Healthcare and education are generally seen as resilient sectors due to their counter-cyclical characteristics. In light of the economic and socio-political instability around the world, recession resistant investments in these sectors have continued to gain traction in recent years. The impact of the COVID-19 outbreak on these sectors is yet to be fully seen. This alert briefly reviews some recent trends in PE investments in healthcare and education in Asia and also provides some practical tips to assist PE investors with deal planning and the execution process in light of these trends.
The Healthcare Sector
Globally, the deal value of PE-backed healthcare deals increased by approximately 50% to US$63.1 billion in 2018, reaching the highest level since 2006. Well-established PE houses, such as Bain Capital, Blackstone and TPG have raised dedicated funds or set up specialized divisions to focus on healthcare and life sciences investment opportunities. The Asia-Pacific region experienced robust investments in the healthcare sector as investors looked to tap into the significant demand primarily driven by rising incomes and the aging population. In 2018, the Asia-Pacific healthcare sector recorded 88 deals with a total deal value of US$15.8 billion (compared to US$7.2 billion for 61 deals in 2017), where China, Australia and India had 44, 15 and 14 deals, respectively, together representing 83% of the deal volume in the region. At the same time, Chinese investors continued to look abroad for investments with an aim of bringing back life sciences and healthcare capabilities and technologies to the Chinese market in line with the Made in China 2025 and Healthy China 2030 initiatives, and the ongoing restructuring of the drug and devices distribution market, being pushed by the Chinese government. Increased focus on this sector has inevitably resulted in intense competition among both corporates and PE investors for high quality healthcare assets. Such competition has prompted many PE investors to diversify deal approaches leading to the following trends:
- Co-investments are more common. For large or more complex assets, funds tend to partner with multiple investors to form consortia to finance deals and to spread the investment risk.
- Roll ups. A number of funds are pursuing roll up strategies in the fractured healthcare markets of India, Southeast Asia and China. Funds often partner with companies with locally or globally known healthcare brands and know-how or significant local presence and influence to establish a platform that will acquire multiple hospitals or other healthcare facilities in one market or region. The key to success in these strategies is ensuring full integration and quality control, both of which may be difficult to achieve. One example is the US$1.2 billion acquisition by TPG and Malaysia based conglomerate Hong Leong Group of seven Columbia Asia Hospitals in Malaysia, Indonesia and Vietnam announced in September 2019. Recent reports suggest Temasek and TPG are backing Manipal Hospitals in the bid for Columbia Asia’s Indian hospital assets.
- There is an increased interest in public-to-private transactions. An increasing number of PE investors are looking at public company spin-offs and take-private deals. Examples are the US$1.4 billion take-private of iKang Healthcare Group by Chinese fund Yunfeng Capital and Alibaba, which closed in January 2019, and the proposed US$956 million takeover by scheme of arrangement of Metlifecare, a New Zealand-based retirement village provider, by EQT announced in December 2019.
- Investments are made into more fragmented sub-sectors with a wider range of risk spectrums. PE investors are also exploring assets across a wider range of the risk spectrum, from stable core assets to higher risk growth assets. The biopharma and medtech sectors are highly sought after by PE and venture capital funds.
- New exit options are emerging. As the market matures, Asia is beginning to see a growing number of sponsor-to-sponsor exits. Sponsor-to-sponsor exits are particularly attractive in the heavily regulated healthcare and pharmaceutical sectors where regionally based sponsors are more likely to have the on-the-ground manpower and local knowledge necessary to bring companies up to the standard where they are ready to be acquired by a US or UK based sponsor. One example is the complete exit of OrbiMed Advisors and Kotak Private Equity from India-based biopharmaceutical company, Bharat Serums & Vaccines, selling their entire minority stake to Advent International (announced in November 2019). New rules allowing biotech companies that are not yet making profits to become listed on the Hong Kong Stock Exchange have also expanded the range of exit options.
- Impact of the COVID-19 outbreak on the healthcare sector. Although it is too soon to predict what impact the COVID-19 outbreak will have on investments in the healthcare sector in Asia, it is likely that the demand for private hospitals and clinics, pharma or biotech companies and start-ups will increase significantly, especially in China. In Part III of our previous article on the impact of COVID-19 more generally, we briefly discussed these sub sectors and online healthcare platforms that we believe will emerge stronger from the COVID-19 outbreak. One possibility would be for a fund to partner with a US or Australian hospital group to acquire and rebrand hospitals in China in order to capitalize on the demand for well-run hospitals. It is also very possible that healthcare technology will draw investors’ interest in light of the need to manage an increasingly complex healthcare ecosystem. Similar investment has been made in the other parts of the world (for example, Blackstone in early March announced its acquisition of a majority stake in a healthcare software firm, HealthEdge, delivering solutions to healthcare businesses).
The Education Sector
In recent years, private education has become a popular sector for PE investments in Asia in light of the significant and ever-growing demand in the region in this sector. The following trends have emerged while investments in the education sector continue to increase:
- There is a significant demand for high-quality international schools but policy changes remain a major investment risk. There is a significant demand for high-quality international schools in Asia. With the lifting of the “one-child” policy in China and the increasing levels of disposable income among the middle class in China, the demand for private education, and in particular, high-quality international schools, is constantly on the rise. However, policy changes are still one of the main concerns of PE investors, in particular, in terms of exits. For instance, foreign investors face strict restrictions on investing in the “nine-year compulsory” education sector, and some recent policies in China prohibit for profit kindergartens from going public or being acquired by public companies.
