per cent stake in Apollo Hospital to take its total holding to 14.52. In another move, UK-based Ashmore Investment Management bought a 19 per cent stake for Rs 90 crore ($23 million) in Quality Care India Ltd (QCIL), the holding company of Care Group of Hospitals. Bangalore-based Narayana Hrudayalaya raised Rs 400 crore ($100 million) from global financial services firms American International Group (AIG) and JPMorgan. The buzz is that PE firm Texas Pacific Group (TPG)-controlled Parkway Hospital in Singapore is on the way to acquiring 25-30 per cent stake in Bangalore-headquartered Manipal Hospital for over Rs 500 crore. Other Areas of Investment: Some of the new targets and focus areas of PE funds would be pharmacy retail chains, health and wellness centres, spas, ayurvedic and herbal skin, slimming and beauty centres which are primarily consumer-oriented sectors, informs Rana Mehta, Vice President, Healthcare, Technopak. With Pantaloon Retail India planning to launch 'Health Village', and Reliance Retail launching Reliance Wellness, this sector would definitely draw more PE funding. And Manipal Cure and Care (MCC), India's first chain of retail wellness centres, which has rolled out a plan of 50 wellness centres by 2011, is looking at PE funding a year from now. Having the first mover advantage in this space, it is being wooed by several PE firms. Says Somnath Das, COO, MCC, "As opposed to funding from banks, where we must keep 50 per cent of capex and opex as security against risk in the retail business, getting funding from PE is definitely a better option. We would have more liquidity in hand that way." However, MCC is considering PE funding only after five quarters of its operations, which is in the next financial year. "We want to run the business on our own, for first two years, turn it cash positive and then go with PE funding. Then we would not have to haggle with the PE firm about the right value," adds Das. Understanding the market opportunities, Blackstone Group has already picked up 22 per cent stake in VLCC at $22 million (Rs 88 crore). Even MedPlus, Hyderabad-based retail pharmacy chain raised $5.2 million (Rs 23 crore) from iLabs Capital, a private equity fund of former Satyam Computers' Executive Director Srini Raju. PE players have also evinced interest in picking up a stake in Bengal Faith Health Care (BFHC), an SPV formed to set up the Bardhaman Health City, a Rs 10 billion public-private partnership project. BFHC is an SPV promoted by CES Infratech and Faith Health Care Group Company of Consulting Engineering Services. Advantage PE Funds The rush of PE fund was triggered by corporatisation of healthcare. Kali Prasad, Partner, Ernst and Young, explains, "Traditionally, most hospitals in India have been owned and run by trusts. Owing to their legal structures, regulations governing them, and a not-for-profit business model they were not attractive for PE funding. However, with the entry of private players including Max Healthcare, Fortis and Apollo, the sector has become attractive for PE funding. Further, these players need significant funding for their expansion plans which has increased the need for PE funding." Corporate hospitals have shown how healthcare is a profitable business. According to the Ernst & Young Healthcare Survey 2007, the Indian healthcare industry's average EBITDA margin is of 17.7 per cent and Return on Capital Employed (ROCE) is 13 per cent, in comparison with the US which has 15.7 per cent and 7.3 per cent, respectively. Some multi-speciality hospitals tend to show the maximum average EBITDA

