PE firms bullish on hospital space in SE Asia but may scout for niche strategies

photo by Daan Stevens on Unsplash

Private equity appetite for the healthcare sector in Southeast Asia continues to remain high thanks to macro factors such as the region’s economic growth and a huge demand-supply gap.

However, investors may be more discerning as they seek to place their bets on healthcare assets, particularly private hospitals, that are run as a tight ship in terms of cost control measures.

According to healthcare sector-focused PE players and industry experts that DealStreetAsia spoke to, hospital operators who have been quick to respond to the COVID situation by adding capabilities such as digital platforms, remote consultation, specialisation in acute care and home care services would attract greater investor interest.

Traditionally, medical tourism and elective procedures significantly contributed to the financial performance of large private hospital operators. But, the pandemic-induced global travel restrictions and social distancing norms have led to the postponement of elective procedures as also medical treatment-related travel.

As a result, during the global pandemic, private hospitals struggled to maintain their financial numbers through the second quarter of 2020 despite the huge increase in demand for patient care.

“In Southeast Asia and in Asia more broadly, COVID cases, especially the severe ones, primarily went to the public healthcare system, with some volume coming to the private healthcare system, which is unlike other markets, such as the US. Hence the Asia healthcare system was more impacted by deferrals and lockdowns which in turn impacted healthcare tourism and local acute cases,” said Aakash Swaroop, director, healthcare sector coverage at MUFG.

Pressures on financial performance

Expand Table

Hospital OperatorRevenue Q3-2020 Profit Q3-2020Revenue Q2-2020Profit Q2-2020Revenue Q1-2020Profit Q1-2020 
IHH Healthcare3.52 billion ringgit309.2 million ringgit 2.56 billion ringgit - 232.15 million ringgit3.55 billion ringgit- 366.66 million ringgit
Bangkok Dusit16.9 billion bath1.9 billion bath13.9 billion bath528.5 million bath20 billion bath2.7 billion bath
Bumrungrad 2.95 billion bath231.3 million bath2.5 billion bath46.6 million bath4.2 billion bath768.8 million bath
compiled by DealStreetAsia

Expand Table

Hospital OperatorRevenue 9mo-2020 Profit 9mo-2020Revenue H1-2020Profit H1-2020Revenue Q1-2020Profit Q1-2020
Siloam HospitalRp 5 trillion- Rp 43.013 billionRp 3.17 trillion- Rp 129.37 billionRp 1.87 trillionRp 19.5 billion
Medikaloka HerminaRp 2.88 trillionRp 349.03 billionRp 1.73 trillionRp 134.25 billionRp 983.889 billionRp 99.319 billion
Mitra KeluargaRp 2.3 trillionRp 570.13 billionRp 1.44 trillionRp 317.6 billionRp 874.7 billionRp 220.4 billion
Raffles Hospital n/an/aS$241.4 million S$16.3 millionS$128 million SS$7.5 million
Thomson Medicaln/an/aS$97.98 million- S$97.06 millionn/an/a
data compiled by DealStreetAsia

Private hospitals suffered top line impact as elective procedures and healthcare tourism nearly disappeared during the first wave of the pandemic.

With break-even volume percentage for providers being 40%-60% depending on the business model, a sudden fall in volumes impacted the profitability of private healthcare providers, Swaroop said.

While elective procedures have rebounded in the last few months, private healthcare operators may face pressures coming from patients who may opt to down-trade health coverage or those who are dependent on insurance provided by their employers.

“The pandemic has affected a lot of businesses leading to lay-offs in various companies and impacting capability to pay private insurance premiums,” he added.

So, hospital operators with a payer profile that is heavily dependent on private health insurance coverage will feel the pain. Currently, the health insurance penetration in Southeast Asia countries, except Singapore, is relatively low at only around 10-30 per cent.

Alongside the pressure on top line, private healthcare operators have also seen costs soar on account of enhanced infection prevention protocols, higher consumption of personal protective equipment and wages.

“The cost increase may not be massive, and most of the large tertiary care hospitals will be able to pass on a lot of their costs [to patients],” Swaroop added.

Emphasising that the additional operating costs due to the pandemic have affected most industries, not just healthcare, Quadria Capital vice-president Mervin Teo said, “In our businesses, we have been able to navigate the challenges and are now operating close to pre-COVID levels, well-positioned to capture market share when the economy gradually recovers next year”.

In general, hospitals are capital intensive businesses to run, Swaroop said. “Hospitals have high fixed costs and require large capex leading to break-even period, for a greenfield project in tier 1 city, of between two to four years from project completion,” he added.

During the pandemic, the market caps of listed healthcare providers dropped but they have come back to pre-COVID levels since the trough seen in Q2-2020. In a few cases where the market cap still remains lower than pre-COVID, it is more driven by asset-specific reasons, Swaroop continued.

Despite the COVID odds, hospital operating under listed PT Medikaloka Hermina Tbk noted an 18 per cent growth in revenue and 63.7 per cent increase in net profit in the first half of 2020. In Q3/2020, Hermina noted 7.26 per cent in revenue growth and a 24.57 per cent profit growth. [See chart above].

“Hermina is participating in the fight against COVID that has offset the lower number of non-COVID cases,” said Hermina director Aristo Setiawidjaja, adding, the overall impact for Hermina itself is neutral, as healthcare sector is very resilient.