- Sub-sectors continue to diversify and mature, and edtech is a hot sector. Different education verticals, spanning from K-12 schools, language training, vocational training, higher education to online education, provide investors with varied market sizes and growth rates. Online education and other technology-based educational platforms continue to be very popular and will likely attract additional users as schools are closed in China, Hong Kong and elsewhere in Asia due to the COVID-19 outbreak and other disruptions.
- Roll ups. Just as in the healthcare sector, a number of funds are backing platforms that are acquiring multiple schools in various jurisdictions in Asia. A notable example of this is Nord Anglia Education, which was taken private by Baring Private Equity Asia and CPPIB in 2017 and continues to acquire schools.
- Outbound Education Investments. Regionally based funds continue to see acquisitions of schools and colleges in the US and the UK as attractive bolt-on acquisitions to their Asia-based education platforms. Ownership of a college in the US can allow schools operated under the Asian platform to guarantee graduates admission to a US college. Given the number of US colleges expected to go bankrupt in the next ten years (which number will likely increase due to the impact of the COVID-19 outbreak), there are many attractive targets. PE-backed companies that own schools in the US or the UK or that can provide services to facilitate Asian students applying to schools in the US /UK can capitalize on this trend. It is still unclear what impact the COVID-19 outbreak in the US and the UK will have on desire of Asian students to study in the US and the UK.
Some Practical Tips
Here are a few tips and reminders for PE investors to factor into the deal planning and execution process in light of the trends discussed above:
- Conduct integrated due diligence and assemble a team with adequate expertise. This is particularly important as PE investors are now looking at healthcare and education portfolio companies with a wider range of risk profiles. In addition to legal, financial and business due diligence, it is also highly advisable for PE investors to engage tax, IP, executive compensation and data privacy/cybersecurity specialists. For investments in both the education and healthcare sectors, it is also important to engage local counsel familiar with the sector-specific regulations and policies to assist investors in evaluating the policy risks and the impact on exit plans.
- Focus early on data privacy and cybersecurity. By their nature, healthcare and education businesses necessarily generate extensive quantities of personal data. Recent years have seen a proliferation and intensification of cyber security and data protection laws in Asia—with China, Singapore, South Korea, Japan, Australia, Malaysia, Indonesia and the Philippines all introducing or updating compliance rules. Moreover, medical records and children’s personal data are considered particularly sensitive and are typically subject to enhanced regulatory restrictions on collection, processing, storage and sharing. A business’s hard-earned goodwill and reputation might easily be destroyed by a single data breach, and its business license may be at risk in the event of material regulatory non-compliance. Given this, it is essential that data privacy and cybersecurity be properly considered from the inception of the business. Specialist diligence should be conducted to confirm that the business has adequate, compliant data privacy and cybersecurity plans and formal policies in place and that actual business practices conform to those policies.
- Regularly review data compliance requirements and export restrictions. Where the business operates or plans to operate across multiple jurisdictions, it will often be advantageous to share data between locations. For example, this may enable the business to save costs by offshoring data processing to locations with better developed infrastructure, or to aggregate data pools to enhance operational efficacy and/or commercial potential. However, such cross-border data sharing has recently come under additional regulatory scrutiny and businesses’ practices and plans will need to be regularly reviewed by specialist counsel to ensure compliance with the patchwork of data localization requirements and export restrictions that are being introduced by jurisdictions across the region. The infrastructure and manpower costs of achieving regulatory compliance when operating a platform across multiple jurisdictions can be substantial.
- Consider regulations and rules applicable to public companies in public market transactions. When PE investors turn to the public markets, this may have substantive implications for, among other things, the transaction timetable, restrictions on access to non public information and the scope of due diligence, deal uncertainty intertwined with minority shareholder protection issues, and potential mandatory disclosure of transaction details with sensitive commercial terms and potential restrictions on future exit options. When selecting transaction counsels and advisers, it is essential to engage a team with expertise in both PE investments and capital market capabilities that can provide well rounded advice from the outset of the transaction process. This is also important as PE investors may be exploring various exit options, including private trade sales and potential IPOs of the portfolio companies. It is also prudent from the outset to consider whether any investment into a public company may trigger concerns with any limited partner(s) of the co investors, in particular when any such limited partner(s) belong to a house that runs its own active public trading platform.
- Accommodate direct or indirect participation by potential co-investors. If co-investment are on the horizon, especially when a consortium is expected to be formed or finalized only after the key transaction documents for the portfolio investments have been signed or nearly finalized, it is important for the lead investor(s) to think ahead and build in language and mechanisms to accommodate the direct or indirect participation by potential co-investors, in order to avoid the need to re-negotiate the deal or amend the transaction documents later to satisfy co-investors’ requirements. Some questions to consider should include:
- Will a co-investment vehicle formed at a higher level facilitate the execution of the deal and the management of the portfolio company, as opposed to direct investments in the portfolio company by the consortium members?
- Do any restrictions on transfer at the portfolio company level appropriately dovetail with those contemplated at the consortium vehicle level? Should there be some reasonable carve-outs to provide some flexibility for realizing liquidity at the consortium vehicle level without triggering the onerous ROFR or ROFO process at the portfolio company level?
- Does the non-disclosure agreement signed with the target company allow the sharing of confidential information with potential co-investors? Can co-investors have access to or rely on due diligence or accountants’ reports?
- Will information rights granted to a target company’s direct investors be sufficient to satisfy the likely requirements of co-investors?