For the past couple of years, private equity has been baulking at rising valuations. Abrar Mir, managing partner, Quadria Capital, the healthcare-focused private equity fund, has a different take on the hard-to-justify, near-record valuations, that is best illustrated with a listing in Indonesia the firm had been watching.
“About three years ago, we saw a healthcare IPO in Indonesia that was valued at a higher multiple than Facebook! Despite that, the company delivered growth as promised, and shareholder returns have actually come,” he said.
Mir pointed out that Asia was now second only to the US in PE investment volume, and added that the sector would continue to grow. “If we are able to execute well, Asia should emerge as the leading global destination for private equity investment,” he said.
Quadria, which invested in Malaysian diagnostics provider Lablink (M) Sdn Bhd, and India’s Strand Life Sciences earlier this year, is currently deploying capital from its first maiden $300-million fund. It may hit the road again later this year to raise a much larger second vehicle. It recently also backed FV Hospital (FV) in Vietnam, and acquired a significant stake in Singapore’s MWH Holdings, the holding company for the Singapore Heart, Stroke and Cancer Centre.
Quadria, which invests in both Southeast Asia and India, said both regions were rapidly converging.
“The mega trends that are driving both these regions are strikingly similar: rising populations, increasing affluence, rapid urbanization. For a long time, there was a view that many of the countries in these markets were prone to economic shocks —political instability, interest rate and currency volatility—and hence not conducive to long-term investment. That view has thankfully changed among many global investors. Economic growth in both the regions is driven by secular mega-forces that are perhaps irreversible in nature. By the end of this decade, 4 out of the 5 largest economies in the world will be in Asia and 7 of the 10 largest cities in the world will be in Asia,” Mir added.
Edited excerpts from an interview:
Quadria invests in South-East Asia and India. Over the last 12-24 months, what is the big difference that you are witnessing across both these markets?
The markets of India and South-East Asia are rapidly converging. The mega trends that are driving both these regions are strikingly similar: rising populations, increasing affluence, rapid urbanization. For a long time, there was a view that many of the countries in these markets were prone to economic shocks —political instability, interest rate and currency volatility—and hence not conducive to long-term investment. That view has thankfully changed among many global investors.
Economic growth in both the regions is driven by secular mega-forces that are perhaps irreversible in nature. By the end of this decade, 4 out of the 5 largest economies in the world will be in Asia and 7 of the 10 largest cities in the world will be in Asia. Both India and South-east Asia are benefiting from a period of sustainable and, more importantly, predictable growth. There has been a divergence, however, between our region and other global growth economies. South America, South Africa and Russia have witnessed more economic and currency volatility.
Sticking to Asia, private equity has a record of dry powder globally. Is there a lot of money chasing too few deals? Can Asia be the answer to private equity’s dry powder?
One of the biggest criticisms that is consistently aimed at PE as an asset class is that there is too much money chasing too few deals. There is endless speculation that dry powder reflects a lack of investible opportunities, and ultimately, leads to higher valuations or, even worse, to poor investment decisions.
Asia, in my opinion, represents an alternate opportunity. Most industries in Asia are highly under-funded. We still have a long way to go to reach a point of maturity. Many industries in Asia are growing at over 10 per cent per annum. If you add the fact that capital markets in Asia are still nascent, and debt financing continues to be an expensive and highly risky alternative, PE has a very important role to play as a catalyst for growth. We have a long way to go and we are only at the beginning.
Let me add some perspective from our sector—healthcare. Over the last few years, significant PE capital has been deployed in the sector. Yet, the World Health Organization estimates that there is about $60 billion of underspend each year just to get Asia to minimum standards. That amount does not even include the need for growth capital. The underlying opportunities are immense—with saturation in Asia not even coming close. This is why we believe that private equity’s future for investing in Asia is well positioned.
To appreciate this, one needs to understand the shifting fundamentals. Over the next 10 years, as I mentioned, economies like China, India and Indonesia will emerge as some of the largest in the world. This is a unique opportunity. To fund that level of growth requires an enormous amount of capital, which is why private equity is so important for development.
Talking of healthcare, PE has begun to see this sector as a safe haven in Asia that is pushing up deal count and deal value but the intense competition for these assets have pushed up valuations. At these valuations, will returns take a beating?
Valuations, in a market economy, should reflect market realities. The healthcare industry in Asia, in particular, is described by some economists as benefiting from the “Goldilocks syndrome”, which is essentially solid top-line growth and low downside risks. So, it is both defensive and fast-growth, increasing almost 10-15% each year. Clearly this dynamic makes the healthcare sector very attractive and has led to valuations rising.
On the other hand, many of the valuations reflect the market reality of the growth opportunity. Recent IPOs and recent deals have been done at pretty full valuations, but despite those valuations, businesses continue to execute well and deliver solid shareholder returns.
About three years ago, we saw a healthcare IPO in Indonesia that was valued at a higher multiple than Facebook! Despite that, the company delivered growth as promised, and shareholder returns have actually come. Clearly, we have to be cautious and not price to perfection. As long as fundamental growth in the industry continues to be double-digit, and regulation does not overwhelm the downside risks, we will probably continue to see robust valuations going forward.
The trick, whether you are a PE firm or investing in public equity, is to always invest in circumstances that you can control, and where you think that you are getting the best value. As a private investor, we think that some of these valuations are high, but there are still big opportunities at the right value.
