Bain Capital buys Chinese hospitals for $150m

Bain Capital has bought a majority stake in the private hospital group in China from existing shareholders.

Bain Capital said on Thursday it had bought a majority stake in a private hospital group in China as the country’s population ages fast and strained public services struggle to offer specialist care.

The Boston-headquartered private equity firm is acquiring about 90% of Asia Pacific Medical Group (APMG) from existing shareholders and will inject fresh capital for expansion across China, a person familiar with the matter said.

In total it is investing around $150 million in the profitable hospital chain. This will be the last investment out of Bain’s second Asia fund and the first out of its third fund, the person said.  

China’s enormous healthcare market continues to expand rapidly, driven by an aging population, economic growth and an expanding basic health insurance. In 2013, healthcare expenditure in China hit RMB3.2 trillion ($493 billion), maintaining an annual growth rate of 17.2% over the past nine years.

There is overwhelming demand in China’s healthcare sector, which is exerting a huge amount of pressure on the under-resourced state medical system.

Pressure is building not in terms of number of beds per capita, but in terms of quality and location. The best hospitals are concentrated in larger cities. Bain plans to expand APMG into other tier one cities in China.

The government has been focusing its efforts on ensuring the availability of basic medical services for the whole population, while encouraging private capital investment to improve service quality and meet the public’s diverse and complex needs.

Public hospitals are constrained in terms of funding so services are limited in areas such as neurology.

Established in 1992, APMG provides a range of services, with a focus on neurology and oncology. APMG introduced China's first gamma knife machine -  a high-tech radiotherapy device that destroys tumours with minimal damage to other tissue.

“APMG is able to provide patients with quicker and affordable access to professional treatment”, said Jonathan Zhu, a managing director of Bain Capital, in a statement. Zhu co-led the deal with managing director Lihong Wang.

Private hospitals in China have enjoyed rapid growth in recent years. By June 2014, there were 11,737 private hospitals in China, clocking an annual growth rate of 16% from 2008 to 2013. Although private hospitals account for nearly half the total in number, they are generally smaller in scale and less frequented than public counterparts, according to an analysis by consultants at Deloitte.

Other venture capital and private equity funds have been investing in the sector.

Sequoia Capital, a Silicon Valley-based venture capital firm, teamed up in November with Irish medical equipment manufacturer Medtronic to set up a China-focused medical technology investment fund worth $60 million. Olympus Capital Asia recently invested $40 million in China's Tian Jian Hua Xia Medical, or Tendcare Medical, a private hospital management company, to help fund the company’s expansion programme. 

“The fundraising environment is good for healthcare companies in China, as so much capital has been pouring into the sector,” Kevin Xie, co-founder of China Renaissance and the head of the bank’s healthcare team, told FinanceAsia.

The average valuation of Chinese hospitals at the growth-stage is around three to four times revenue. For more mature institutions investors pay two to three times revenue or 30 times P/E.

"There has been a lot of Chinese capital which is also keen to invest in the healthcare sector; international investors will face fierce competition in China," Steven Wang, managing partner and founder of HighLight Capital, a Shanghai-based healthcare investment fund with assets under management of $650 million, told FinanceAsia. "From the government's perspective, it will certainly support domestic companies more than foreign companies," he added.

Also the barrier to entry into hospitals is high due to China’s state-run insurance scheme, which is more comfortable covering services at public hospitals. Also doctors are considered largely to be state officials and depend on their hospitals for a steady stream of clients so very few go into private practice.

“Running a hospital is like running a school. It takes time to build up your reputation, patient cases and then the valuation will follow,” added China Renaissance's Xie.



Number of private hospitals in China

Bain has been tracking APMG’s progress for about two years and when earlier investors IFC and Cathaya Funds decided to exit it created the chance to gain control on an exclusive basis. IFC invested $30 million in 2012 in loans and equity. 

APMG was founded by Dr Michael Choy and a group of US-based physicians and surgeons in 1992. It has five hospitals and a number of clinics in China and Southeast Asia.

Dr Choy will remain as a minority shareholder while Bain is looking to bring in positions such as chief financial officer and will likely exit the investments in Southeast Asia, the person familiar with the matter said.

Bain Capital's investment completed this week.

The Boston-headquartered private equity firm said last year that it saw China's healthcare market, as well as its fintech sector, as one of the most promising areas for investment in the years ahead. It has raised $3 billion for deal making in Asia in its latest fund.

Bain Capital has invested in healthcare companies such as HCA, QuVa Pharma, Quintiles, Warner Chilcott, Emcure Pharmaceuticals, Bio Products Laboratory, Beacon Health Options, Physio-Control, CRC Health and Grupo Notre Dame Intermedica, and Air Medical Group Holdings.


Private vs public hospitals in China


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