Healthcare investment outlook – 2022 and beyond

Attracted to healthcare’s high returns, recession resilience, and demographic tailwinds, more diverse investors with a broader range of strategies are pursuing opportunities in healthcare.

Every sector experienced its watershed moment during Covid-19, with healthcare being the most impacted of all. As the pandemic made exacting demands from the healthcare system, experts across the globe realized the need for an overhaul of the existing care models.

Healthcare companies stepped in just at the right time to breathe new life into the healthcare system, supporting it through this tough time, and making it resilient for the future.

As the pandemic subsided in most parts of the world in 2021, many predicted the investor appetite for healthcare would wane from the highs of 2020. However, deal-making trends in 2021 dispelled all such notions, as capital invested via venture capital (VC), private equity (PE), initial public offering (IPO), and merger and acquisition (M&A) deals soared and the number of megadeals surged in 2021.

Some of the recent notable investments in Indian healthcare space in May 2022 include:

Eight Roads Ventures launched its first India-dedicated life sciences and healthcare fund of USD 250 million, hoping to exploit a boom in the healthcare sector that has been one of the core investment themes for the venture capital firm. Eight Roads Ventures, which began its India operations in 2007, will use the fund to invest in 15–20 companies over three to four years.

Chennai-based Dr. Agarwal’s Health Care Ltd. (DAHCL) closed a landmark fund raise of ₹1050 crore from TPG Growth, the middle market and growth equity platform of alternative asset firm Texas Pacific Group, and from existing investor Temasek, a global investment company headquartered in Singapore. The investment round will also provide significant capital to fuel the company’s expansion plans and pave the way for an exit for existing investor, ADV Partners. DAHCL also raised ₹270 crore investment from Temasek in 2019.

Motilal Oswal Private Equity made an investment of ₹194.4 crore (USD 25 million) in Pathkind Diagnostics. The fund will be utilized for expanding into southern parts of India, further develop the IT infrastructure, and digital marketing efforts. The diagnostics chain has over 75 labs and 2000 exclusive collection centers in 23 states.

Karkinos Healthcare, a technology-driven, oncology focused managed healthcare platform, announced that Mayo Clinic has invested a minority stake in the company, subject to certain conditions precedent. Karkinos Healthcare, which is pioneering the Distributed Cancer Care Network model in India has Ratan Tata, Venu Srinivasan, Kris Gopalakrishnan, Ronnie Screwvala, Vijay Shekar Sharma, and Bhavish Agarwal amongst its set of investors. The Tata Group is investing ₹110 crore in Karkinos while Rakuten Medical and Reliance Digital Health hold minority stakes.

Goldman Sachs announced plans to invest about ₹2700 crore (USD 350 million) in API Holdings, the parent of online pharmacy PharmEasy, in a structured debt transaction. The debt will carry an interest rate of 14–15 percent and also have a pre-agreed equity upside, or a premium to the rate based on potential increase in the company’s valuation, the people said. The money will predominantly be used to refinance the debt the company had taken to fund its acquisition of diagnostics chain Thyrocare last year. PharmEasy had plans to raise ₹6250 crore through an initial public offering of shares and use ₹1929 crore of that for paying off debt. A part of the debt payment is due by August 2022.

Earlier in March 2022, Baring Private Equity Asia (BPEA) had announced plans to pick up a significant minority stake in India’s leading gastroenterology hospital, Hyderabad-based Asian Institute of Gastroenterology (AIG) Hospitals. Investment bank Goldman Sachs is advising on the sale process and if talks conclude, BPEA may end up holding a total stake of around 40 percent in AIG Hospitals as part of the negotiations along with governance rights. Existing investor private equity firm Quadria Capital, which holds a 30-percent stake in AIG Hospitals, would exit the company as part of the proposed deal.

And in February 2022, Asia Healthcare Holdings (AHH) inked a pact to raise ₹1284 crore (around USD 170 million) from Singapore’s sovereign wealth fund GIC. Till date, AHH has invested around USD 200 million across single-specialty healthcare enterprises in oncology, mother and childcare, and fertility. Most recently, AHH acquired Nova IVF in 2019 and grew it from 19 IVF centers to 50 IVF centers across 35 cities in India and South Asia. Similarly, Motherhood Women & Children’s Hospital network has grown from three hospitals in 2017 to 16 hospitals in 2021, with several other facilities under execution.

In the same month, Cloudnine, chain of hospitals for women, childcare, and fertility announced plans to raise about ₹1200 crore from the public market. The private equity-backed chain is likely to float its IPO by the middle of 2022. True North (erstwhile India Value Fund Advisors) is the largest shareholder in Cloudnine with about 36 percent stake. While other investors NewQuest and Sequoia together hold about 35 percent stake, promoters hold about 20–25 percent stake, while the rest is ESOPs.

