PE’s Healthcare Takeover

ABHAY SOI, 49, chairman and managing director of Max Healthcare Institute, India’s second-largest listed hospital chain by revenue, is a billionaire. Max Healthcare’s market capitalisation is over ₹79,100 crore. Soi-led promoter group held 23.74% stake as on March 31. This is in stark contrast to 14 years ago when Soi was not even an entrepreneur. Instead he was a financial restructuring expert who had done stints at Arthur Andersen, EY and KPMG before co-founding a $350 million special situations private equity (PE) fund. In 2010, he floated Radiant Life Care, which took over New Delhi’s BLK Hospital and Mumbai’s Nanavati Hospital. In 2017, U.S. PE firm KKR picked up a 49% stake in Radiant for $200 million. In June 2019, Radiant bought 49.7% in Max from Analjit Singh for ₹2,136 crore; the two merged to form Max Healthcare Institute. “Operational synergies resulted in cost efficiencies. The combined entity has a broader market presence and a better negotiation platform with external stakeholders such as suppliers and service providers,” says Soi. FIIs and FPIs like government of Singapore/GIC, GQG Partners and Blackrock own majority stake in the company.

Manipal Hospitals, based in Bangalore, is majority-owned by Singapore’s sovereign wealth fund Temasek, which increased its stake from 18% to 59% in March last year by investing nearly $2 billion in what was one of India’s largest PE deals that year. Temasek bought the stake mainly from primary investors such as TPG. Founder Ranjan Pai’s family now holds just 30% in the chain. ‘’PE support since 2015 has been helpful in expansion. We are looking at 14-15% rise in turnover to ₹8,000 crore in FY25,” says MD and CEO Dilip Jose. Before becoming the MD & CEO of Manipal in 2017, Jose was senior advisor to TPG Capital and MD of Care Hospitals heading Fortis Healthcare’s South India operations.

Early April, Dubai-based Dr. Azad Moopen’s Aster DM Healthcare split India and Middle East business to become one of the top three hospital chains in the country. A consortium led by Fajr Capital, a sovereign-backed PE firm, acquired a 65% stake in Aster GCC (Middle-East) for $907.6 million with Moopen family retaining 35% stake along with management and operational rights. The family will continue to have a 41.8% stake in India operations. ‘’We will invest ₹1,000 crore to take bed tally in India to 6,600-plus in three years and scale up our labs and pharmacy business,” says Dr. Moopen, founder-chairman, Aster DM Healthcare.

India’s healthcare sector is undergoing large-scale ownership change in favour of PE funds. It has come a long way from the days when Dr. Prathap Reddy introduced the concept of corporate hospitals with the first Apollo Hospital in Chennai in 1983. Apollo’s success — it is India’s largest healthcare chain with 73 hospitals and 10,000-plus beds — encouraged others. Many hospital chains came up during 2000-2015 — Sahyadri Hospitals in Maharashtra, Sterling Hospitals in Gujarat, Care in Hyderabad, and larger chains like Max, Fortis, Medanta, Manipal, Narayana Health, Aster DM and VPS Healthcare. As most had to pay banks high rates for funds, PE firms saw an opportunity and offered capital against minor ownership. Now, they are majority owners in many of these chains and pumping in money for expansion. “This is good for growth of this capital-intensive sector. Expertise and management skills of PEs come in handy for scaling up and managing a profitable business,” says Vishal Bali, executive chairman, Asia Healthcare Holdings (AHH) and former CEO of hospital businesses of Wockhardt and Fortis.

Deals & New Owners

Grant Thornton Bharat’s deal tracker shows pharma and healthcare has been reporting the largest number of deals after start-ups, e-commerce, IT & ITES and banking & financial services — 39 in 2021, 42 in 2022 and 38 in 2023. The value of these deals was $2 billion in 2021 and $5 billion in 2023. ‘’We expect deals to continue, although volumes may be subdued. Growth drivers such as rising demand, adoption of new technologies and government support are expected to remain in place,’’ says Bhanu Prakash Kalmath S.J., partner and healthcare services industry leader, Grant Thornton Bharat LLP.

