There is no question that healthcare is booming despite the financial crisis — not only in the Middle East and other emerging markets, but also in many parts of the developed world.
Healthcare services throughout the Gulf Cooperation Council countries were worth $18 billion in 2008, a figure expected to grow to between $47 and $55 billion by 2020, according to investment bank Alpen Capital.
This bright macro potential is attracting private equity (PE) attention. In the region, PE funds are focusing on education and healthcare as the most promising growth sectors.
Over the past 10 years, healthcare private equity deals accounted for 9 percent of total PE investment. In 2008, the last year for which there are comprehensive industry statistics, healthcare was the number one destination for PE funds, attracting 16 percent of all investment.
Healthcare is now a consumer priority, and it is setting the political agenda. Despite the individual and governmental focus, the current system for delivering healthcare is believed, by most experts, to be archaic. In the United States, the cost of maintaining the existing structure is consuming around 15 percent of gross domestic product, and many believe this is heading toward 20 percent of gross domestic product.
In the GCC, quality healthcare is simply not delivered by the current system to most of the population, despite the fact that gulf governments have made healthcare as a policy priority. Consequently, this implies that this sector will continue to witness significant investment and growth, but also significant change in the regulatory frameworks, as is being seen in the US.
Where to invest
The healthcare sector is tricky to invest in. Market forces do not necessarily translate into revenue or profits; just look at how insurance companies have squeezed hospital profits in many markets.
Regulatory intervention, for example in setting the price of pharmaceuticals, is the norm rather than the exception, and skews the sector economics significantly.
The misalignment of interest between the patient, the payer (usually government or insurance), and the service provider creates mistrust and sub-par service delivery to the ultimate consumer of the service (i.e. the patient).
In the GCC, the government controls almost 75 percent of the sector, and public service providers are resisting change and protecting their turf.
The physician-centric model for delivering healthcare is under pressure due to escalating costs and a shortage of doctors, yet physicians, through their professional associations, are resisting initiatives to improve the system.
In addition, investment opportunities in healthcare are sparse and expensive. There are few sizable investment opportunities for PE funds to target because the sector is fragmented and private operators have, until recently, stayed on the margins.
Once an opportunity is available, it is usually expensive: most PE investments in healthcare were done at earnings before interest, taxes, depreciation and amortization (EBITDA) in multiples of more than 10 and in some cases, more than 15.
The lucrative investment opportunities in the Middle East are in specialized healthcare delivery and supporting services. Such services, like radiology centers, dialysis centers, ophthalmology clinics, or labs, have easy to understand business models and controlled and well understood cost structures, require limited real estate investment, can be quickly replicated across geographies and sustain better margin pressures.