(BN) Indian Hospitals Lure Private Equity as Demand Surges

Indian Hospitals Lure Private Equity as Demand Surges

Indian hospitals are admitting more than just patients.

Private equity funds such as Sequoia Capital LLC and Advent International Corp. are buying stakes in hospitals in the South Asian nation, lured by a market that's forecast to reach more than $80 billion in revenue in 2015.

"If you want to deploy capital in India, health care is a nice area to be in," Abhay Pandey, a managing director at Sequoia's India unit, said in an interview. "It has lesser regulatory issues and usually no governance issues. Most of the investment is going after a very large, untapped market."

Private equity firms are set to invest the most in Indian hospitals in at least six years in 2012, according to Chennai- based Venture Intelligence. There were 12 investments in hospitals, clinics and drug makers totaling $527 million so far this year, almost double the $287 million in 2011, the researcher said. Sequoia, the fund that backed Google Inc., this month paid 1 billion rupees ($18 million) for a stake in Moolchand Healthcare Ltd., a New Delhi hospital operator which plans to add fertility clinics and medical centers.

Revenue for the hospital services industry was $37.4 billion last year and will more than double over four years, according to RNCOS, a researcher based in Noida near New Delhi. India, which has a population of 1.2 billion, still needs to add 3 million hospital beds to meet the global average of three for every 1,000 people.

Health Problems

With government-run hospitals suffering from shortages of doctors and equipment, the growing ranks of India's middle classes are increasingly turning to private health care. Prakash Gupta, head of Mumbai-based public-health researcher Healis, said private clinics are widely accepted as offering a "far better" service. India's gross domestic product per capita based on purchasing power parity surged to $3,425 in 2010 from $1,512 in 2000 and $872 in 1990, according to World Bank data compiled by Bloomberg.

Increasing wealth may also lead to health problems as people's work and dietary habits change, adding more pressure for hospitals to grow. The International Diabetes Federation estimates that the number of diabetics in India was 61.3 million in 2011 and may reach 101 million in 2030.

"Incomes are rising, and more people are getting lifestyle diseases like diabetes, but the pace of new hospitals coming up is very slow," Siddhant Khandekar, a Mumbai-based health-care analyst at ICICI Direct, said in an interview. "That's why private equity funds are ready to come to India to put money and wait for five to seven years."

Market Momentum

Hospitals are tapping private equity as the market for public share offers shrinks. Indian companies raised 198 billion rupees from 18 stock sales so far this year, less than half the amount in the same period in 2010 when issues peaked, according to data compiled by Bloomberg. Aside from private equity, there is a "lack of public markets momentum or other sources of capital" for hospitals, according to Avnish Mehra, a director at Advent International.

Investors are predicting the new entities will emulate the growth of operators such as Apollo Hospitals Enterprise Ltd., ICICI Direct's Khandekar said. Apollo (APHS), the biggest operator of hospitals by market value, surged 31 percent in the past year and more than tripled since 2009.

Advent, the Boston-based leveraged buyout firm founded by Peter Brooke, spent $105 million buying shares of Hyderabad- based Care Hospitals, it said in April. The deal was its third in India and follows investments in a provider of outsourced transaction processing and a corporate e-learning business. Care, which operates 1,700 beds in its 12 hospitals, plans to almost double capacity by end-2014, Chief Executive Officer Krishna Reddy said in a telephone interview.

Eye-Care Clinics

Vasan Healthcare Pvt., a Chennai-based operator of eye-care clinics, in March got $100 million from Government of Singapore Investment Corp. to fund new clinics and acquisitions. Sequoia is also an investor in the chain.

Olympus Capital Holdings Asia, a private-equity firm, in January bought a stake in DM Healthcare Pvt., which runs hospitals under its Aster brand in Kolhapur, in western state of Maharashtra, and Faridabad near New Delhi, for 5 billion rupees. DM, which operates hospitals in Qatar, Oman and Saudi Arabia, has more than 900 hospital beds in India and aims to reach about 3,000 beds by 2015, it has said.

Moolchand plans a network of in vitro fertilization, or IVF, clinics across India, either through acquisitions or opening new branches, Chief Executive Officer Shravan Talwar said in a telephone interview. It also expects to spend 5 billion rupees on acquisitions in the next five years, he said.

Doctor Shortage

Investing in the health care industry in India isn't without its drawbacks. The nation's hospitals face shortages of doctors, nurses, technicians and paramedics as they expand, putting services and expansion at risk. The country has 0.67 doctors for every 1,000 people, compared with a global average of 1.4, according to a report this month by Technopak Advisors Pvt., a Gurgaon-based consultant. India needs at least 800,000 additional doctors and 1.8 million more nurses, it said.

Interventions by private equity in the decisions of the management of a hospital sometimes leads to problems, according to Frost & Sullivan. Transition from an operation run by the founders, who are usually doctors, to one that's backed by private equity firms may lead to friction, the researcher said in an e-mailed response to questions.

Still, exposure to private equity brings some benefits for staff in India, according to Care Hospital's Reddy.

"It's like getting an executive MBA program in a management school for some of our senior managers," he said.

Recession-Proof

Investors in India could use some good news. The nation's economy is growing at the slowest pace in three years and the rupee, Asia's worst performer this year, tumbled to a record low against the dollar last week amid concern about the nation's finances.

Hospitals may offer a haven from the turmoil.

"The health care industry is relatively recession-proof,'' said V. KrishnaKumar, partner, mergers and acquisitions at Ernst & Young Pvt. in Mumbai. ''Rising disposable incomes are improving people's capacity to pay. Besides, there is severe shortage of good-quality health care facilities in India. Hence this sector will continue to grow in excess of 15 percent per annum and even average business-models will continue to work.''

To contact the reporter on this story: Adi Narayan in Mumbai at anarayan8@bloomberg.net

To contact the editor responsible for this story: Jason Gale at j.gale@bloomberg.net

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