Portfolio: Advent International and CARE Hospitals

When Advent International sells CARE Hospitals or takes the business public, approximately 100 doctors and other healthcare professionals will share in the wealth. All are members of the company's employee stock ownership plan (ESOP), put in place to properly incentivize staff and ensure alignment of interest with the major shareholders.

The CARE Hospitals 100 are unique in India's hospital industry through their participation in a widely-structured stock option program. This approach turns on its head a business model that tends to be founder and promoter-dominated, with highly-concentrated ownership.

"We believe we are the first healthcare company to do this in a structured fashion," says Dilip Jose, who was brought in as CARE's CEO in 2013. "The ESOP cuts across management layers, giving everyone a stake in the growth. It depends not only on a person's age or length of service, but it is also a forward-looking scheme that recognizes people who will do well in the future, as well as those who have already contributed."

This was part of a broader reorganization of that was discussed even before Advent invested. The private equity firm acquired a controlling stake in CARE for around $105 million in April 2012 following a competitive process. But when this process started, CARE's founders did not envisage selling control; rather, they were looking for new capital from a minority shareholder who would replace two existing backers.

Advent approached the situation on the back of four years spent scouring India for targets in healthcare. It met with almost every hospital chain of sufficient size to absorb at least $50 million, crossing off listed entities where there was little chance of wielding significant influence as well as less attractive geographies. CARE was among the remaining candidates, but Advent concluded that a cleaner shareholder structure was required to realize the growth potential.

"Although they had a clear vision in mind, they were not sure as to how to get there in terms of the detailed plan. We spent 2-3 months working with them on this. We explained we had the operational capabilities and we are willing partner with them, but not in a minority context," Avnish Mehra, a director at Advent, says.

"The question was then should they sell control to a PE firm or a strategic player. We said they would create more value by partnering with us today and then selling to a strategic in 4-5 years' time."

Advent bought control by taking out three investors: a high net worth individual, a family office, and Ashmore Investment Management. Over the next few months Advent acquired shares from another 100 very small investors - including some management team members - to clean up the shareholding structure.

ESOP was one of several initiatives introduced to professionalize management. When Advent invested, two of the co-founders, Dr. B. Soma Raju and Dr. N. Krishna Reddy, served as chairman and CEO, respectively. Both remain actively involved in the business, especially onthe clinical side, as chairman and vice chairman, but a management team has been built around them.

Jose, formerly head of southern India at Fortis Healthcare, was brought in and the strengthened senior team then set about reforming the two management layers below it, extending down to the unit heads within each hospital. In addition to introducing regular performance reviews, clear reporting lines and proper leadership functions in areas such as procurement and supply chain management, steps were taken to make administration more efficient.

"The head of each hospital used to be a medical person, typically a doctor doubling up as an administrator. We created a two-in-a-box structure of the doctor and a professional, full-time manager with accountability for the business," Jose explains.

Overseeing CARE is not only a board that meets once a quarter, but also an operating committee comprising key board members. This approach is taken when there is a need for rapid decision-making. The committee meets once a month and sometimes at even shorter notice. Its members include Dr. Vikram Chhatwal, the former CEO of Reliance Healthcare who is Advent's operating partner for the investment. He spends 3-6 days a month with the management team, working on a variety of projects.

Expansion story

CARE was set up in 1997 as a 100-bed facility focused on cardiac care. By the time Advent invested, the business had grown into a chain comprising 11 hospitals across seven cities, with nearly 1,600 beds and competence in cardiac care, neuroscience and natural science. It ranked fifth in India by number of beds and revenue.

Over the last two years, annual revenues have risen from $80-90 million to around $120 million, while EBITDA margins are now in the mid-teens, up from 9-10%. CARE now runs 15 hospitals across nine cities with 2,300 beds and 500-600 more expected to come online in the next 12 months. The beds added since 2012 have come through the expansion of existing hospitals and contracts under which CARE acts as a third-party facility manager.

Advent's total investment now stands at about $120 million following additional commitments to support expansion. From a return-on-capital perspective, efforts are best focused on adding beds to existing hospitals - if a facility is performing well and running close to capacity, then 50-100 beds can leverage technology and equipment already in place. In certain cases, however, acquiring hospitals or building new ones cannot be avoided.

"Greenfield takes the longest amount of time but in certain cities you need to follow this strategy because otherwise you have a mismatch of structures and styles," Mehra says. "We were lucky that when we invested in this business it already owned land in a number of cities, and land is a major barrier to building new facilities."

Jose also senses an opportunity to run more facilities on a contract basis. He observes that many stand-alone hospitals in India and the doctors who set them up are now open to handing over control to larger players that can offer economies of scale, marketing strengths and professional management. CARE currently runs two hospitals through this kind of arrangement and in each case it has an option to buy full ownership within five years at a predetermined multiple.