Regarding Goldilocks syndrome—which is about the right amount of capital at the right time—healthcare is a segment that needs patient capital. Is PE comfortable with deploying long-term capital? What I mean by long-term capital is that be it the 7+2 or 7+3 structure – is it sufficient for healthcare to generate returns, or does it require longer time?
We believe private equity is best suited for providing long-term capital. PE firms can take a long-term perspective—they can make difficult decisions and large investments where the returns are not judged on a quarter by quarter basis, and this allows companies (that receive the capital) to build large-scale infrastructure for the long term. Building these large and scalable businesses in a private context, where investor focus is on the long-term, is much more aligned to private equity.
In terms of how long the PE firm should stay invested, it is a market-by-market experience. There are certain markets where the level of healthcare infrastructure is so nascent, that it may take a longer time for the investment to reach a scalable position. Regions like Sub-Saharan Africa, or even markets closer like Myanmar, where the underlying base is low – it can take a longer time, as most investments will be greenfield investments. But in other markets like China, India, Indonesia and the Philippines, we certainly think that the building blocks are already in place. What is needed is building scale going forward.
For many of the large healthcare businesses that are now listed, it has taken them about 15 years to get to their current capacity of somewhere between 2,000 – 4,000 beds. Yet, many of these groups with the help of PE are doubling that capacity in just two years. That is the power of private equity. It can really accelerate growth.
Across several sectors—be it South-East Asia and India—the challenge for PE is that most businesses are family-run. The mindset for such businesses is different, culture is different, and promoters are often unwilling to sell stakes that are meaningful to PE. But in the recent past, are we seeing a change where family-run businesses, with the next generation coming in, are more open to PE, are willing to give up control—what is bringing about the changes in this region?
Families continue to dominate the corporate landscape in Asia and will do so for the foreseeable future. I do not think this will change overnight. But we believe that this creates discipline for PE firms. Entrepreneurs and families ask a simple question: What can bring that is more than just money? So, it is very important that PE offer more than just capital—today entrepreneurs can access debt and capital markets to raise cash. PE players need to focus their skillsets to bringing more to the table. This is a very important discipline—as it enables us to be value additive and better partners.
Equally, families recognize that outside capital is important. Not just to fund growth, but also to professionalize the business or become a leader in its sector. The onus is always on PE firms to prove to families that we can bring value or expertise that they cannot achieve on their own.
Traditionally, PE fund managers in markets like India and South-East Asia have been used to taking minority positions in companies. As we see more buyouts and path to control deals, have fund managers been able to make that mindset change, where they see themselves as owners of that business? Are they able to think as promoters of the companies?
For PE, control deals enable us to be much more active in running that business. It allows us to execute a clearly defined management strategy and bring in the right management team to execute it—that is a positive phenomenon. Some PE firms only want to be minority investors and want the entrepreneur to drive the business. Those firms will continue to enjoy the strength of entrepreneurial spirit. As deals become larger and more scalable, I think more PE firms are actively driving business and leading execution. The one difference is, of course, that we do not build these businesses for our next generation but need to exit at some point.
We are in an era of abundant capital—a lot of PE firms chasing the same deals—in such times, when you look at companies, what differentiates you from other PE players?
We position ourselves in the market as a strategic investor, and not a financial investor. Over the last 10 years of our investing, what we’ve been able to do is to bring in-house the healthcare ecosystem that we think our investee companies can leverage to emerge as leaders in their sectors. For us, the dialogue is always what we can bring to the table to your business that you cannot do on your own. The conversation is always about operations and strategies—that is the key. We bring the money, but our focus is not on the money—it is about how can we help the business that we are investing in achieve its full potential. Being sector-specific investors, we really understand our industry—we have spent all our lives as managers in that industry or operating in that industry—it enables us to have a very specific conversation about the value that we can bring. That we feel is more valuable than capital alone.
How have the limited partner-general partner (LP-GP) dynamics changed over the last couple of years? Today, LPs have a wide range of GPs to choose from. A lot more GPs are now competing or pitching to the same LPs. At times, LPs are also competing with GPs for the same deals.
The LP-GP dynamic will continue as it has always. I do not think that it has become more acute or less acute recently. If LPs require Asian GPs to be more sophisticated, that is a very positive dynamic. Asian GPs face the pressure to bring the best international standards to the region in terms of execution, governance and transparency—that is a very constructive force. If it means that some PE firms can’t adhere to those international standards, that is the law of the market. But continued pressure from LPs to achieve the same level of excellence that they are used to in other markets is very positive.
I do think that there may be some LPs that may compete with GPs for deals, but the vast majority of LPs want to work with PE firms because the skillsets required to be an LP and a GP are very different. LPs will continue to want to have long-term relationships with GPs, where they can deploy more durable capital and get the upside on co-investments. I still think that is the best model. There are very few LPs that have the inclination to go it alone in Asia.
Today we are seeing several pension funds and sovereign wealth funds compete with GPs for the same deals. How has this changed the PE landscape?
It is rare but it’s positive. In the recent times, we’ve seen very large pension funds in the US and Europe specifically state that they want to put more money to work in Asia. That speaks of the opportunity. Our view continues to be that as more global investors get comfortable with the opportunity in Asia and the downside risks, the more capital will flow to Asia. This ultimately will enable the private equity industry in Asia to achieve sustainable, fast growth.
This article was first published on livemint.com.