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It’s a Munna Bhai MBBS Remake for Healthcare Investing in India


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2018 outlook for Healthcare Investing in India

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It’s a Munna Bhai MBBS Remake for Healthcare Investing in India

  1. 1. ' Kapil Khandelwal. Managing Partner. Toro Finserve LLP and Director. EquNev Capital Pvt Ltd OVER 2016-17, India has undergone the MunnaBhai MBBS n1ovie phenomena between the private equity investors (the college Princi- pal Dr. Asthana) with his deviantstudent(Nlun- naBhai) in the college of healthcare investing pot boiler. While the disciplinarian Principals (privateequityinvestors) wanted higher stakes, exits, secondaries, and return of n1ultiples on the other hand the truant MunnaBhais of healthcare (physician/Inedical entrepreneurs) were trying to coach their Principals that they need patient capital, higher valuation and their Principal who is not breathingdown their neck in the classroon1 of healthcare ventures. Pretty tough to balance out the Principals and Mun- naBhais of healthcare in India! The outcmne of this'love-hate all' MunnaBhai NIBBS flick with the drying up of equity gravy-train is that the credit ratio for the private healthcare sector at an all-tin1e high of 1.5 ti1nes in 2017! Investment Deadlock In 2018-19 our MunnaBhais on the streets of healthcare will touch '5.5 lakh crores in rev- enues and would require 1ninin1un1 of ' 5,500 crores (barely I% of topline as capex for a countrythat needs 5% oftopline as investn1ent in capacity building) to build additional bed capacities.There is a latent fear that MunnaB- OPINION hai's father (the Govenunent) 1nay 1nake a late entry into this n1ovie and scold MunnaBhai for playing their extortion gan1e to curb prices to win audience (vote bank in 2019) approval. In such a scenario would the Principal give away their priced daughter, Dr. Su1nan (aka Laksn1i or investn1ents) to MunnaBhai to fund ' 5,500 next year in holy wedlock? The MunnaBhais of healthcare will have to turn to their trusted goons, Circuit (invest1nent bankers) to bring then1the booty of dead bodies for conducting autopsies! Fairly a headyren1ake ofNlunnaBhai NIBBS! Not yet? Let's cmnpare all the healthcare investn1ent n1odels and their issues in India. These financ- ing options are fairly li1nited and include: + PE investn1ent in operating co1npany for future expansion.These are expensive with 1ninin1un1-IRR of25%,equity-dilutive and restrictive with the strings attached. + Loan against Property (Hospitals) fron1 Banks. These are cheaper with rates rang· ing fron1 9% to 11% pa, lin1ited a1nount, short tenure, not for debt averse healthcare entrepreneurs. + Land Acquisition I Developn1ent finance fron1 a Financial Investor. These are expen- sive with n1inin1un1 IRR of 25% to 30% at land stageand li1nited. 33
  2. 2. OPINION can a new investment model save the day? In 2018-19,a new avatar ofbenefit is on the ho- rizon in healthcare investing, which will debut India's first healthcare real estate fund for un- derwriting exiting healthcare assets of private sector healthcare ventures (hospitals,diagnos- tic centers, assisted living facilities, rehab and long-stay facilities) through a sale and lease back nlodel at I00% loan to value (LTV). The key advantage ofthis 1nodel is that, it willallow players who have been burdened with debt and are unable to raise private equity funding for growth to raise capital for establishing newer facilities and nlaking their business nlodel asset-lite. Our fund has also smne of the State Governn1ents which will co-invest with us into the healthcare ventures in their relevant states. 34 December 2017 • There is apipelineofinvestn1ents fron1 2016-17 funding opportunities of around ' I000 crores which we are evaluating for invest1nents in 2018-19. These are in healthcare facilities lo- cated in top-18 tier I and tier 2cities of India. Healthcare real estate fund benefits Investn1ent in nlaking current healthcare play- ers asset-lite apart, the need of the hour is to nlake healthcare delivery of our investee part- ner cheaper,better and faster! El-Toro provides these through its total solutions of partner eco- systen1s that it has built. Cheaper This fund provides funding which is half the rate of return expected by private equity fron1 their investn1ents in healthcare ventures. India's first health- care real estate fund for underwriting exitinghealthcare assets ofprivate sectorhealthcare ventures is now in available.
  3. 3. Better This investor becon1es 1nore of a partner than a 1nere financier for the healthcare ventures by providingperpetual capital without the hassles of equity dilution with tag-along rights and exits.There is independence for the healthcare entrepreneurs to 1naneuver their growth strat- egy and stabilize their new healthcare assets without undue pressure for exit valuations and profitability. We do not acquire equity into the healthcare venture. Faster This invest1nent firn1 does not guarantee that all deals will befunded however we turnaround nlost oftheinvestn1ent proposals pron1ptly. The key criteria that the healthcare assets need to qualify include location of existing healthcare assets has to be top-18 cities in India; the op- erations of the facilities have stabilized and is EBITA positive to sustain the sale and lease back nlodel of servicing the investn1ents and healthcare entrepreneur con1es with a nlanage- n1ent track record. Other key issues in 2018-19 that need to be resolved Are you a Clinician or a Business- man? For the '5,500 crores investn1ents to con1e to reality in the next year will increase the reali- zation that the doctor-entrepreneur nlodel for operating hospitals is not sustainable for the investors or the doctor-entrepreneur. Its ti1ne that the doctor-entrepreneur needs to decide where his heart lies. Either it is in doing the clinical stuff or a businessn1an running the chain of hospitals? This alter-ego phenon1enon has not delivered focus in driving neither the clinical excellence nor business excellence in healthcare. People Supply Chain For the scale of investn1ents expected to cmne up in the next year, the constraints of people supply chain need to be solved i1nn1ediately. vVe have noticed that nlost healthcare facili- ties have slipped on their tin1elines to stabilize due to supply of inadequate skilled nledical, para 1nedical and support staff which is right trained and credentialed. Build-2-0perate Time Our analysis of the investn1ent in healthcare facilities over the last I0-years has revealed that there is 15%-20%delay in build-2-operate tin1e. This tin1e not only increases the capex cycle but also affects the long-tern1 break-even and profitability and return of the investn1ents. Let's see whether 2018-19 will be another MunnaBhai fv!BBS blockbuster year at the in- vestlnent box office for the industry!!lWil Our analysis of the investment in healthcare fa- cilities overthe last IO-years has revealedthat there is 15%-20% delay in build-2-operate time. 35