margins (20.7 per cent), followed by single-speciality (14 per cent) and cardiology (13 per cent), says the same survey. Undeterred Even the volatility in the market has not affected the fund flow. PE houses have shifted their attention to more stable businesses like healthcare that are decoupled from economic downturns, informs Mehta. Statistics also indicate that market opportunities lie untapped in healthcare. India needs to add 2 million beds to the existing 1.1 million by 2027, and requires immediate investments of $82 billion to make up for its infrastructure deficit, according to a CII study. According to Pankaj Chaubey, Practice Head, Financial Deals, DATAMONITOR, "Steady economic growth has led to rising income of the 300 million strong middle class, who are now demanding better healthcare services. On the supply side, healthcare infrastructure has remained poor and hence there is a huge gap. For PE firms, this represents an opportunity to bring best-in-class delivery facilities and command strong return on their investments by leveraging the growth." While healthcare is capital intensive with a long gestation period, this sector is considered to be a defensive sector for investments. "This is because the volatility of this sector is significantly low as compared to other sectors," Gupta explains. Funding Options PE has definitely become the preferred mode of investment. When earlier debt to equity ratio was 2:1 for a healthcare company, now the trend is to have 1:1. These days, healthcare companies seem to prefer PE fund over raising capital through the IPO or debt. "In comparison with debt, raising capital through PE reduces the debt burden and thus you have more money for growth," explains Dr Vivek Desai, MD, Hosmac, India's leading hospital consultancy firm. PE is also better than raising funds from the capital market as the latter is still not giving the right value to most healthcare companies, experts point out. Says Ashutosh Gupta, Head, PE Funding, Evalueserve, a market research firm, "To raise money from the capital market, a company needs to be a particular size, which most healthcare companies are not. Also, there is also a lot of administrative work and regulation involved post-IPO as one becomes answerable to shareholders. So, raising money through PE is the best option." Naveen Reddy Kalluri, Project Manager, DATAMONITOR, echoes, "Currently, healthcare companies are focusing on building their brand and expanding their presence across India. Except a few cases, companies have still not reached a stage where they can raise capital through public offerings. Consequently, these companies are relying on PE investment to build capability and establish a pan-India presence." Many healthcare groups are trying PE funding for the first time. Take the case of Guwahati Neurological Research Centre (GNRC), which planned to raise around Rs 100 crore through an IPO, but was compelled to rethink because of the volatile market. Now, for the first time it is planning to raise Rs 25 crore through PE. Priyanka Borah, Director, GNRC, says, "We have leveraged the debt fund to the maximum to complete our recently opened 150-bed tertiary care hospital with level-three ICU and our retail venture. Hence, PE funding is our next best option." GNRC is hunting for a strategic investor as their domain knowledge would also be a value-addition in the offer. Even Wockhardt Hospitals Group after its recent IPO debacle has been hunting for PE fund to raise about $150 million. According to reports, it has approached groups like AIG, 3i, Actis and Carlyle. The Impact Experts opine that the infusion of PE fund in healthcare would bring in fiscal discipline, a trait that is lacking in many healthcare institutes. "Many institutes are poor in managing funds and cash transactions. Having a PE firm with rich knowledge of global market, strategic management and fiscal management would be good for

the healthcare companies," says Dr Desai of Hosmac. It would also lead to consolidation of the unorganised healthcare market. "Large players would learn how to utilise their manpower and technology effectively and refrain from duplicating resources at smaller hospitals. The industry would also reap the benefits of integration," says Anupam Verma, CEO, DM Healthcare. The only flipside could be that the cost of healthcare may go up by 15-20 per cent as the focus of the organisation may shift from philanthropy to profit generation, fears Dr Desai. However, Verma differs, "When an organisation is run efficiently, the cost of treatment is supposed to come down. In this age of inflation, the cost may be the same, not more. Anyway, in today's competitive environment, the cost is determined by market dynamics." Parameters for Selecting Investee Companies Ready for expansion in the region. Executable Growth plan. Healthy Financial Indicators. Sustainable Business Model. Competitive Landscape. USP. Market opportunity. A team that is prepared to learn and adapt as they progress. Differentiated and scalable value proposition.

