Pakistan PE: Maturing morale

When Rizwan Uppal founded Islamabad Diagnostics Centre (IDC) in 2003, he was an army doctor who, like many medical practitioners in Pakistan, was struggling to access quality technical equipment. In a turn of events that mirrors much of the country’s recent economic development, he has now signed a partnership with Abraaj Group that will see IDC’s medical facility footprint double to more than 50 branches across the next five years.

From Abraaj’s perspective, the deal offers exposure to a compelling demographic story driven by a nascent middle class with important unmet service needs. More significantly, it illustrates part of a renewed fervor to accelerate Pakistan’s economic momentum through private investment. In the case of IDC, this means luring back a skilled diaspora with previously unavailable infrastructure and opening the door for more holistic socioeconomic problem solving through public-private cooperation.

“At one end, we are providing cost effective quality diagnostics, and at the other end, we are making a good business model for others to follow,” says Uppal. “Many hospitals and diagnostics businesses are following us, changing their technology and protocols, and moving toward ISO accreditation.”

Rough beginnings

Pakistan’s private equity industry began tentatively in 2006 with a debut fundraise of $158 million by JS Private Equity (JSPE). Abraaj quickly added to this with the close of a $2 billion regional infrastructure vehicle that has made a number of forays into the country, but institutional investment has otherwise remained limited. 

The context for this trepidation has been a decidedly rocky run in Pakistan’s modern history, including a string of dramatic leadership changes, perennial territorial rifts with neighboring India, and an often violent role in international efforts to contain regional terrorist networks. By 2008, this geopolitical backdrop nearly crippled the local economy, the Pakistan Stock Exchange effectively closed for four months, and GDP growth dived as low as 2%.  

PE has played a small but meaningful role in the subsequent recovery effort, with the US government notably mobilizing $150 million in 2013 to be managed by JSPE, Abraaj and Indus Basin Holding. Last year, it followed up with a $100 million commitment in the same three firms as the PSX 100 jockeyed back and forth among the world’s five best performing markets. With the resulting improvement in sentiment, international investors in the coastal financial center of Karachi have progressively viewed the terrorism-related concerns of the country’s remote north as distant, fading thunder.

“The security question is binary for foreign investors, but I think the switch has been flipped,” says Steve Smith, a partner at JSPE. “Foreign investors are seeing Pakistan as an interesting place to be and have noticed the improvements in fundamentals, so it should do well in the short to medium term.”

In addition to a reduction in security threats, these fundamentals include a population of almost 200 million potential consumers, stabilized inflation rates and what is generally regarded as a better performing government after the election of the conservative Nawaz Sharif as prime minister in 2013.

For private equity, most of the inroads relate to a patchy infrastructure sector. Energy, in particular, has surfaced as perhaps the biggest value-add opportunity due to chronic supply deficits in the public-private power generation space and operational inconsistencies on the state-owned distribution side of the industry. Deals of this kind are available but difficult to achieve given the sparse institutional investor presence in the country. Investors therefore see more practical near-term potential in social infrastructure themes, including education, logistics and, especially, healthcare.

“The partnership with IDC is just our first step into this sector, but we have ambitions to roll out an integrated healthcare ecosystem across the main cities of Pakistan that can cater to the needs of the middle income groups,” says Hisham Moussa, managing director for the healtchcare team at Abraaj. “We’re seeing opportunities across the board and a lot more institutionalization.”

Opportunity drivers in this sector reflect much of the overall investment case for Pakistan. For example, a growing public demand for state-of-the-art medical treatment has suggested a new sophistication among consumers. Also, the higher relative prevalence of lifestyle diseases such as diabetes marks the arrival of more widespread affluence.

The VC angle

Healthcare development strides have also highlighted an urbanization trend that is expected to result in some 40 million rural consumers moving to the major cities during the next 10 years. This shift is beginning to evolve venture activity from a disparate network of local family offices making direct investments to an ecosystem of more formal managed funds.  

Frontier Digital Ventures exemplifies the transition with a keen interest in South Asia that is tempered by a wariness of India’s relatively oversized and hypercompetitive markets. The firm has invested in Sri Lanka and Myanmar as well as two start-ups in Pakistan, where it focuses on building online classified businesses in the property and automotive segments.

“We’re facilitating commerce rather than disrupting an existing environment or business model,” says Shaun Di Gregorio, CEO and founder at Frontier. “We went into Pakistan as a new market but with a pre-tried and trusted business model that we’ve seen work in many places and that we understand deeply.”

Such investments are being interpreted as setting the stage for Pakistan’s first generation of homegrown venture success stories within the next two years. Although any future ecosystem will doubtlessly be plagued by many of the country’s current political headwinds, the underserved nature of the modernizing cities will become increasingly impossible to ignore.

“There are moments when you scratch your head at the decision making, but there is an unstoppable economic development in places like Pakistan,” adds Di Gregorio. “From time to time there are going to be political instances that retard that development, but you’re never going to stop it – the momentum is too strong.”

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• Topics
• South Asia
• Healthcare
• Infrastructure
• Pakistan
• energy
• TMT
• Abraaj Capital
• Growth capital