The region’s healthcare sector currently faces several pressing priorities, including rising rates of lifestyle ailments such as diabetes and heart disease, a growing population and problems of accessibility and quality of care. In addition, the predominant financial model, in which the state assumes most of the financial burden of care, is unsustainable. Both factors have led private equity (PE) firms in other markets to invest into healthcare infrastructure and the delivery of services, thus addressing societal needs while generating attractive returns.
Yet, PE investors in the Middle East and North Africa have made only minimal contributions to the reshaping of the healthcare sectors in the countries of the Gulf Cooperation Council (GCC) and elsewhere in the region.
During a recent roundtable discussion organized by the Middle East and North Africa Private Equity Association (MENA PEA) for PE firms, consultants and healthcare practitioners, four factors were named to explain the lack of industry investments in healthcare projects: mismatched investment horizons, state involvement, regulatory surprises and a lack of clarity about exit strategies. This notwithstanding, MENA PEA members affirmed that private equity can and should be a key contributor as GCC countries seek to improve healthcare and bring better services to their populations.
Patience is a virtue
Before advocating stronger PE involvement in Arab healthcare, there are barriers that need to be addressed. First, most PE investors seek deals with a short timeline and a high rate of return. The ideal scenario is to make an investment, improve operational efficiency and then exit the investment after three to four years while aiming for a high return. Healthcare deals, in contrast, often take far longer to pay off, and returns are not necessarily as attractive. Greenfield projects offer potentially higher returns, but require a longer timeline. One rule of thumb is that PE investments in healthcare require a minimum of five years to ensure proper returns.
The second barrier to PE investments is the large presence of GCC governments in healthcare. In many markets, the state remains the primary healthcare player, regulating the industry and operating most hospitals and care facilities. Many governments have publicly stated that they want private companies to enter the healthcare sector, but at the same time are increasing their own role — which sends a mixed message.
For example, the Saudi Health Ministry recently announced the launch of 420 health projects, including the construction of 127 hospitals, in addition to the 259 it already operates, at a cost of $3.2 billion. Such moves in effect “flood the market”, leaving little room for PE investors. These measures also put the public sector into competition with the private sector for scarce resources, such as talent.
Third, a lack of clarity on regulations — both new rules and enforcement — also makes investors cautious. “We don’t necessarily dislike regulations per se,” said Nicolas Murat, a partner at Dubai-based Levant Capital. “What we dislike are surprises: new rules that we didn’t anticipate, or an unexpected application of the rules.”
Last, many participants in the MENA PEA roundtable were hesitant about healthcare investments because they do not offer a clear “exit strategy”, a path to divest investments once they have achieved their target returns. Only a handful have successfully launched initial public offerings, such as Dallah Healthcare Holding Co. on the Saudi Stock Exchange last November, or Abu Dhabi-based NMC Health Plc on the London Stock Exchange in August 2012.
Remedies, opportunities
To overcome these obstacles and engage in the healthcare sector, PE firms can deploy several solutions. One promising approach is public-private partnerships (PPPs), or collaboration arrangements between governments and private companies. These arrangements have already been used in the GCC for building such infrastructure as airports and power plants. They are a potential stepping stone for the state-operated healthcare segment to attract more private-sector players such as PE firms.
Under a typical healthcare PPP, the government reduces its involvement and no longer operates facilities or delivers care. Instead, the government exercises an oversight role, identifying gaps in accessibility and quality, regulating the market and offering incentives to attract commercial players. PE investors inject capital into profitable opportunities — such as promising for-profit companies — and contribute their expertise in clinical, administrative or support services to improve performance.
There are several successful healthcare PPPs already under development in the region. Egypt last year signed PPP deals for the construction of a 200-bed gynecology and obstetrics university hospital, a new general hospital and a blood bank and pediatric and emergency-care ward at an existing facility, all in Alexandria.
While the tendering of these healthcare projects was disrupted two years ago in the wake of the Arab uprisings, the contracts are now ongoing, according to the information available from Egypt’s PPP central unit, notably with the participation of the Cairo-based PE firm, Bareeq Capital.
The Saudi Health Ministry is currently investigating several PPP opportunities, and there is an established track record of successful healthcare PPPs in the EU, including Spain and several Scandinavian countries. These examples provide guidance for structuring the PPP mechanism.
A second avenue is for PE firms to look beyond hospitals and clinical operations. While the most obvious components of healthcare, they are also complex and require specific expertise. More accessible opportunities for PE investors exist in adjacent categories, such as medical supplies, pharmaceuticals and laboratory and diagnostic services.
For example, Gulf Capital, a PE house, acquired a diagnostic imaging company in Egypt with 13 centers in 2009 and then made add-on acquisitions in Saudi Arabia, Jordan and Turkey. The company expects to run 37 centers by the end of this year, making it by far the biggest diagnostic imaging chain in the region. The company can now use its bargaining power to secure good pricing deals and financing on equipment. “It’s possible to add value in the sector by improving the quality of operations and implementing standardized procedures, and, via tele-radiology, provide specialized services in more remote areas that would otherwise not be available,” said Jonas Voelker, vice president of Gulf Capital.
PE houses can also move one degree away from clinical care by building administrative, finance and support capabilities for healthcare operators. Or they can take over some service elements from governments that are too busy building and operating hospitals. Such ventures would allow PE investors to tap into the expertise they have already built up in areas such as software, equipment and human capital through their investments in other industries.
Last, PE houses must recalibrate the expectations of their investors by clearly communicating that healthcare is not like other industries. Investments take longer to pay off and often have complex exit strategies, thus requiring greater patience. One investment house, ReAya Holding, keeps its investments as long as it takes — including some greenfield investments such as a vaccine production plant — giving them time to mature.
Following Dubai’s lead
Healthcare investment is more difficult than other industries where PE investors have succeeded in the past. Yet the opportunities are compelling. Given the scope of the region’s healthcare challenge over the coming decades, PE firms that choose their strategies and targets carefully — in markets where the government has established clear expectations, as has occurred in Dubai — will find success. They will generate attractive returns for their investors, and they will help build a stronger and healthier GCC overall.
