PE investors’ focus on APAC healthcare push deals up 60% to $36.4b: Bain & Co

Map of the Asia Pacific. Credit: Business & Human Rights Resource Centre

Uncertainty about global economic growth trajectory led private equity (PE) investors to focus on healthcare as a safe haven in 2016. This not only resulted in increased PE deal count but also deal value during the year.

PE deals (disclosed) in the healthcare space globally surged to $36.4 billion in 2016, excluding several large deals with undisclosed deal value, its highest level since 2007. This marks a nearly 60 per cent increase from the deal value of $23.1 billion in 2015, as per the findings from Bain & Company’s sixth Global Healthcare Private Equity and Corporate M&A report that was released today.

The PE activity was also very strong in the Asia Pacific (APAC) region, especially in the provider sector where deal count nearly tripled and there was a total of 52 buyouts, a return to levels of 2013.

According to the report, healthcare assets saw intense competition for deals that drove up valuations and saw funds capitalising on the disparity between public and private valuations for some healthcare assets, which prompted a surge in public-to-private transactions.

Corresponding to this was a falloff in the number of IPOs, amid a modest decline in overall exit activity and a broader decline in PE deal making.

Source: Bain & Company

The APAC region continues to see a growing interest in health and wellness. One of the most active areas in biopharma was OTC products and supplements. Given the growing trend of Chinese consumers flocking to global health and wellness brands, Chinese investors looked overseas – mainly to Australia and Canada – to buy OTC manufacturers that marketed their products in China.

One such deal saw Primavera Capital partner Shanghai Pharmaceuticals Holding to privatise Vitaco, an Australian developer and manufacturer of vitamins and supplements.

“As a long-term bet, healthcare is hard to beat,” said Kara Murphy, a partner in Bain’s Global Healthcare and Private Equity Practices and co-author of the report. “Deal activity will continue to be high as more funds look to deploy capital into the sector. Given the intense competition, funds will need to be increasingly creative to get deals done,” she added.

After three consecutive record-setting years, total deal value in the APAC region declined somewhat in 2016 to $3.2 billion from $4.9 billion in 2015. However, this falloff was largely due to the lack of a megadeal, such as the $3.3 billion buyout of publicly traded WuXi PharmaTech that dominated 2015. The few mega scale assets that became available in 2016 went to corporate buyers.

Underlying momentum was very strong, with 10 buyouts in 2016 valued at more than $100 million and an additional $700 million of the region’s capital was deployed in private investments in public equities (PIPEs).

Also Read: Alternative investment firm TPG sees opportunities in Asian healthcare, finance

APAC deals, APAC demographics

Source: Bain & Company

PE investors continue to find APAC’s demographics promising, with economies supported by both a growing and ageing population, an expanding middle-class and rising burden of both chronic and communicable diseases, the report said.

The total disclosed value of provider buyouts in Asia-Pacific surged to $2.4 billion in 2016, up from $0.8 billion in 2015, on the back of favourable regulations and the availability of assets. Funds faced heated competition from corporate buyers, but different categories of investors also collaborated, often across borders.

Corporate competition for the largest assets in the region was strong, especially from Japanese conglomerates. The biggest asset to come to the APAC market in 2016 was Toshiba Medical Systems, which attracted interest from PE investors, but ultimately got sold to Canon for $5.9 billion. Similarly, Fujifilm beat PE investors for the sale of Takeda Pharmaceutical’s 70% stake in Wako Pure Chemical Industries, which makes diagnostic reagents.

APAC deals, in particular, saw a mix of buyers including corporates, PE firms and sovereign wealth funds (SWF). For instance, Malaysian sovereign fund Khazanah Nasional formed a joint venture (JV) with Mitsui of Japan and US-based DaVita Kidney Care to support DaVita’s expansion in the APAC region.

In India, investors were active in hospitals and clinics space. Last year, the Abraaj Group bought a majority stake in CARE Hospitals, India’s fifth-largest healthcare provider, from Advent.