Recent Trends With the healthcare industry flush with PE funds, some noticeable trends have emerged. One is for a PE firm to float an SPV for healthcare financing, the way ICICI Venture has done, or entering into a JV with a healthcare group to tap the healthcare marketas IVFA has done with Dr Moopen's Group or Acumen Fund with HLL. "Later on, these new-found companies may get listed," predicts Dr Desai of HOSMAC, which is exploring the opportunity of setting up a healthcare fund to fuel healthcare ventures. Rather than remotely managing their business, many foreign PE firms are setting up shop in India. More than 100 PE firms already have their offices in India. Nearly all the leading firms such as Apax Partners, Carlyle Group, Kohlberg Kravis Roberts, Blackstone Group, and Barings Private Equity Partners India have an office in India with a team of professionals spread across key sectors. The firms have also recruited people from the healthcare industry to manage the funds. ICICI Venture has recruited former COO of Artemis Health Institute Somnath Chakravorty and Sudhir Bahl from Apollo Hospitals, to manage I-Ven Medicare. DM Healthcare has hired Anupam Verma, Former Director, Administration, of PD Hinduja Hospital as its CEO. Also, Dubai-based Evolvence India, which paid $5 million for a 12 per cent stake in Healthcare Global has partner Dr Anula Jayasuriya who holds an MD (Microbiology and Molecular Genetics) and PhD from Harvard Medical School, in addition to an MBA from Harvard Business School. "Management of healthcare requires a deep understanding of the domain in order to fully understand the value creation opportunities as well as risk factors that are specific to the industry. Experts who have years of experience of managing healthcare businesses are much better placed to capture the cross-sub-sector opportunities and manage risks. Healthcare sector focused funds in the western countries typically have domain experts with years of experience as funds managers. And these funds have proven to give higher returns than general private equity funds that have also invested in the healthcare sector," avers Gupta. Caution and Patience

To avoid the bust that PE and VC firms faced some years back with IT and ITES, experts caution that the PE firms interested in healthcare need to tread with caution. In early stage companies, there are often challenges with respect to strategic direction, talent management, new business acquisition and developing systems and processes, analysts point out. Understanding the dynamics of PE funding in healthcare is of utmost importance before making a foray. "Value creation takes longer in healthcare, but once created, it is sustainable," says Verma. So, while PE firms in other sectors can exit within two to three years, in healthcare the PE firms need to wait for six to eight years to get the right value for money. "The PE firms in healthcare definitely need to have patience to get the right value," advises Chakravorty. Verma further cautions that with healthcare being a complex sector where one has to deal with diverse sets of people with high dependence on technology, domain knowledge is a sine qua non for the PE firm. "This is mainly so if the investee company lacks good management processes," he suggests. Shetty warns, "Risks of investing in small companies include team related risks, scaling, market acceptance, hiring and funding. The key to de-risk a small company investment is to invest with an excellent quality experienced team. During our evaluation, the PIGA product was in beta testing. Hence our investment was de-risked by the positive feedback received during beta testing and trials." Having synergy of culture between the investor and investee is also extremely crucial as it is often noticed that investee companies resist suggestions made by PE firms. This is observed more often when the company is family managed. A few years back, a PE firm was reportedly forced to become a majority stakeholder in a family-run healthcare company when its suggestions met severe resistance from the healthcare company. PE firms also need to conduct a proper due diligence which includes checking capabilities of the management team, performance record, deal flow, investment strategy and legals, along with taxation and auditing of the company before one agrees to invest, experts advise. "The PE firms should also have an agreement with the investee that no major financial transaction and no change of top management should happen without their consent," says Dr Desai. The Road Ahead According to experts, the next few years would see PE firms which have invested in healthcare increasing their allotment for healthcare and also new firms getting interested. Consolidation of the healthcare market would also get a further boost. "Many institutes would become globally oriented, but locally available because of this consolidation," Verma forecasts. "We will see local players consolidating their presence in the regional market to emerge as a strong regional brand leveraging their local brand pull," predicts Chakravorty. PE firms are also planning to expand their portfolios. "We continue to scout for opportunities in the speciality healthcare chains like diagnostics, dialysis centres and oncology centres," says Kandasamy. I-Ven Medicare is currently evaluating different healthcare delivery models for investment to identify right investment opportunities, adds Chakravorty. Clearly, there is less VC funding in healthcare. "VC's have not seen business models that are innovative and can be scaled up and that's why the funding is less," explains Jacob. In the medical devices segment, however, there have been several early stage deals. VC funding will continue to flow mainly for medical technology. "Medical technology is at a start-up phase and as companies mature, they will seek significant growth capital for expansion. Such companies will not only target emerging markets like India, Indonesia, Philippines, Malaysia and SAMENA regions, but will also supply OEM products to large MNCs for international markets," predicts Kandasamy. The challenge is to get the necessary approvals for launching such products in international markets. Apart from this, technology innovations or disruptive business models could emerge in various areas like online healthcare services, speciality healthcare chains in areas like dialysis, oncology and ortho-rheumatism, he adds.

rita.dutta@expressindia.com