Global Health Private Limited, which operates hospitals under the Medanta brand, has received SEBI’s approval to raise funds through an initial public offering (IPO). As per the draft papers, Global Health’s IPO consists of a fresh issue of ₹500 crore and an offer-for-sale of 4.84 crore shares. The proceeds will be used to pay debt and for general corporate purposes.

Attracted to healthcare’s high returns, recession resilience, and demographic tailwinds, more diverse investors with a broader range of strategies are pursuing opportunities in healthcare. Growth-equity investments helping disruptive innovators scale have surged. And consortium-led megadeals in 2021 broke deal-value records. With healthcare returns expected to remain strong, despite rising competition, we expect investors to continue diversifying how they deploy capital. Rigorous planning for value creation as part of the diligence process will become even more important. One development to watch over the coming years will be the rise of healthcare-focused funds that have a scale comparable to the tech megafunds through the market this year through their IPOs. These include Rainbow Children’s Medicare, Yatharth Hospital, Mediassist Healthcare Services, Skanray Technologies, Infinion Biopharma, Healthium Medtech, Veeda Clinical Research, Sahjanand Medical Technolgies, Global Health, GPT Healthcare, API Holdings, Kids Clinic India, Macleods Pharmaceutricals, and Portea Medical.

In less than a year, 12 healthcare companies raised ₹11,584 crore. These include Nureca, Krishna Institute of Medical Sciences, Tatva Chintan Pharma, Glenmark Life Sciences, Windlas Biotech, Krsnna Diagnostics, Ami Organics, Vijaya Diagnostics, Sigachi Industies, Tarson Products, Medplus Health Services, and Supriya Life Sciences. Most are trading on positive levels even post their listing.

HealthQuad, an India-focused healthcare venture capital firm, has raised USD 162 million (₹1215 crore) in the final close of its second fund. The firm, which counts Medikabazaar, Ekincare, Healthifyme, and Qure.ai in its portfolio of invested companies, has got global pharma maker MSD (Merck & Co, Inc.) as its anchor investor for the new fund.

The Mankind Pharma IPO is expected to value the company overall at ₹61,000 crore. That is roughly equivalent to about USD 8 billion at the current exchange rates. Among major PE investors in the company, the consortium of ChrysCapital, Government Investment Corporation (GIC) of Singapore and CPP Investments of Canada own 10 percent of Mankind Pharma. In addition, Capital International currently owns another 21-percent stake in Mankind Pharma. The pharma company is based out of Delhi, and it will be among the most valuable pharma companies in India post the IPO. Mankind Pharma has already hired JP Morgan, Citigroup, Jefferies, Axis Capital, IIFL Securities, and Kotak Mahindra Capital as the investment bankers and the Book Running Lead Managers or the BRLMs.

Healthcare companies, which have grown manifold and provided significant assistance both on physical and virtual platforms during the Covid-19 pandemic, are increasingly trying to raise funds through capital markets. This has prompted a shift toward virtual care delivery, a focus on mental health and well-being, and a push for speedier drug and vaccine candidate discovery.

This would not have been possible without the contributions of new-age healthtech companies. From wellness and hospital groups to diagnostic services and bulk drugmakers, most are keen on going public.

The explosive growth in demand for healthcare and lack of funds to match it by expanding facilities, and buying equipment necessitates sourcing the funds through various investments. PE investors, most of them based overseas, are attracted to invest in Indian hospitals. However, a few years after such an investment, the PE firm typically seeks to exit by finding a suitable buyer to sell its investment at attractive valuations.

Recently, several PE firms are preparing to exit hospital investments to capitalize on abatement of the pandemic and a rebound in businesses of their portfolios.

Investors, such as True North, Creador, and Everstone Capital, have either begun the process of exiting hospital investments or have initiated talks with buyers to sell their stakes in these assets. If the deals fructify, several hospitals could see a change in their shareholding structure over the course of the year.

True North Partners is considering an exit from Kerala-based KIMS Healthcare Management Ltd., where it had first invested in 2017. Similarly, Creador is in talks to exit its investment in Delhi-based Paras Hospitals. Everstone Capital is in talks to exit Sahyadri Hospital, while Faridabad-based Asian Institute of Medical Sciences (AIMS) may also see investor exits.

Hospitals were under stress during the pandemic as reflected in the performance of listed firms. A large number of hospital chains grew only at single-digit CAGR (compound annual growth rate) for the last few years. The lower revenue growth and pressure on profitability pushed back any significant capacity addition by these hospitals, barring a few that have still been acquisitive.

More varied investors with a larger range of strategies will target healthcare prospects because of its strong returns, recession resistance, and demographic tailwinds. Expect investors to continue diversifying their capital allocation strategies as healthcare returns are projected to stay robust despite increased competition. As part of the diligence process, meticulous planning for value development will become even more critical. The rise of healthcare-focused funds, with a scale equal to tech mega funds, will be one trend to monitor in the coming years.