Tourism impact

For SE Asia case, the major medical tourism destinations are Singapore, Malaysia and Thailand.

Although some countries have allowed international travel, it is still not clear how easily patients can travel especially for elective and non-emergency cases. “It will not happen immediately. Maybe somewhere around the second half of 2021,” Swaroop added.

Malaysia expected 300,000 medical tourists in 2020, a huge decline from 1.2 million in 2019. And revenue for hospitals from this segment may fall to around 500 million ringgit this year, from 1.7 billion ringgit in 2019, as reported by media.

Meanwhile, Thailand’s medical tourism market worth up to $87.5 billion annually is expected to shrink until 2021. Thailand’s Bumrungrad International Hospital, which has over 50 per cent of its patients from overseas, has predicted 28 per cent decline in revenue by the end of 2020, according to media report.

“Whilst there are near-term headwinds in medical tourism, the underlying attraction of SE Asia as a prominent medical tourism hub, for its clinical reputation and competitive pricing, remains unchanged – in particular for chronic diseases such as cancer, diabetes, cardiovascular diseases and others,” Teo said.

Expand Table

PE FirmHospitalCountryInvestment date
TPG Columbia Asia Malaysia, Indonesia, VietnamSeptember 2019
Navis CapitalHanoi French HospitalVietnamJune 2016
Kendal CourtMandaya HospitalsIndonesiaOctober 2018
Quadria CapitalFV Hospital Vietnam2017
CVC CapitalSiloam HospitalIndonesiaAugust 2016
Baring PEJakarta Eye CenterIndonesia2015
Affinity Equity PartnersIsland HospitalMalaysiaJune 2015
Saratoga InvestamaAwal Bros HospitalIndonesiaOctober 2016
Falcon House Partners Brawijaya HospitalIndonesia2015
TPG Cardiac Vascular Sentral Kuala Lumpur MalaysiaAugust 2018
EQT Health Management InternationalSingapore, MalaysiaDecember 2019
VinaCapitalThu Cuc HospitalVietnamAugust 2020
Clermont GroupHoan My MedicalVietnamJune 2013
GIC, KKRMetro Pacific HospitalsPhilippinesOctober 2019
TPG Jetanin Institute for Assisted ReproductionThailandMarch 2018
VinaCapitalThai Hoa HospitalVietnamMarch 2016
VinaCapitalTam Thri HospitalVietnamAugust 2018
IFCPrincipal Capital PCLThailandNovember 2019
Persada Capital InvestamaPersada HospitalIndonesia2014
CreadorHermina Hospital Indonesiaexited
Khazanah Nasional BerhadIHH HealthcareSingapore, Malaysia, India, Turkey
data compiled by DealStreetAsia

New strategies for operators and investors

In the long run, investors will be keenly watching healthcare operators who pursue a deeper growth strategy beyond the traditional model of adding beds.

“Our argument is that hospitals, in the future, will need to focus more and more on acute care, because this is where their strength is. And this is where they can actually hope and have always made the most money,” said Helmut Schuehsler, CEO of TVM Capital Healthcare.

Although non-urgent treatments were deferred during the COVID period, the main point is providing confidence to patients in terms of infection control protocols and thereby assuring safety, Swaroop said.

Hospitals may also need to think about other delivery solutions beyond teleconsultation such as home care or home delivery solutions, daycare or ambulatory care, Swaroop added.

“The key question for investors is unlocking these healthcare opportunities by leveraging technology and backing business models capable of addressing the huge demand-supply conundrum – for example in healthcare services, investing in large, scalable businesses and solutions that are able to deliver affordable, high-quality care to the masses,” Teo added.

Another area that investors may be focusing on is talent and management teams.

In most emerging SEA countries, the main challenge in operating hospitals is to find quality medical and management teams to work with, who are aligned with your vision, values and culture, said Martin Robinson, partner of HEAL Partners. It was one of the major challenges he faced when he worked as Chairman of Hoan My Medical Corporation in Vietnam.

Echoing similar views, Teo said, “Quadria continues to back market-leading businesses that are better positioned than its peers to withstand short-term shocks, and providing strategic capital and hands-on support to drive growth and weather-proof our businesses from future shocks.”

Valuation and return expectation remains high

Investment prospects in SE Asia’s healthcare services space remain as strong as ever, said Robinson of HEAL Partners. “The healthcare gap remains significant and therein lies for the opportunity for private investors to help close the gap,” he added.

While private hospitals face a rough patch during the pandemic, for PE investors, this segment is still too attractive to be avoided. Thus, the valuation and return expectations remain high.

“The pandemic has not altered the immense opportunity in Asian healthcare, in fact, it accelerates and brings a new sense of urgency for private investments,” Teo said.

On valuations, Schuehsler said, while it usually depends on the quality of the asset, deal valuations are still not going down at mid-teen multiples range, and for clinics maybe around 12-13 times of EBITDA multiples.

The internal rate of return (IRR) expectations for PE investments in hospitals remains at 25 per cent in local currency or 20 per cent in US dollar return, a SE Asia industry player said.

In the near future, the volume of patients will come back, and hospitals are said to regain their ground in the next few months.

“The underlying growth fundamentals remain strong and the defensive nature of the Asian healthcare sector compared to most other industries will continue to make the sector a bright spot in the region for regional and global investors,” Teo said.

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.