BENGALURU: Healthcare operating platform Asia Healthcare Holdings (AHH), which is backed by private equity firm TPG Growth, plans to invest $150-200 million to buy companies in the ophthalmology, urology, and gastrointestinal (GI) segments over the next two to three years, buoyed by the mega success of its first exit.
In May, New York Stock Exchange-listed Varian Medical Systems said it will acquire Cancer Treatment Services International (CTSI), a chain of cancer treatment hospitals for $283 million. In 2016, AHH had acquired CTSI for nearly $38 million, when it operated one facility in Hyderabad.
CTSI has now grown to a network of 11 cancer hospitals with a pipeline of six more hospitals under execution.
This means AHH registered an internal rate of return (IRR) of more than 50% in this exit, according to industry experts. Private equity firms typically expect 15-22% for an investment horizon of five to seven years.
Bengaluru-based AHH acquires and builds small-format single-specialty healthcare delivery businesses and leads these companies through a single management team.
Besides CTSI, which is set to be acquired by Varian, AHH’s portfolio includes mother and child hospitals under the Motherhood brand, and Nova IVI Fertility, a chain of fertility clinics.
“What can be done in the single specialty space fundamentally arose out of conviction that there are certain specialties that can be unbundled from the large multi-specialty hospitals. In the early 1990s, there were players who actually did cardiology on a standalone basis and several cardiac centres came up. Narayana Health (which started as Narayana Hrudayalaya) is a classic example of that,” said Vishal Bali, executive chairman of AHH.
Bali, a healthcare veteran who has been group chief executive of Fortis Healthcare and managing director of Wockhardt Hospitals, believes single specialty hospitals have a better return on invested capital (ROIC) than large format hospitals.
“Most large players see sub 10% ROIC. With the kind of capital investment that happens in this sector, it becomes unfeasible in the long run. So we have to think about small format, not only from a revenue, Ebitda or ROIC perspective, but also from the perspective or the trajectory of growth that you can get in a small format,” said Bali. Ebitda refers to earnings before interest, tax, depreciation and amortization.
A healthcare operating platform is not new in the private equity world. Private equity giant KKR, for instance, backed Radiant Life Care in 2017, creating a healthcare platform for making investments in this space.
Recently, Radiant completed the acquisition of a 49.7% stake in Max Healthcare Institute from Life Healthcare, a South Africa-based hospital operator. More than 10 years ago, ICICI Venture had launched I-Ven Medicare India Pvt. Ltd, a $250-million special funding vehicle aimed at investing in hospitals.
“An operating platform works well if the management team has a background in the segment. An operating platform can bring efficiencies into play through common backend, which can reflect in improving margins. The hard part is hiring the right people, who can run and scale these ventures with absolute conviction” said a Mumbai-based investor who did not wish to be identified because of competitive reasons.