MSPEA enters the China hospital space

Now the PE firm wants to repeat the trick with hospitals. Prior to December, MSPEA had yet to invest in a Chinese hospital. In the past few weeks it has taken a minority stake in Baijia, China's second-largest private sector maternity hospital operator for $38 million, and completed two control deals for hospitals in Jiangsu province, working in partnership with Sihuan.

"The government made announcements about liberalizing the industry in late 2013 but even before that we saw the catalysts for consolidation," Sun says. "We think there is a window to do this and we wanted to make sure we had the best operating structure to execute that thesis."

The MSPEA-Sihuan relationship stretches back to 2009 when the PE firm supported the chairman, Fengsheng Che, in a privatization of the business, then listed in Singapore. Sihuan subsequently went public in Hong Kong. Both groups have a long-term interest in hospitals so they decided to form a joint venture, with MSPEA and Sihuan each owning 38.14% and Che holding the remainder. They are combining sourcing channels, with MSPEA providing acquisition expertise and Sihuan tapping its strong network of management talent.

While Baijia is a classic growth deal - it has 600 beds across 13 hospitals and will open another four facilities in the next six months - the JV platform is a dedicated acquisition vehicle. The plan is to absorb 6-12 hospitals, exploit scale and operating synergies, and ultimately take the platform public. A total of RMB1.24 billion ($200 million) has been deployed so far in the acquisition of majority stakes in HY Hospital in Huai'an city and JB Hospital in Nanjing. While JB was already under private ownership, HY is being acquired from the local government.

Last year the government opened the door to private investment in public hospitals and more opportunities will come assets are sold off with a view to improving the quality of healthcare. But increasing PE competition is not the only challenge; these deals must go through a formal sale process and they are difficult to transact.

"Among the key criteria are the well-being of the existing employees and the patient population as well as the stability of the tax contribution. They always focus on the background and operating credentials of the acquirer," says Sun.

If a PE firm can secure the right asset at the right valuation with the right management, however, hospitals are highly attractive. "What we like a lot about this sector is the barriers to entry are high if you are well positioned. The cash flows are stable and very defensive," Sun adds.

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• Topics
• Healthcare
• Greater China
• Buyouts
• China
• healthcare
• buyout
• Morgan Stanley Private Equity Asia