Four in five new beds that came online between 2002 and 2012 were provided by private hospitals looking to address the imbalance between inadequate public facilities and the rising demand for better services from a growing middle class, according to a PwC-NatHealth report.

India still has only 1.3 beds per 1,000 people, trailing China and Brazil, and these beds are spread across 55,000 hospitals. It is estimated that the country will require 650,000 new beds by 2017 at a cost of more than $26 billion, more than 50% of annual government healthcare expenditure.

Despite this compelling opportunity to expand and consolidate, CARE is not adding capacity for the sake of it. The company has five hospitals in tier-one Hyderabad, but beyond that the focus is on smaller, faster-growing cities. Mehra notes that healthcare is a very local business so it is better to concentrate on established demand bases than spread resources too thinly.

At the same time, bed capacity is becoming less significant: healthcare is shifting to an out-patient setting, which means ensuring swift turnover with the existing capacity is just as important as adding capacity. "When we invested the average length of stay was five days across the group. We have brought that down to four, which means a lot of capacity has been released," he says. "Adding bed capacity is expensive, takes a long time and isn't necessarily the best use of capital."

As such, CARE does not have a set-in-stone expansion target. Rather, the goal is to be a top three player in every city in which it has a presence. The resulting development strategy has two strands.

First, resources have been plowed into improving patient experience. This arose from customer feedback obtained by Advent during its due diligence process, which found that, while there was general satisfaction with the standard of CARE's clinical teams, some of the facilities were described as tired-looking. Areas such as food and beverage, housekeeping, IT and supply chains have been upgraded. In one case, a new out-patient building was added to a congested hospital.

Second, CARE has been expanding its clinical coverage. Heart disease and cancer have become the two leading causes of death in India, exposing a shortage in diagnostic and therapeutic facilities.

There are only 1,050 cardiac centers nationwide capable of performing about two million angiography procedures, yet there are now more than 50 million patients suffering from coronary heart disease, the PwC-NatHealth report says. The number of cancer centers as well as PET, CT and MRI scanners is also insufficient given the rate of new diagnoses.

Already well-established in the cardiology field, CARE is busy building up expertise in sub-specialties. It recently entered into a partnership with US-based medical technology specialist Medtronic to set up heart failure clinics. At the same time, the company is branching out into oncology and diabetes and strengthening its programs in neurology, nephrology, orthopedics and organ transplants.

Overcoming obstacles

These initiatives bring their own challenges. In a country with a mere 0.65 physicians per 1,000 people, the availability of able healthcare professionals is a common concern.

"One of the major issues is the shortage of talent - managerial and clinical - particularly when you are developing niche specialties," says Jose. "Most of the talent is concentrated in major cities - Delhi, Mumbai, Bangalore, Hyderabad and Kolkata - and so it is difficult at times for us to attract people to smaller locations."

Regulation is also a potentially contentious area, with the government placing greater emphasis on cost controls. The 2014 union budget pushed forward the Modi administration's ambition "health for all," which will be rolled out in phases from April 2015 with the ultimate objective of providing universal access to drugs and diagnostic services by 2019.

The estimated cost is $11.4 billion per year, and while private healthcare providers will no doubt be accommodated, the environment is uncertain.

Around 55% of CARE's business is cash-in-hand, with the remaining patients covered by some form of insurance, whether it is a private or corporate scheme or a government program. For the former, tariffs are negotiated with insurance companies; for the latter, they are mandated by the authorities.

"You have to make sure pricing points are sensible," says Mehra. "Most hospitals now have to cater to at least some government-sponsored insurance schemes for below-poverty-line patients, where the price is fixed at a certain level by therapeutic area."

Less than 15% of India's population has some form of health insurance, with the penetration of private programs in the low single digits. Working from such a low base, the share of CARE's business coming from insurance customers will almost certainly increase; and then urbanization, government policy, the arrival of more foreign companies that offer healthcare cover and rising disposable incomes may accelerate uptake.

Operating a more mature business in a more mature industry will likely improve Advent's exit options, provided the business achieves its financial and strategic targets, although neither the PE firm nor CARE's management - which would participate in any upside - says it has given detailed thought to the virtues of an IPO versus a trade sale.

For his part, Jose claims to be more focused on containing the various day-to-day pressures, with human resources, pricing and cost controls top of the list. "On the softer side it is finding the right people; on the hard side it is cost management," he says. "It all filters through into how you manage effectively and deliver a profitable business."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Buyouts
• Healthcare
• South Asia
• Operating partners
• buyout
• India
• healthcare
• Advent International