Singapore-based private equity firm Kendall Court has announced an investment of $55 million in Indonesian healthcare business Mandaya Medical International Pte Ltd (MMI), an arm of local conglomerate Selaras Group.
The investment has been done by way of preference shares in the Mandaya Medical Group that operates a 218-bed hospital in Karawang. The funds will be used to develop a 420-bed hospital in Jakarta which is expected to open at the end of 2019, Kendall Court said in an announcement on Friday.
The investment follows Indonesia’s decision to open up the general hospital sector to foreign investors to support its ambition to achieve universal health coverage in 2019. In 2017, foreigners were allowed to acquire a maximum stake of 67 per cent in general hospitals in Indonesia, and ASEAN investors, up to 70 per cent.
“As part of its expansion strategy, Mandaya plans to build two more hospitals in the next five years, bringing total investment in the new projects including Mandaya Royal Hospital Puri (the new Jakarta hospital), to about $150 million during that period. The two additional hospitals will be located in major cities in Indonesia and will capitalise on robust economic growth fundamentals to drive demand in the country’s underserved healthcare sector,” the announcement said.
The Selaras Group acquired its first hospital, Mandaya Hospital Karawang, located 50 km east of Jakarta, in mid-2015 and following a revamp, transformed it into a 218-bed hospital with heart and vascular, neuroscience, and trauma recovery centres. The 420-bed hospital Mandaya Royal Hospital Puri will be located in Metland Cyber City, Jakarta.
It will be a general hospital with a neuroscience spine centre, an advanced cancer centre and a cardio-vascular arrhythmia centre – as well as 10 other specialist centres including those for women’s health and fertility, dental and oral surgery, as well as medical fitness and rehabilitation.
Indonesia has one of the lowest bed-to-population ratios in the world and needs an additional 500,000 hospital beds in the medium term. With a burgeoning middle class and rising income levels, there are plenty of opportunities in Indonesia’s healthcare industry.
Kendall Court Managing Partner Chris Chia said, the firm has been investing in Indonesia for many years and continues “to remain bullish about its overall prospects. We continue to look out for attractive growth opportunities for our investors.”
The PE firm, which manages equity-linked and mezzanine investments across Southeast Asia and has deployed and managed over $600 million in the region, is backed by several institutional and high net worth investors and has invested into the natural resource, healthcare, consumer and telecom industries over the past decade.
DEALSTREETASIA caught up with Chia for an interaction on the investment space in the region and how Kendall Court has moved away from the fundraising model. Chia, who co-founded Kendall Court in 2004, was a former Vice President at Citigroup and also an investment banker at Goldman Sachs focusing on mergers and acquisitions.
You had mezzanine funds and now you are following a different strategy. Could you update us on the shift?
Over the last 10 years, we have changed our thesis to be more equity biased than debt biased in our investment approach. Instead of doing primarily loans with warrants, we started doing preference shares and convertible bonds and equity linked notes, – lowering our debt return hurdles but taking much higher equity upside in whatever we do.
We raised our third fund by 2012 which is now fully invested. The thought then was, do we want to raise the fourth fund but we had great support from our investors who expressed that they will work with us in a JV structure and replicate all that we have in a fund. So there is no need to go raise another fund at the moment. Last year, we managed to deploy more capital this way than when we were managing funds per se.
Is that a co-investment model that you follow ?
Similar but a co-investment model may still mean an LP commitment and a co-investment alongside it. We do it in a way that I put up my capital, you put up yours and we will go in together and deploy it in a JV structure. There will be some economics that we share and it is across a portfolio – no different than an investment holding corporate structure. The substance of what we do does not change and only the form in which we take investors has changed.
There are certain things about that model that may not be suited to all investors and all investees as well because there is a time frame consideration as well. So we chose to go with a more suited approach to our investors and of course, fundraising as a traditional GP – LP structure fund these days is also not easy as evidenced by the longer time taken to close funds.
You moved away from the fundraising model. Is it because it is not easy to raise a fund and are you not looking at fundraising anytime soon, in the short term ?
I can’t say. Fundraising is not easy for sure. Right now, we have the honor and privilege of partners that are supportive of us in the deployment of capital. So, we really need to ask if we really need to have a fund that is fixed in its commitment period and time to exit. We are not a big sized operation so the model of sequential fundraising on a focused strategy fund may not be best suited. Further some of our investors are no longer keen in investing into traditional funds.
