Private equity and venture capital investor Heritas Capital is betting that disruptions caused by the pandemic will have re-shaped behaviour to sustain the digitalisation of healthcare and education systems.
The Singapore-based investment arm of shipping and industrials group IMC Group recently launched its second venture fund (Heritas Venture Fund II) with a target corpus of $30 million to back about a dozen startups in the health tech, edtech, and foodtech sectors.
It is also launching a $150-million private equity growth fund, Heritas Growth Fund III, to invest in businesses that will include later-stage tech companies.
Heritas Capital has hitherto been investing in non-tech businesses, including in Q&M Dental Group, a Singapore-based chain of dental clinics, from its first PE fund; and Timberland Medical Centre, a private hospital in Kuching, in east Malaysia, from its second PE fund.
In 2018, from its first venture fund, it led a $9.75 million pre-Series A funding round in Holmusk, a digital health and analytics startup. Other companies in the venture portfolio include insurance platform CXA Group, biotech startup Hummingbird Bioscience, and foodtech startups Alchemy and SilverConnect.
From its second PE fund, Heritas Capital invested in Indonesian telehealth startup AloDoktor in 2019, and most recently, in Indian telemedicine startup MFine.
Tech businesses are expected to make up half of the portfolio of its third PE fund, Heritas Capital’s CEO Chik Wai Chiew told DealStreetAsia in an interview.
“To be clear, even the so-called traditional businesses are going to infuse more tech into their operations,” Chik said, noting that Q&M, for instance, is using artificial intelligence to plan treatments.
Chik joined the firm in 2016, after stints at Temasek Holdings in Shanghai, and Tembusu Partners. He was also at the Singapore Agency for Science, Technology and Research, where he was responsible for commercialising biomedical and engineering deep tech ventures.
Edited excerpts of the interview:
Where are the opportunities in tech for Heritas Capital, and why?
In our view, healthcare is a laggard [in digitalisation]. The earlier waves were in fintech, e-commerce, ride-hailing. Healthcare is generally more conservative. Digital therapeutics, for example, is a very novel concept. Also, using health data to manage better outcomes, to be more predictive, to diagnose better, and manage human chronic diseases better.
Although healthcare has been a laggard, it is picking up pace. So that’s why for us, being a healthcare investor, we’re actually combining what we know of the traditional healthcare services that give us the insights to assess which health tech is probably viable.
As investors, you bet on the right direction and trajectory. But your timing is also important. There’s such a thing as being too early. If we were purely health tech, we may not fully appreciate the kind of adoption on the ground [that’s needed]. But because we are healthcare services investors, we have an additional kind of appreciation; [for example] do the hospitals really take these things well? Because in theory, the technology looks very compelling and scalable. But only when you understand service providers and the kind of constraints they face in adopting certain kinds of solutions, then we are better investors.
So while we didn’t jump into health tech from day one, we leverage our knowledge of the traditional healthcare services and constraints.
Healthcare is also tightly regulated, and there was no clarity in government policy on telehealth [for example]. So during COVID, what was important was that countries like Indonesia and India clarified their policy stance. So we felt comfortable investing in India when we saw that the regulations were clarified.
How sustainable is the COVID-accelerated adoption of health tech?
We have to struggle with that as well because it is still a bet. What exactly are we banking on for the medium to long term? To me, the duration of COVID is long enough to reshape certain habits. And digital health adoption in our judgment will become more mainstream. But it will never replace hospitals. That is very clear. We are still investors in traditional service providers.
But COVID has accelerated the trend towards [healthcare] 3.0.
1.0, in terms of digital health, is a little bit like a Zoom meeting for a doctor’s consultation, which is very transactional. But our understanding of healthcare is that it is not a transactional relationship.
Healthcare 2.0 should facilitate a deeper relationship. For example, some of the investee companies are going into electronic healthcare systems.
3.0 is what we are starting to make bets on. This way is integration – of not just digital health, but with offline systems as well. And you add things such as services, care plans, wearables. You have devices that measure vitals, that make digital health more effective. You add big data and AI. That’s where things come together.
How do you generate returns through such investments in tech, as they are not structured as businesses that private equity funds traditionally invest in?
We look at the runway for every fund – if the fund life is near the second half I won’t go in too early in a business.
With the kind of traction we are seeing in the telehealth companies, we believe that in the next two-plus years they would prove to be self-sustainable. I would not have said this without COVID, because what we’re seeing is accelerated adoption, and this shortens the time to viability.
We are betting on category leaders so that from either the potential M&A standpoint or SPACs, they would be natural candidates.
Sea Group’s success [in the public market] and its becoming a giant is forcing consolidation within similar industries. It will percolate down to other industries, like edtech, health tech. So in the next few years, I see that these are all going to flourish, from an exit standpoint.
When I was based in China I watched [the tech industry] very carefully. In those years, foreign players dominated. And then the ‘three mountains’ that came up, Tencent, Baidu and Alibaba – these were the first wave of successful Chinese tech companies.
Now, look at Tencent and Alibaba – they are basically supporting an ecosystem. They have healthcare, logistics. Why shouldn’t that happen in Southeast Asia? As the first few big [tech startups] consolidate, they will expand and will be looking for acquisition targets.
How outsized are the returns?
I would be disappointed if we don’t do a 3x, or 5x for a traditional PE strategy.
But for tech, if it works out well, you’re talking about acquiring users every year, 2, 3x to 10 x increase in a year. For [online language learning platform] Cakap, the number of users actually increased by 20x in the 12 months prior to our investment.
Ultimately, the performance metrics will transition, as they grow to a stage where they become profitable. The metrics at that point in time that is applied will be multiples of profits.
What we need to do is to manage that point of transition, because you don’t want to overpay using early metrics, and to find later that it does not translate to a viable valuation.
Do you see more PE investing in tech, and what does that mean for you, in terms of competition for assets? Are valuations getting too rich?
Sure, this is just a natural evolution.
There are many generalist tech firms – that means they could do fintech, health tech, edtech and all sorts of tech.
For us, because of the background that we come from, we have chosen to specialise in healthcare. We also invest in education for diversification and the impact that education and healthcare can create.
We want to be able to compete on specialist knowledge and value. So if we talk to an investee, we say this is what we plan to work with you on, for example, introducing other customers or other complementary networks or peers.
For us, there are enough of these emerging tech coming up, that we still have a strong pipeline. I do think that having more funds actually give founders a better boost at this point.
For digital health, we are not in bubble territory. But if we’re not careful, it can easily swing into that territory. I am fully cognisant that not every fund is like us. We still have a traditional industry play, which we still want to do. There is still a lot of consolidation to go in the traditional services industry, where our traditional playbook can still be very applicable because it is still a fragmented industry.