Asian healthcare investment booms, offers ‘double bottom line’ for private equity

A man holds medicinal pills in his hand. Photo: Volodymyr Hryshchenko/unsplash

Healthcare-focused private equity firm Quadria Capital has what may be called a leisurely approach to investing in what is an increasingly active sector.

It can work two to three years with a potential portfolio company, sometimes even on a pro-bono basis, before its partners make a decision to invest in it. But the fund’s limited partners do not complain, Amit Varma, managing partner at Quadria Capital, said in a recent interview with DealStreetAsia. 

“We don’t raise funds and then start to worry about when we’re ever going to deploy,” he said. “By the time we raised the fund, we’re already clear on where the funding is going to go. We can tell you today where 60 per cent of our funds will go.”

Quadria recently closed its second fund at $595 million, above its targeted $400 million. It is also nearly double the size of its first fund launched in 2014 and closed the following year. LPs in Fund II include previous investors, such as development finance institutions DEG and the International Financial Corporation (IFC), as well as asset management company Neuberger Berman. 

Quadria has deployed around $110 million from its Fund II, including in acquisitions of India’s Akums Drugs & Pharmaceuticals as well as Asian Institute of Gastroenterology Hospitals.

The fund manager’s approach may seem counterintuitive in what is a booming sector.

According to the latest report by global advisory consultancy Bain & Co, the Asia Pacific healthcare sector saw at least $11.5 billion in deals done in 2019. That was the second-highest deal value since the last recession, even as the number of deals fell to 68, from 88 in the year before. That just meant that deal sizes were bigger. 

In Southeast Asia, deal value soared to $2.4 billion in 2019, from $720 million the year before, boosted by the $1.2 billion acquisition of the Southeast Asian assets of Malaysia-based Columbia Asia Hospitals by a consortium of TPG and Hong Leong Group. 

“Southeast Asia, which historically constituted a small share of the region’s deal value, expanded as assets reached the buyout sweet spot,” Bain analysts observed in the report. 

But in taking its time, Quadria also avoids overpaying for assets. The firm targets healthcare services providers, pharmaceutical and medtech companies, as well as diagnostics and telemedicine, in South and Southeast Asia.

“Multiples in this part of the world are, quite frankly, crazy, because everyone wants to be part of healthcare,” Varma said. “We’ve never been top bidders.” 

Healthcare boom

The demographics of the region, with a rapidly urbanising middle class in the emerging economies, as well as an ageing population in the more developed markets, are supporting the healthcare industry’s growth story.

As such, over time assets have become bigger, and reached the scale that attract the bigger buyout funds, as Bain partner Vikram Kapur explained. At the same time, “there are investor-backed assets looking for liquidity,” added Kapur, who is Bain’s APAC Healthcare Practice lead.

Ultimately, healthcare is a defensive investment. “In times of uncertainty, people flock to healthcare,” noted Kapur.

Still, despite a large and fast-growing population in need of access to good quality healthcare, Asia accounts for a significantly smaller proportion of global public healthcare spending, according to a spokesperson for IFC. 

Even as demand grows, it is still largely an underserved market that offers ample opportunity for private capital to jump in.

From the perspective of investors, injecting capital into the healthcare sector will bring higher returns due to heightened awareness, growing demand for treatments, as well as the increasing disposable incomes and willingness to invest in wellness. Investment in the sector also fulfils a key goal for certain institutional investors.

“Healthcare serves a double bottom line by simultaneously providing attractive investor returns and creating significant developmental impact,” a spokesperson at DEG told DealStreetAsia.

Said Quadria’s Varma: “I have never ever met an impact investment investor LP who says it’s fine for you to give me a lower IRR.”

To be sure, there has also been criticism that private equity involvement in healthcare has driven costs up. However, investors that DealStreetAsia spoke to for this story are nearly unanimous in their approach: they target companies and service providers in the mid-priced market.

“Investors are really focused on how to create an affordable care offering, that comes with a huge market,” Kapur observed.

The ‘holy grail’

Even as the largest deals in the industry have typically centred around hospitals, clinics and other services providers, which have clear earnings visibility, some investors see the long-term potential of healthcare technology such as in biotech, diagnostics, and digital health platforms. 

Bain & Co noted that the biopharma sector was one of the hottest deal landscapes in 2019, with a 150 per cent growth to $24.2 billion in deal value. The acquisition of European Nestlé Skin Health for $10.1 billion in October 2019 accounted for a quarter of total biopharma deal value last year.

Heritas Capital, a healthcare-focused Singapore-based private equity and venture capital investor that is also one of the LPs in Quadria Capital, has invested from its second PE fund in Tessa Therapeutics, a clinical-stage biotechnology company focused on developing cell therapies to treat cancer, and Alodoktor, an Indonesian platform that links patients with doctors. 

Tessa Therapeutics’s other investors include Singapore state investor Temasek Holdings, and EDBI. Alodoktor’s backers include SoftBank Ventures Asia, Golden Gate Ventures, and FengHe Group.

Meanwhile, both Heritas and Quadria are co-investors in Strand Life Sciences, which provides data analysis in the life sciences sector such as gene sequencing. 

Another Singapore-headquartered, India-focused investor Frontline Strategy Funds has recently invested into Uber Diagnostics, a startup that has developed a handheld 12-lead ECG monitor that can be deployed just about anywhere from rural villages to offshore oil rigs. However, the hardware was not the draw, said Atim Kabra, Frontline’s founding partner. Rather, the device, Cardiotrack, can transmit the ECG readings and connect patients to a network of cardiologists. 

“Connected devices and advanced networks will transform healthcare,” Kabra told DealStreetAsia in an interview. “Low latency networks in high density cities, with connected devices and sensors, will make it possible to monitor patients at home in real time.” 

“On top of that, you can put in an AI layer. If I have your information on the cloud, at some point in time I will be able to run a diagnostics and be able to tell you there was a significant deviation, time you visited a doctor,” Kabra added. 

“That’s the holy grail.”

Clearly, healthcare is a specialised field where expertise is critical to a successful investment, investors acknowledge. “There is a need for patient capital since exit horizons for healthcare sector investments could be longer due to the longer gestation required in the healthcare field to expand or improve operations,” the IFC spokesperson said.

But as the industry becomes more attractive to investors, valuations are going to get more competitive. That means investors would have to “be more thoughtful about how to realise value, and accelerate value creation, post-transaction,” Bain’s Kapur said.

“If we apply our private equity kind of discipline to running a business that caters to the mass affluent, our returns will not be any less than anybody else’s,” says Heritas CEO Chik Wai Chiew.

Even so, Quadria’s Varma says: “We do not promise outsized returns because we’re in a sector which has massive moral and social implications. You can’t turn around and show outlying profits when you’re dealing with people’s lives.” 

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.