PE targets Australian healthcare
AT A TIME WHEN PROFITABLE EXITS in Australia are difficult to achieve due to the lingering effects of the global financial crisis, private equity firms continue to rely on healthcare for returns. This strategy received a ringing endorsement last week as CHAMP Ventures, the growth capital arm of CHAMP Group, sold Healthe Care, the country’s third-largest hospital group, for 13x EBITDA. Archer Capital paid A$240 million ($255 million) for the company in a secondary transaction. It is the most notable private equity healthcare deal since TPG Capital and Carlyle Group acquired Australia’s number-two hospital manager Healthscope last September for $2.36 billion.
No shortage of suitors
Healthe Care – considerably smaller than Healthscope, with 12 hospitals to its rival’s 44 – garnered interest from a range of private equity and trade players. Local reports suggested that Archer faced off against Pacific Equity Partners (PEP) in the final round of bidding; Quadrant Private Equity pulled out earlier.
According to Healthe Care, CHAMP Ventures made four investments between August 2007 and June 2010, and then embarked on a capital-raising endeavor to finance further renovations to the hospital network.
Su-Ming Wong, managing director of CHAMP Ventures, says that his fund considered pairing with several private equity and corporate partners to foot the bill, yet attractive buyout offers also materialized out of the negotiations, eventually leading to Healthe Care’s sale to Archer for a price the fund is “very happy with.”
“We weren’t looking to sell the business – we continue to believe in the business and its growth,” he tells AVCJ. “But after the Healthscope deal, which highlighted the attractiveness of the private hospital sector, we were constantly approached by intermediaries looking to invest in the business.”
The same day CHAMP Ventures and Archer announced their deal, SA Health Partnership finalized the A$1.85 billion ($1.9 billion) construction of the new Royal Adelaide Hospital, touted as one of the market’s largest public-private partnerships (PPP) to date. That project garnered more than A$300 million ($320 million) from private equity investors, including InfraRed Capital Partners Limited, Leighton Infrastructure Investments, John Laing Investments, Lloyds Bank Corporate Markets and Macquarie Capital Group.
In addition, CHAMP Private Equity, the buyout unit of CHAMP Group, last November received A$122.5 million ($118.6 million) in cash for its majority stake in Healthcare Australia Holdings, a nursing staff agency, as part of an acquisition by UK-based Healthcare Locums.
Privatize and consolidate
Australia’s healthcare sector has become attractive to private equity as an ongoing privatization drive promises to bring consolidation and more lucrative returns. One Sydney-based healthcare analyst explains that the sector is predominantly comprised of hospitals, pathology and oncology assets. Of the three, hospital groups have seen less government interference, which means a greater level of autonomy for the assets’ owners.
According to a report by Nomura, private equity is also attracted by the fact that Australian healthcare companies tend to operate in areas with high barriers to entry and a limited number of competitors. Furthermore, these companies deliver strong cash flow, which can be used to recoup debt and costs associated with any investment, and are relatively immune to downturns in the economic cycle due to the nature of healthcare funding.
Private equity activity in the space is bound to increase due to the attention garnered by the Healthscope deal and an easier fundraising climate globally, Nomura concluded. It identified companies such as ResMed, Cochlear and CSL – all of which manufacture specialist healthcare products and are deemed to be strong on operational efficiency – as potential acquisition targets.
The industry is supported by robust fundamentals, notably an ageing Australian population – the proportion of the population aged over 70 is forecast to double in the next 40 years – and consequent rising revenues from private insurance payouts. Health companies are certainly not slow to invest in these trends, with a particular focus on “brownfield” investments in existing properties.
Ramsay Health Care, the country’s top healthcare group, has made A$670 million ($710.8 million) worth of brownfield investments into its hospitals over the years, and Healthscope spent A$200 million ($212.2 million) on its facilities before being privatized, the analyst says. CHAMP Ventures established a $90 million ($95.5 million) brownfield development pipeline at Healthe Care, helping the company grow to 1,000 beds and turning it into a more valuable asset.
“The brownfield developments not only add capacity but also improve the patient accommodation and facilities for the doctors,” Wong says. “A focus on quality and improving clinical governance is important to the business and the doctors it partners with to drive growth.”
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