UK buyout giant
Apollo Hospitals Enterprise operates more than 40 facilities across India, making it the country’s largest private healthcare provider. It was founded in 1983 by entrepreneur Prathap Reddy, and currently serves 7.4 million customers with the aim of increasing bed capacity by around 30% every year. For Apax, the investment not only adds to the firm’s already bulging healthcare portfolio but is also a demonstration of its intentions for the country.
A McKinsey report published in 2002 stated between US$22bn and US$31bn will need to be invested in the Indian healthcare sector by 2012, 70% of which will come from the private sector. The growing wealth of the Indian middle class is driving pressure for improved standards of healthcare. According to The Economist, India has 0.6 doctors and 0.9 hospital beds per 1,000 of the population.
As a result, investing in the Indian healthcare sector has been a favourite of Western funds since the country emerged as a legitimate destination for private equity in the early to mid part of the decade.
The sector is proving so popular it already has two dedicated funds:
Hold the phone
Another popular sector for investment in India is telecommunications. The growing spending power of the Indian middle class is driving demands for an improved fixed line and mobile phone infrastructure. India currently has 4.1 telephone lines per 100,000 of the population (by way of contrast, the UK has 56.4 lines per 100,000 people) and 4.4 mobile phone subscribers for the same number (102.2 in the UK). India needs to double the size of its cellular infrastructure over the next three years. The country has 1,10,000 telecom towers at the moment. By 2012 it is expected to triple in size as mobile subscriber numbers reach 500 million – telecom players are cashing in by selling off their tower arms.
The country’s second largest mobile service provider
Sam Mahtani, manager of the Indian arm of asset manager
PricewaterhouseCoopers, in a half-yearly update on the M&A environment in India, reports over 200 private equity investments have been completed in the opening half of 2007 – the value figure is already at US$6bn, projected to reach US$10bn by the end of the year, surpassing the US$7.9bn for the whole of 2006. PwC also notes private equity is widening its focus to include not just the traditional sectors like IT & ITeS, pharmaceuticals & healthcare and telecom, but also real estate, banking and financial services, media & entertainment. Investment in banking & financial services accounted for over 20% of total private equity investment in H1 2007 compared to just 7% to 8% in 2005 and 2006. One of the best examples of this was the acquisition of a stake in one of the country’s biggest stock exchanges, the National Stock Exchange (NSE). NYSE Group, Goldman Sachs, General Atlantic, and Softbank Asian Infrastructure Fund, invested approximately US$500m for a 5% slice of the NSE in March.
The growth of Indian private equity is being aided by an increasing pool of private equity funds focused purely on India. In the first seven months of this year, US$2.5bn has been raised according to Asia Private Equity Review, only marginally trailing the full-year figure for 2005 (US$2.7bn) and within sight of last year’s record total of US$3.3bn. July saw the first US$1bn-plus fund raised by an Indian firm when
Laying the foundations
Neil King, a partner of the infrastructure team at 3i, said: “It’s pretty clear that India has massively under-spent on its infrastructure over the years and now the Government is worried that unless they upgrade it, the economy will stop growing at the rate it has been. The Government has realised it can’t do it itself and wants the private sector to pick up the slack. The Government estimates that private sector investment in infrastructure will be between US$400bn and US$500bn.”
3i is focusing on four specific areas: power, toll roads, ports and airports. Over the course of the last year, the firm has made a US$50m investment in
As a result of the huge strides the Government is seeking to make, 3i isn’t the only private equity firm also to have been busy establishing an infrastructure fund.
In times of economic turmoil, it is typical for investors to pull in their oars, reduce their exposure to risky assets, like emerging markets, and redistribute that money into safer hands. As the investment predictions shows, this doesn’t seem to the case this time around. With India looking at smashing last year’s record number of investments, international private equity firms are ignoring the problems at home and ploughing money into emerging markets like India.
India’s political stability, familiar legal system and strong economic growth are keeping the country attractive. Pat Hedley, a senior vice-president at General Atlantic, says: “India represents a very attractive region due to its growing middle class and the opportunities associated with that – growing sophistication of financial services, healthcare and other consumer products/services – and also because of the tremendous opportunities for global firms to tap into the large and educated population for a business services. We have many investments in some of the highest quality global business services firm, such as Genpact, Patni, Hexaware, IBS and Infotech.”
The next challenge is for firms to put all that money raised into play. In an Apax report published last year, the UK buyout firm placed India as the 32nd most attractive investment destination in a list of 33 (China finishing bottom). Whilst it acknowledged the benefits of a large, cheap and skilled labour force and the increasing spending power of the middle class, it also highlights the bureaucratic nature of the Indian regulatory system, the difficultly of setting up a new business, the strict labour laws, and the restrictive constraints on foreign investment. There is undoubtedly opportunity in India, but investors have to exercise a degree of caution as there remain significant barriers, which could seriously hinder a firm’s investment ambitions. The Indian Government has started to ease up on the red tape, but investors need to be wary of the herd mentality.