KKR's $2 Billion Max Healthcare Deal Is Just The Beginning. Here is The Next $100 Billion Play.

On August 16th, KKR, a New York-based private equity firm, sold its remaining 27.5% stake in Max Healthcare, a hospital chain in India, for INR 9,185 crores—registering a 5x return in four years. In 2018, KKR bought a 49.7% stake in the company at INR 80 per share, selling it off at INR 353 per share.

This blockbuster deal is significant for more than one reason:

1. It is the most lucrative exit by KKR India since it entered the country 27 years ago.

2. It is the first time a PE fund has sold a 25%+ stake in India.

3. KKR's Max exit is the highest return deal by a PE firm in India, signalling that the Indian PE industry has finally come of age.

So what is the secret behind KKR's mega success?

The Investor - Operator model for investing that KKR used is unique to this deal.

In 2018, KKR acquired a 49.7% stake in the combined entity of Radiant Life Care and Max Healthcare, valuing the business at $900 Million. This new company, Max Healthcare, was helmed by Abhay Soi, a turnaround industry specialist. He also received a 23.1% stake to operate the business and drive value.

In 2019, when KKR acquired Max Healthcare, the hospital chain struggled with cost inefficiencies and low margins. Abhay Soi spent the next three years restructuring the business and driving both top-line growth and bottom-line margin improvement by:

• Cost Cutting through driving Supply chain efficiencies: Combining various functions to drive scale. Savings in material cost through renegotiation of supplier contracts and corporate overheads (Head Office cost optimisation) and shutdown of unviable units.

• Margin Improvement by identifying Synergies across the businesses: Combining overseas medical tourism offices that Max and Radiant ran separately.

• HR Compensation structure and KPIs: Manpower realignment of roles and responsibilities, reduced minimum guarantees in doctor fees, aligning staff strength to occupancy levels.

And Soi's hard work paid off. Max's EBITDA margin rose from 9.7% in FY2019 to 27.2% YTD in FY2022. It also reported a consolidated net PAT of INR252 crores in the quarter ending December 31st 2021, with sales growth at 32% CAGR over the last three years. The company is now India's second-largest hospital chain by revenue and market capitalisation, with over 3,400 beds at its 17 facilities.

The Promise of Indian Healthcare

Indian healthcare has been an attractive destination for Private Equity investments.

The first PE investment in Indian healthcare was in 1999 by UK-based global asset management company Schroder Ventures, which invested in Indraprastha Medical Corporation Ltd. Since then, several foreign-based PE investors have picked up equity stakes in large Indian healthcare providers. Most recently, Ontario Teachers' Pension Plan Board acquired a majority stake in Sahyadri Hospitals from the Everstone Group; Investcorp divested its entire stake in ASG Hospital, an ophthalmology chain, clocking 5x returns.

So far, PE exits from healthcare, and related sectors entailed 55 deals in 2021, up from 32 in 2020 (the value of the exits remained more or less the same at around $1.39 Billion). Despite negative market sentiment, 2022 is shaping to be a busy year for Indian healthcare.

What is driving this PE interest in the Indian healthcare sector?

Overall, the Indian healthcare sector is expected to add $100 Billion in market cap in the next 15 years in the premium segment.

Presently, the availability of quality hospital beds in metros is 0.6 per 1,000 people. By 2035, India's urban population is estimated to stand at 675 Million, growing from 483 Million in 2020. With the addition of approximately 200 Million people, the total number of additional quality hospital beds that will be added is 200 Million X (0.6/1000) = 120,000 beds. The average earning per bed for a premium hospital chain is INR19L per year; thus, the total earnings generated will be INR 22,800 Crores ($2.9 Billion). With the current sector P/E of 30, an additional $100 Billion of market cap will be added in the next 15 years.

The focus of investments so far has been mainly on multi-speciality hospitals. However, the next big investment opportunity in healthcare is single-speciality hospitals and specialty clinics (such as nephrology, dermatology, oncology, eye-care, IVF.) owing to the growing need for distributed healthcare that can cost-effectively reach the consumer while yielding profits. Single-speciality chains are scalable, replicable, capex-light and have a payback period of three to five years - the tailwinds in favour: increasing urbanisation, increasing healthcare spending, rising prevalence of chronic diseases, increasing life expectancy, and a rise in women's participation in the workforce, subsequently leading to a drop in fertility rates.

In summary, while this is a moment of celebration, the healthcare private equity party has just started in India. The next 15 years will see value creation of over $100 Billion market cap in healthcare businesses. But the value in private equity in India will be created through this investor operator model instead of the pure play PE approach of the west.

(The views expressed in this article are personal and that of the authors. The authors head AltG, a firm that Offers Proprietary Research That Clients Leverage to Identify and Execute High Growth Capital Allocation Opportunities. You can reach them at ideas@altgind.com)