In October 2023, Blackstone entered India’s healthcare sector by taking over Hyderabad-based Care Hospitals and KIMS in Kerala in twin transactions worth over $1 billion. The deal, done by Quality Care India in which Blackstone owns 73% and TPG Growth 25%, will create one of India’s largest hospital chains with 23 hospitals (4,000 beds) in 11 cities. While the PE fund bought Care shares from Evercare, a platform of TPG Rise Funds, it bought KIMS stake from founder CMD Dr. M.I. Sahadulla, who will continue to run the chain. ‘’We want to build a patient-centric platform focused on top-notch service,” says Ganesh Mani, MD, Blackstone Private Equity.

In first week of April 2024, another PE major, General Atlantic, bought Ujala Cygnus Healthcare Services, a Delhi-based multi-speciality chain owned by media group Amar Ujala. Sources say the deal values the company at ₹1,600 crore and enabled full exit of early investors Eight Roads Ventures, Somerset Indus Capital and Evolvence Capital. Ujala Cygnus has expanded from nine to 21 hospitals and 1,000 to 2,500 beds since 2018. Among other deals, Girish Patel sold Sterling Hospitals to a consortium led by Arpwood Partners for an undisclosed sum. Canadian pension fund Ontario Teachers’ Pension Plan Board bought Sahyadri Hospitals, Maharashtra’s largest private hospital chain, from Everstone Group in August 2022. Max’s Soi says promoters have sold their assets not due to cash crunch but to monetise holdings. ‘’Another factor is capital-intensive nature of the business. It requires huge funds that many promoters are unable to provide,” he says.

Race To Expand

Helped by PE money and guidance, the chains have made ambitious growth plans. Take Max Health Institute. In FY23, it had 17 hospitals, over 3,500 beds, ₹6,236 crore gross revenues and three-year revenue compound annual growth rate (CAGR) of 13%. It plans to expand the number of beds by 2,740 in next four years by investing ₹4,000 crore. ‘’We are debt-free. In fact, we are net debt positive due to cash reserves. Internal accruals can fund current expansion. We should even have a significant surplus post that,” says Soi.

Manipal is also expanding after ownership change. In September last year, it acquired an 84% stake in Kolkata-based AMRI Hospitals, owned by Emami Group, for ₹2,500 crore to enter East India. In 2020, it had bought hospital chain Columbia Asia for ₹2,100 crore, and Bangalore-based Vikram Hospitals for ₹350 crore a year later. Manipal now has 33 hospitals and about 9,500 beds. It is building four greenfield hospitals, including three in Bangalore. ‘’We are investing ₹1,500-1,600 crore in expansion,” says Jose. Dr. Moopen of Aster DM Healthcare says they ‘’plan to add 1,700 beds by FY27 through organic route and also look at the inorganic route.’’

Egged on by rising competition, even non-PE-owned chains have become aggressive. The leader, Apollo Hospitals, plans to invest ₹3,435 crore to add 2,860 beds by FY27. Fortis Healthcare, owned by Asia’s largest healthcare chain IHH Healthcare, plans to add 2,200 beds to existing 4,034 (FY23).

Single Speciality Focus

PE funds are also investing in single-speciality chains due to shorter gestation periods and need for much less capital than a tertiary care or a multispecialty hospital. Vishal Bali’s AHH specialises in this. Founded in 2016 with acquisition of Cancer Treatment Services International for $38 million, and later sold to Varian of California for $283 million, AHH is a single speciality platform funded by TPG Growth and GIC. It owns 23 woman and child hospitals under Motherhood Hospitals and Nova IVF Fertility, a chain of 78 IVF centres in South Asia, both acquired in their infancy. It recently bought Asian Institute of Nephrology & Urology for ₹600 crore; it is India’s largest urology & nephrology network with seven hospitals and 500 beds. ‘’Our financial success speaks for itself. Motherhood Hospitals has a ROCE (Return on capital employed) of 30-35% and Nova’s exceeds 50-55%, highlighting the potential for high returns from single-speciality enterprises” says Bali.

