Fund focus: Quadria's health check

Quadria Capital’s second healthcare fund closed at $595 million in the third month of the coronavirus outbreak. Given that medical infrastructure in many emerging countries – not least in India and Southeast Asia – was already in need of an upgrade, Abrar Mir (pictured, right, with fellow managing partner Amit Varma), a managing partner at the firm, believes the crisis underlines the need for more investment in the sector.

Among Quadria’s existing portfolio companies, lower footfalls are expected in hospitals and clinics but that could be counter-balanced by enhanced demand for the services of companies selling products like medical drugs or offering diagnostic solutions.

Despite the gloomy backdrop, the Quadria team was happy that the latest fundraise exceeded expectations. It initially set a hard cap of $500 million, but increased this to $600 million after reaching a first close in March 2019. LPs come from around the world although North American and European investors comprised a majority. Rahul Agarwal, Quadria’s India-based director says that larger pools of capital available in the West naturally lead to sub-allocations into healthcare specialist funds.

“LPs who sit in Asia feel they can access some of these companies or stories directly because they are much closer to the market. Although some Asia-based LPs contributed to Quadria Capital II, many are still warming up to sector-focused funds,” says Agarwal.

Scaling up

For the previous fund, a $304 million vehicle raised in 2014, LPs were able to co-invest in many of the nine companies backed. As a result, Quadria deployed more than $450 million in total capital. Medical drug producers, hospitals, clinics, vitamin manufacturers, an at-home healthcare provider and diagnostic firms were among the recipients. They hail from Vietnam, Indonesia, Singapore and India.

As mid-market healthcare businesses have grown in line with broader macroeconomic trends in Indian and Southeast Asian markets, Fund II is also likely to feature plenty of co-investment. In the coming years, the firm is expected to make 8-10 investments once more with check sizes ranging from $70 million to $200 million (including co-investment).

Agarwal says what has worked in Quadria’s favor is its proprietary deal flow – only one of the nine investments was banker-led. This meant the firm avoid beauty parade auctions in which valuations escalate as private equity firms compete for assets. It also helps that Quadria remains the sole healthcare-focused GP in Southeast Asia. That does not mean a lack of competition; it comes up against the regional teams of global private equity firms like TPG Capital, TA Associates, and General Atlantic.

In India, Quadria is fighting for deals against seasoned firms like Tata Capital Healthcare Fund and TPG-backed Asia Healthcare Holdings that have been investing for more than a decade. As a result, a pool of healthcare-focused PE specialists has emerged, and Agarwal expects similar manpower growth in Southeast Asia. 

Quadria’s singular focus, though, enables it to build up country-specific knowledge that is well received by the private equity firm’s investors. “The fact that we were able to demonstrate that we had a net deployable pipeline has resonated with a lot of LPs,” says Mir, adding that over 60% of total capital committed from Fund I went to companies in Southeast Asia.

There are three main areas of investment opportunities within the healthcare sector the firm looks out for, according to Agarwal: core healthcare services like hospitals; pharmaceutical and life science firms; and associated healthcare services providers such as medical device manufacturers, health insurers, pharmacy chains, and healthcare financiers.

“Given the evolution of the markets and the size of the opportunities, the first two buckets gave maximum deal flow for us in Fund I. For Fund II, pharmaceuticals has become more interesting. Because of the clampdown in China [due to the coronavirus], countries like India can pick up a greater opportunity,” he says.

In addition, increased regulatory scrutiny in developed markets might mean investments in healthcare service providers might not bring the same returns as they did in the past.

Agarwal notes that investment activity related to the latest fund will have an increasingly strong environment, social and governance (ESG) focus. How hospitals dispose biomedical waste or pharmaceutical plants handle emissions are now regular topics of conversation at the pre- and post-investment stage. 

Further, the increase in fund size means reinforcements – investment professionals and healthcare experts – are required, especially in the Singapore office due to the nuances of investing in a region with diverse healthcare regimes. Even though the region might not represent as big an investment opportunity as India, it brings additional complexity.

Downturn dynamics

Perversely, the coronavirus could play a part in making life easier in the long run. Much like SARS in 2003, it is expected to emphasize the importance of health awareness and prompt government-led initiatives after years of cutbacks. “One of the key things that the coronavirus has taught us is that it’s very important to have a consciousness of health around us. In the long term, this will lead to greater demand for the right health infrastructure in place,” says Mir.

At the same time, Agarwal concedes the downturn will make it difficult for portfolio companies seeking IPOs. Of the nine businesses backed in Fund I, at least one is looking at that exit path. Meanwhile, larger financial sponsors are tracking other Quadria investees.

Just as prevailing market conditions are problematic for exits, they could be a boon for new deal flow. Fund II is already being put to work. Hyderabad-based Asian Institute of Gastroenterology (AIG) and AKUMS Drugs & Pharmaceuticals, India’s largest contract manufacturer for pharmaceutical companies, are recent additions to the portfolio. Quadria initially invested in AIG in 2014 but bought out Samara Capital’s stake towards the end of the last year.

“Bearing in mind the impact that it’s having on markets, valuations are actually under pressure but the underlying quality of the opportunity in Asian healthcare continues to be very robust,” says Mir.

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• Topics
• South Asia
• Southeast Asia
• Fundraising
• Growth
• Healthcare
• India
• Quadria Capital