While funds expressed interest in Southeast Asia, they continue to be deterred by a lack of assets and steep valuation expectations. One deal in the region that did come to fruition, however, was CVC Capital Partners’ taking a 15 per cent stake in Indonesian hospital operator Siloam.

This resurgence in deal activity across the region was led by the provider sector, with 31 provider deals in 2016. This is about triple the number of deals in 2015, with assets changing hands in China, India, Southeast Asia and Australia.

Vikram Kapur, Bain partner and leader of the firms APAC Healthcare practice, explains: “Healthcare is becoming a “go-to” destination for financial investors in Asia Pacific. The attractive fundamentals of the sector are bolstered by the fact that, today, assets in the region are reaching the scale that gets more and more PE investors to take notice.”

“Additionally, recent PE exits have demonstrated that the sector can deliver solid returns. As a result, competition for deals continues to heat up. What we see winners do differently is focusing on the value they can bring to these assets, including creative angles such as partnering with corporates and fueling cross-border M&A activity,” he added.

Also Read: India: PE, VC investments up 13% in March quarter, says Bain & Co report

China Highlights

Chinese funds continued to be encouraged by the 13th Five-Year Plan (set forth in 2015), which supports more private sector activity in the provider, medtech, and HCIT segments to meet the growing demands of the population.

The funds were very active in cross-border investing in the APAC region in 2016, often buying overseas companies with services they hope to bring to China. Developed market funds in the region also invested heavily in emerging economies.

In Asia-Pacific’s largest provider deal, Hong Kong-based China Resources Group joined Australian investment bank Macquarie Group to buy a majority share in GenesisCare, Australia’s largest provider of radiation oncology, cardiology and sleep treatments, plans to take the company’s care delivery expertise to China.

This transaction also saw the exit of KKR, which had acquired stake in GenesisCare in 2012.

In 2016, investors were able to consummate a number of investments in Chinese provider assets. For instance, Bain Capital acquired a controlling stake in Asia Pacific Medical Group, a Chinese hospital group specialising in neurosurgery and neurology.

Additionally, Carlyle Group bought a stake in Zhongmei Healthcare, a speciality hospital group that filed for an IPO later in the year. This specific deal was a $64 million pre-IPO investment that saw it acquire a 15.7 per cent stake in the company prior to its listing in Hong Kong.

Another notable transaction was Singaporean state investment firm Temasek Holdings‘ JV with Seattle-based Columbia Pacific Management to expand the company’s specialty hospital operations in China.

Also Read: Bain to invest $816m on S Korean beauty products maker Hugel

APAC Prospects 2017

According to Nirad Jain, a partner at Bain’s Global Healthcare and Private Equity Practices and the report’s co-author, investors can continue to expect more volatility in 2017, which will boost the appeal of healthcare assets as a safe-haven investment.

“With an ageing and ailing global population, demand for healthcare services will rise regardless of whether there are economic headwinds, tailwinds or crosswinds. But, that’s not to say all healthcare investors will have smooth sailing—sky-high valuations for healthcare assets mean that there are choppy waters to navigate,” Jain said.

In this environment, deal makers will need to continue to be creative and look harder to find targets that have the capacity to deliver meaningful returns. Additionally, investors are entering 2017 with significant dry powder—a legacy of years of low-interest rates. Moves to deploy this capital are likely to result in bidding prices being pushed up.

“In Asia Pacific, the coming of age of assets and growing competition from PE and corporates will continue to raise the bar for investors and they will need to think hard about the differential value add they can bring to targets beyond growth capital,” Kapur added.

Category leaders, which are often better positioned to weather an economic downturn, will continue to command a premium. Investors interested in pursuing buy-and-build strategies will prize these companies as those best situated to roll up smaller, weaker competitors, the report said

Bain anticipated that more consortium arrangements are also likely in future. An increase in partnerships between PE funds and corporations will also emerge, particularly in the pharmaceutical and medical technology sectors, which may be ripe for carve-outs after the wave of megamergers over the past several years.

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