The same way as the public market investing has gone whereby you have smaller to mid size managers swallowed up by passive investing and ETFs. That has been actively happening. Fee structures have been going down dramatically over the last decade in that space. So if you are going to have a set up, you probably want to walk to an investor and say, here are all the different products I have and show them your full investment platform across different products, geographies, strategies, etc. That would probably be a more sustainable model. In short, I think the big funds will get bigger because they can operate across a wider platform.
What is your geographical focus and also in terms of sectors ?
In the last couple of years, it has shifted from different countries within ASEAN in terms of prospects and attractiveness. However, Indonesia has always been a consistent bet for us. The core countries are Indonesia, Singapore, Malaysia and Thailand. We have also been looking at the Philippines and Indo-China but more opportunistically.
We do not typically do hi-tech and VC investments. We prefer not do manufacturing either but we focus on the consumer story play of the region such as consumer services, healthcare, education and financial services. We also have a focus on natural resources and infrastructure services.
What would be an ideal portfolio company for you ?
A company with an enterprise value of $50 to $100 million and we go and do a $20 to $50 million investment. We don’t always choose to do a majority control investment as we just want to be a partner with the owner/management to build their business.
How do you think the private equity scene has evolved over the years?
In 2004-2005, we believed that the region was not yet ready for PE and that is why we launched a mezzanine product because it is more of a funding strategy to provide capital to growth companies. But then there was a really good mushrooming of the environment and a lot of funds were successfully raised and deployed. Some measure of exits and so on and then it stalled a little bit over the last five years. I think it is a combination of a few things – the strategics are also investing, family offices are getting more prevalent in doing their own deals, sponsors turning to more bank debt funding due to the low interest rate environment and as such they may not necessarily go for a PE investor. The depth and breadth of our capital markets are not as developed as the western markets and this may have stalled exits as well.
Apart from capital, what else do you bring to the table ?
We typically sit on boards, manage their corporate finance/accounting functions and provide strategic/business development direction to the investee. We also map up very closely with the senior management about the management gaps and where the right people should go to. So, we are quite active. We are not in their day-to-day operations but are in constant conversation about how they are growing. We are focused on ensuring we work with the family/owner/management versus replacing or replicating what they already are good at. We truly believe in a collaborative approach.
What is your take on the kind of deals available in the region. Are there enough worthwhile deals or do you find a dearth?
I don’t think there is a dearth of deals. There are a lot of deals and there is a question if that is attractive and one can close it or not. It comes down the quality of management and structuring win-win investments for us and the investees alike.
Are you also impacted by competition with the big global firms coming into the fray. We see some large funds going for the mid market space ?
That is also by design. Once we know it is a competitive deal, we kind of back away. We like to be in the human to human interaction of the deals. If you think you want a partner, we can grow with you and that is where we would like to be in. We do believe the deal sizes we do are not the focal points of the large funds.
Has that in anyway impacted the playing space in terms of valuations or others ?
We have not seen a hike-up or a bidding war for things. Again, that is a function of our focus not to get involved in such situations.
What is your take on valuations trends?
I think valuations continue to be high, only because it reflects the opportunity set in Southeast Asia and its secular growth trends. Whether people will buy, that is a separate issue. Especially pertaining to healthcare, we see there are a lot of opportunities in Indonesia where lot of people are asking for elevated valuations.
But it is not across all sectors. Healthcare, education and financial services are a few hot sectors.
When you say financial services, would you also include fintech. And would you go for an opportunity there ?
Yes, fintech is in. It is a hot sector and we will look at it if there is an opportunity.
Exits have been a pain point for many in the region. Also, we have hardly seen IPOs as exit opportunities as compared to trade sales ?
Unless you launch an IPO of a certain size in Singapore (as the most developed financial market in the region) the company is likely not to be very well traded post IPO. So, your ability to get on the secondary market or to sell out thereafter could be difficult.
You may list, but it does not mean you have exited. You have a price that nobody believes in and you trade a few thousand shares a day. So, I think the strategic sale makes more sense because there is a premium that you can garner from saying to someone that you are coming in because it holds a strategic value to you. That is a more sane way but it is of course case dependent. Listing a hospital business may be easier than say listing a traditional manufacturing business.