Private equity investors are making bigger bets in Asia’s healthcare sector

In 2018, when Navis Capital Partners acquired the Australian medical device company Device Technologies for over $508.7 million (A$700 million), it raised several eyebrows. Reason? Not only did it mark the biggest transaction for the Kuala Lumpur-headquartered private equity (PE) firm, it also paved the way for one of most notable exits for its earlier investor Pemba Capital Partners.

Navis is not the only one to have set its sights on healthcare. Risk capital investors in the Asia Pacific region are increasingly looking to gobble up healthcare businesses that ride on the domestic consumption wave.

A sector considered a safe bet for fund managers, healthcare has typically garnered great returns for fund managers.

Consider 2018, for instance, that turned out to be the most active year for the Asia Pacific region. Deal value during the year increased to $15.8 billion, a whopping 119 per cent jump from $7.2 billion in 2017, according to Bain & Co.’s eighth Global Healthcare Private Equity and Corporate M&A Report. In terms of volume, the number of deals stood at 88 in 2018, while it was 61 a year ago.

Globally too, in 2018, healthcare private equity outperformed other asset classes by registering $63.1 billion worth of disclosed deal values across 316 transactions – almost a 50 per cent jump from $42.6 billion over 265 deals in 2017.

“The year was characterised by increasing competition, rising deal sizes and creative partnering strategies as investors flocked to the sector attracted by both its demographic tailwinds and its defensive nature in times of uncertainty,” said Bain & Co.’s head of Asia Pacific healthcare Vikram Kapur.

The region’s deal increase accounted for more than half of the total global rise in buyout volume. Heightened activity in China – which had only 8 deals in 2016, 32 in 2017 and finally 44 in 2018 – accounted for most of the surge in volume. Australian activity also rose meaningfully to 15 deals in 2018 from 6 deals in 2017.

As more healthcare assets come of age and funds realize solid returns, growth prospects of the ‘sponsor-to-sponsor’ activity in the region looks up. “The first substantial wave of healthcare buyouts in Asia-Pacific are reaching the end of their holding periods, leading to several high-profile sponsor-to-sponsor exits,” said the consultancy firm.

For the uninitiated, a sponsor-to-sponsor deal refers to trade sales between private equity firms.

Road Ahead

Bain & Co. expects demand for assets in the Asia Pacific region to increase over the next few years as healthcare private equity tends to be less vulnerable to downturns than other sectors. This is primarily because healthcare caters to a domestic market.

Going forward, with the sector gaining prominence, the ancillary services such as pharma and diagnostics, single-specialty hospitals, among others, are expected to attract significant investor interest.

As companies explore ways to increase access to healthcare, emerging trends, such as digital healthcare solutions, should gain steam in China, India and other countries. Those trends are fueling interest in companies such as Good Doctor, Wedoctor and Alodokter, points out the Bain & Co report.

While Good Doctor and Wedoctor are China’s technology-powered online healthcare solutions platform that cater to the country’s overburdened public healthcare market, Alodokter is an Indonesian digital healthcare platform.

Advantage Healthcare

Rising income and aging population in Asia’s largest markets China and India have significantly strengthened demand for healthcare, which in turn are attracting investors.

For both the countries, consumer demand is being fueled by healthcare providers who focus on the ‘business-to-consumer’ segment. According to Bain, ‘provider-related’ deals rose to 39, up from 23 deals in 2017, and accounted for 44 per cent of regional volume and 53 per cent of regional value in 2018. Hospital deals were the most common in this segment as China expands its ‘provider’ coverage.

Three of the top five deals in the region were provider-related, including the region’s largest of the year, Brookfield Business Partners’ acquisition of Australian hospital provider Healthscope for $4.1 billion.

According to the report, China will increasingly look to supplement its local innovation engine with global expertise as it continues to address the growing healthcare demands of a large, aging population.

Creative partnering strategy

Due to tough competition among corporate and buyout funds, fund managers are increasingly tweaking their investment strategies, thereby looking at creative or alternative deal structures to clinch deals. In some cases they are also teaming up within the fraternity to acquire larger assets.

Three of the top five deals in 2018 involved a consortium or corporate partnering. For instance, the $1 billion acquisition of Indian health insurer Star Health and Allied Insurance was led by a consortium comprising WestBridge Capital and Madison Capital Partners.

Alternatively, investors are also sealing ‘public-to-private’ transactions, wherein a bid for a listed entity is typically made by a newly incorporated unlisted company. Recently, China’s iKang entered into a definitive merger agreement with Yunfeng Capital and Alibaba Group Holding Limited for going private transaction.

This deal had represented one of the last of the US-listed Chinese assets to be taken private, with the likely goal to list in Asia.

And, that is not all.

Investors in Asia are also adopting the buy-and-build platform strategy that is already common in North America and Europe. A buy-and-build platform typically entails buying a platform company with established management that in turn would be used to acquire subsequent tuck-in acquisitions.

“With the competitive intensity for healthcare assets showing no signs of abating, we see the most sophisticated investors shaping their approach around four key principles – developing a clear playbook and the right capabilities to support their investment strategy, developing a value creation plan very early, executing next-generation diligence, and increasingly pursuing creative paths to get deals done,” added Kapur.

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