Bali’s success has inspired many such investments. In July last year, BPEA EQT spent $657 million for a majority stake in Indira IVF, the largest provider of fertility services in India. Same month, Singapore-based PE firm Quadria Capital invested $155 million in Maxivision Eye Hospital, a network of 42 centres in southern and western India. In August last year, Dr. Agarwal’s Eye Hospital raised $80 million (₹650 crore) from existing investors TPG Growth and Temasek to double its footprint to 300 hospitals in India and Africa in three years. The two funds had invested ₹1,050 crore in the chain in May 2022.

Managing Governance/Costs

Institutional investors like PEs are also helping investee companies improve governance and control frameworks in areas such as budgeting, capital allocation and management. Global investors also improve brand perception and introduce globally tested strategies and technologies. ‘’At Max, we analysed processes, identified bottlenecks and streamlined workflows, resulting in savings and improved resource utilisation and patient care,” says Abhay Soi. He says Max’s management is prudent with capital allocation, be it acquisition of a hospital or day-to-day expenditure, and every decision is based on return on capital and adding value for patients. This was not the case with traditional hospitals.

Experts say PE players are also helping hospitals face capex and profitability pressures. A typical 250-bed speciality hospital requires an investment of ₹250-350 crore. ‘’Typically, annual maintenance and technology spend is ₹7-8 lakh per bed. Facility upgrade is required every three-five years,” says Dilip Jose.

The sector is also grappling with 25-30% yearly rise in manpower and real estate expenses. Dependence on imported technology (95%) adds to the cost. A professionally managed enterprise has an edge in such a situation. However, founders often continue to remain involved but assume the role of chairman, allowing professionals to run the show.

Market Opportunity

For PE funds, the chief attraction is the potential of the Indian market. The healthcare industry has grown at a CAGR of 10-12% over FY17-22 and is expected to reach ₹8.6 lakh crore by FY27 (10-12% CAGR), according to a Crisil estimate. A CRISIL Ratings analysis of 89 companies that account for two-third revenue of large private hospitals indicates revenue of private hospitals will go up a healthy 11-12% in FY25 after 14% growth in FY24. Operating profitability in FY25 is likely to be 16-17%. “Healthy demand for healthcare services due to increased awareness of lifestyle treatments, rise in medical tourism and widening health coverage will ensure 60-62% bed occupancy even on significantly enhanced capacities. Average revenue per occupied bed, estimated to have grown 8% to ₹36,000 in FY24, will be ₹38,000 in FY25,” says Anuj Sethi, senior director, CRISIL Ratings.

The funds also see huge scope for growth due to massive shortage of healthcare infrastructure in India. India has 14 beds per 10,000 people. The global average is 29. The global average is 16 physicians per 10,000 people; India has 7.4. The share of public health expenditure is just 34%; the rest 66% is with private sector. Out-of-pocket healthcare expense is 55% compared with 11% in U.S. Healthcare expenditure as percentage of GDP was 3% in 2019 compared to 17% in U.S.

Dilip Jose says insurance penetration has also made a difference as 60-70% population is now covered either by employer or state/central schemes. Crisil Research says health insurance penetration has grown from 17% in FY12 to 38% in FY21. Pradhan Mantri Jan Arogya Yojana has also helped — 24,000-plus hospitals have been empanelled and nearly ₹50,000 crore disbursed for 42 million treatments since September 2018.

The funds are also bullish on demand from ageing population, medical tourism and rising lifestyle and non-communicable diseases. “India is at the cusp of a significant demographic change leading to doubling of population aged over 60 years by 2050. Cancer incidence is expected to increase 77% during this period,” says Dr. B.S. Ajaikumar, executive chairman of HealthCare Global Enterprises, one of India’s leading cancer hospital chains. Rating agency ICRA estimates that Indian private hospitals are going to add 30,000 beds in next three-four years by investing ₹32,500 crore. Mythri Macherla, assistant vice president and sector head, ICRA, says growth will be led by demand for elective surgeries, preference for large hospitals, insurance penetration, rising non-communicable diseases and medical tourism. While occupancy level will remain 64-65%, average revenue per occupied bed will grow 8-10% and revenue 12-14% in FY24, according to ICRA.

With that kind of opportunity beckoning, more capital will flow to Indian healthcare, say experts. Big investors will continue buying smaller, single speciality and standalone facilities.