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COMMENTARY

Asian healthcare hits investment sweet spot, but beware heady valuations

THE healthcare sector in South-east Asia and India hits the sweet spot for private equity, thanks to strong growth fundamentals, a clear regulatory environment, and increasing deal-flow opportunities, but investors should be wary of inflated valuations and look for value in specialist provision outside of hospitals.

The demand for healthcare in this region is being driven by ageing demographics and the increasing prevalence of lifestyle-related diseases, the scale of which the public sector is unprepared for. Forecasts show that South-east Asia and India's median age will rise to around 37 over the next 30 years, from under 30 now.

Each healthcare market in India and South-east Asia is at a different stage of development, each with its own distinguishing characteristics and regulatory systems. They range from mature in Singapore, developed in Thailand and Malaysia, developing in India, Indonesia, the Philippines and Vietnam, to nascent in Cambodia and Myanmar.

The region also offers a variety of healthcare players from basic government universal healthcare provision and fragmented private medical insurance coverage, to a growing middle class used to and willing to pay cash for a decent brand and high quality service.

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Some of the biggest publicly listed firms in the Asian healthcare sector are trading at high earnings multiples, which is helping to lift valuation expectations for private firms. Listed healthcare companies in India were trading at a weighted average of 58 times earnings at the end of 2017, while peers in Singapore were trading at around 25 times.

ATTRACTIVE OPPORTUNITIES

This has helped fuel a growth in deal flow, with more than 400 private equity and venture capital investments made in the Asian healthcare and pharmaceuticals sectors in the last five years.

There are attractive early-stage opportunities for the private sector and for public-private partnerships, thanks to the region's well-established and sophisticated regulatory systems, high appreciation for quality standards, and skilled, local pool of healthcare professionals.

The returns are impressive. Our data shows that private equity investments in emerging market healthcare firms have delivered an average internal rate of return (IRR) of 17.5 per cent over the last five years, compared to 11.6 per cent for all sectors.

Healthcare in South-east Asia has primarily been a hospital centric-model, where everything is done on a big campus - even primary care. In South-east Asia's well-established hospital segment, market share has been captured by big brands that command high valuations.

But there are tremendous investment opportunities for healthcare provision outside of hospitals. Demand for off-campus provision has been growing strongly, supported by patient outcome benefits and hospital capacity shortages, with ambulatory centres, labs and specialist inpatient facilities all taking root in the region.

Entrepreneurs have a whole palette to work with, and a lot of tools available. Up-and-coming entrepreneurial companies with good management on the verge of profitability usually fail to attract the big fish due to smaller ticket sizes. Investors that do focus their attention in this segment will harvest the high multiples seen in the sector, if they are nimble, experienced and astute.

  • The writer is a Singapore-based senior adviser at TVM Capital Healthcare
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