India Awards: PE Deal of the Year – CARE Hospitals

When Advent International invested $105 million in CARE Hospitals it was the private equity firm's first foray into India's healthcare sector, yet it didn't represent a step outside the comfort zone. About 20% of Advent's sixth global fund has been committed to the sector, with seven investments in the last three years ranging from mental healthcare assets in the UK to IVF clinics in Ukraine.

"We have a very strong set of operating partners on a global and a local level," MiteshDaga, a Mumbai-based assistant director at Advent, tells AVCJ. "We have people like Tim Elsigood, who was CEO of Capio, one of the largest healthcare chains in Europe, and then in India we have Dr.VikramChhatwal, who was previously CEO of Reliance Healthcare and before that CIO at Apollo Hospitals Group."

Chhatwal spends at least one day a week at the company's headquarters, supporting management on a number of initiatives. These include brownfield and greenfield expansion projects - much of Advent's capital is going towards enlarging the CARE network - improving patient experience across clinical and non-clinical areas, and setting up a marketing division.

"CARE previously relied on walk-in customers and word-of-mouth, but as the group expands it needs to have a marketing team and start thinking about branding strategy," Daga explains.

Extensive groundwork

Advent's comfort with Indian healthcare also derives from the four years spent identifying a suitable investment target. The sector as a whole is worth $40 billion and is expected to reach about $120 billion by 2015 and then continue to double twice in the coming 10 years. This is driven by rising household incomes and a double-digit increase in health insurance penetration, with less than 15% of India's 1.2 billion population currently covered.

Service quality is an issue but so is scale. Advent met with almost every hospital chain of sufficient size to absorb an equity investment of at least $50 million, which is the private equity firm's threshold for India. Daga estimates that only 7-8 could have handled the $105 million that was eventually committed, but several of these weren't viable. Apollo and Fortis Healthcare, for example, are listed companies and $100 million would have obtained a small minority stake and little operational influence. Meanwhile, Sterling Hospitals was struck off the list because Advent wasn't comfortable operating in the notoriously difficult Gujarat market where, as Daga puts it, "every doctor is an entrepreneur."

The Advent team comprised Managing Director Georg Stratenwerth, who oversees the Mumbai office, Director AvnishMehra and Senior Analyst Abhinav Sharman, as well as Daga. Once they settled on CARE, it took nearly two years to close the transaction.

The team first met the company founders during their industry investigations but still had to participate in an auction process run by Rothschild that eventually saw two potential buyers shortlisted. The challenges remained after the competitive process ended: Advent acquired its holding from three large investors - a high net worth individual who is among India's most prominent public markets investors, a family office and Ashmore Investment Management - as well as about 300 small shareholders, principally CARE staff.

"It was complex because of the number of shareholders selling and the fact that they all had different objectives and had come in at different times and at different price points," Daga says. "But it did allow us to build a great relationship with the founders in terms of agreeing on one-year and five-year plans for the company."

The reputation of the founders was one of the main reasons why Advent wanted to invest in the first place. CARE was set up in 1997 by a group of medical professionals led by Dr. B. Soma Raju. They turned a 100-bed cardiac care-focused facility 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 when Advent invested.

However, the founders were performing procedures in the morning and running the business in the afternoon, which created inefficiencies. Advent's first priority was to bring in professional managers - IT and marketing department heads were among the early recruits - to provide additional support.

Second-tier focus

The private equity firm was also drawn to CARE because of its geographical focus. The company has hospitals in Hyderabad, Vishakhapatnam, Raipur, Bhubaneshwar, Nagpur, Surat and Pune - second-tier cities that are expected to be the driving force as India's healthcare sector continues its rapid growth.

"The major cities are more or less saturated with most of the large national hospital chains present," says Daga. "Out of all the hospital chains in India CARE has one of the largest networks in these tier-two cities. The company's expansion will be in the seven cities where it is currently present because there is strong demand and limited supply, and we already have teams of doctors and administrators."

CARE is also likely to feature strongly in Advent's future India strategy as relevant opportunities that fall below the $50 million threshold - perhaps stand-alone hospitals or smaller regional chains - can be acquired through bolt-on transactions. However, Daga expects to see more investment activity on the pharmaceuticals and life sciences side, which also feature strongly in the PE firm's global portfolio.

"Advent just raised its latest global fund so we are actively looking for investment opportunities," he says. "There is a lot of capital to invest and India remains an important market for us, as does healthcare."

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• Topics
• South Asia
• Healthcare
• Expansion
• Advent International
• healthcare
• India