2018 outlook for Healthcare Investing in India Kapil Khandelwal QuoteUnquote with KK www.kapilkhandelwal.com

1. '
Kapil Khandelwal.
Managing Partner.
Toro Finserve LLP and
Director. EquNev Capital
Pvt Ltd
OVER 2016-17, India has undergone the
MunnaBhai MBBS n1ovie phenomena between
the private equity investors (the college Princi-
pal Dr. Asthana) with his deviantstudent(Nlun-
naBhai) in the college of healthcare investing
pot boiler. While the disciplinarian Principals
(privateequityinvestors) wanted higher stakes,
exits, secondaries, and return of n1ultiples
on the other hand the truant MunnaBhais of
healthcare (physician/Inedical entrepreneurs)
were trying to coach their Principals that they
need patient capital, higher valuation and their
Principal who is not breathingdown their neck
in the classroon1 of healthcare ventures. Pretty
tough to balance out the Principals and Mun-
naBhais of healthcare in India! The outcmne of
this'love-hate all' MunnaBhai NIBBS flick with
the drying up of equity gravy-train is that the
credit ratio for the private healthcare sector at
an all-tin1e high of 1.5 ti1nes in 2017!
Investment Deadlock
In 2018-19 our MunnaBhais on the streets of
healthcare will touch '5.5 lakh crores in rev-
enues and would require 1ninin1un1 of ' 5,500
crores (barely I% of topline as capex for a
countrythat needs 5% oftopline as investn1ent
in capacity building) to build additional bed
capacities.There is a latent fear that MunnaB-
OPINION
hai's father (the Govenunent) 1nay 1nake a late
entry into this n1ovie and scold MunnaBhai for
playing their extortion gan1e to curb prices to
win audience (vote bank in 2019) approval. In
such a scenario would the Principal give away
their priced daughter, Dr. Su1nan (aka Laksn1i
or investn1ents) to MunnaBhai to fund ' 5,500
next year in holy wedlock? The MunnaBhais
of healthcare will have to turn to their trusted
goons, Circuit (invest1nent bankers) to bring
then1the booty of dead bodies for conducting
autopsies! Fairly a headyren1ake ofNlunnaBhai
NIBBS! Not yet?
Let's cmnpare all the healthcare investn1ent
n1odels and their issues in India. These financ-
ing options are fairly li1nited and include:
+ PE investn1ent in operating co1npany for
future expansion.These are expensive with
1ninin1un1-IRR of25%,equity-dilutive and
restrictive with the strings attached.
+ Loan against Property (Hospitals) fron1
Banks. These are cheaper with rates rang·
ing fron1 9% to 11% pa, lin1ited a1nount,
short tenure, not for debt averse healthcare
entrepreneurs.
+ Land Acquisition I Developn1ent finance
fron1 a Financial Investor. These are expen-
sive with n1inin1un1 IRR of 25% to 30% at
land stageand li1nited.
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2. OPINION
can a new investment model
save the day?
In 2018-19,a new avatar ofbenefit is on the ho-
rizon in healthcare investing, which will debut
India's first healthcare real estate fund for un-
derwriting exiting healthcare assets of private
sector healthcare ventures (hospitals,diagnos-
tic centers, assisted living facilities, rehab and
long-stay facilities) through a sale and lease
back nlodel at I00% loan to value (LTV). The
key advantage ofthis 1nodel is that, it willallow
players who have been burdened with debt and
are unable to raise private equity funding for
growth to raise capital for establishing newer
facilities and nlaking their business nlodel
asset-lite. Our fund has also smne of the State
Governn1ents which will co-invest with us into
the healthcare ventures in their relevant states.
34 December 2017
•
There is apipelineofinvestn1ents fron1 2016-17
funding opportunities of around ' I000 crores
which we are evaluating for invest1nents in
2018-19. These are in healthcare facilities lo-
cated in top-18 tier I and tier 2cities of India.
Healthcare real estate fund benefits
Investn1ent in nlaking current healthcare play-
ers asset-lite apart, the need of the hour is to
nlake healthcare delivery of our investee part-
ner cheaper,better and faster! El-Toro provides
these through its total solutions of partner eco-
systen1s that it has built.
Cheaper
This fund provides funding which is half the
rate of return expected by private equity fron1
their investn1ents in healthcare ventures.
India's first health-
care real estate fund
for underwriting
exitinghealthcare
assets ofprivate
sectorhealthcare
ventures is now in
available.

3. Better
This investor becon1es 1nore of a partner than
a 1nere financier for the healthcare ventures by
providingperpetual capital without the hassles
of equity dilution with tag-along rights and
exits.There is independence for the healthcare
entrepreneurs to 1naneuver their growth strat-
egy and stabilize their new healthcare assets
without undue pressure for exit valuations and
profitability. We do not acquire equity into the
healthcare venture.
Faster
This invest1nent firn1 does not guarantee that
all deals will befunded however we turnaround
nlost oftheinvestn1ent proposals pron1ptly. The
key criteria that the healthcare assets need to
qualify include location of existing healthcare
assets has to be top-18 cities in India; the op-
erations of the facilities have stabilized and is
EBITA positive to sustain the sale and lease
back nlodel of servicing the investn1ents and
healthcare entrepreneur con1es with a nlanage-
n1ent track record.
Other key issues in 2018-19 that need to be
resolved
Are you a Clinician or a Business-
man?
For the '5,500 crores investn1ents to con1e to
reality in the next year will increase the reali-
zation that the doctor-entrepreneur nlodel for
operating hospitals is not sustainable for the
investors or the doctor-entrepreneur. Its ti1ne
that the doctor-entrepreneur needs to decide
where his heart lies. Either it is in doing the
clinical stuff or a businessn1an running the
chain of hospitals? This alter-ego phenon1enon
has not delivered focus in driving neither the
clinical excellence nor business excellence in
healthcare.
People Supply Chain
For the scale of investn1ents expected to cmne
up in the next year, the constraints of people
supply chain need to be solved i1nn1ediately.
vVe have noticed that nlost healthcare facili-
ties have slipped on their tin1elines to stabilize
due to supply of inadequate skilled nledical,
para 1nedical and support staff which is right
trained and credentialed.
Build-2-0perate Time
Our analysis of the investn1ent in healthcare
facilities over the last I0-years has revealed
that there is 15%-20%delay in build-2-operate
tin1e. This tin1e not only increases the capex
cycle but also affects the long-tern1 break-even
and profitability and return of the investn1ents.
Let's see whether 2018-19 will be another
MunnaBhai fv!BBS blockbuster year at the in-
vestlnent box office for the industry!!lWil
Our analysis of
the investment
in healthcare fa-
cilities overthe
last IO-years has
revealedthat there
is 15%-20% delay
in build-2-operate
time.
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