For several years, private equity firms have recognized the profit potential of India’s surging economy.

They
invested heavily in a variety of industries—notably information technologies (IT) and financial institutions—
the question, not unexpectedly, has arisen: What is the next target for private equity investors in India? The a
may well be India’s healthcare system, a sector under increasing scrutiny from savvy equity investors.

Expanding demand for quality healthcare services (a worldwide phenomenon), in conjunction with relax
government restrictions on infusions of offshore capital, make the sector an attractive environment for fore
investors. In addition, the major players within India’s healthcare industry—prominently, Fortis Healthcare
Wockchardt hospital chain, and Max Healthcare—are currently planning major growth
developments, including initial public offerings (IPOs). These activities point to the potential of the industr
terms of both growth and return on investment. Indeed, many private equity investors have already identifie
investment potential of the healthcare industry and have negotiated multi-million dollar deals. This infusio
private equity will drive future industrial expansion and strengthen the nation’s healthcare infrastructure. An
corollary, private equity investment in the sector will have the added benefit of supporting related industr
notably medical tourism and real estate.

India’s economy and its reception of private equity firms

India’s economy is currently benefiting from the forces of globalization, economic processes that have encou
heightened levels of competition, as well as new opportunities for financial success. “Intense competition an
augmentation of business opportunities are two distinct characteristics of the globalization of worldwide ma
and economies.”[1] India has the world’s second largest population and is home to the world’s fourth largest
market.[2] India’s average annual household income has been increasing almost exponentially, reaching o
$3,000 in 2005.[3] Equally important, this growth has been accompanied by commensurately increasin
consumption. In the past, the Indian government has maintained tight control over its economy and, as
consequence, limited foreign business influence. However, in recent years the government has bowed to pub
private pressures for an increased foreign business presence, a development that generated an explosion of in
on the part of international private equity firms.

Inherent benefit of investing in developing economies

Private equity firms have long acknowledged the superior potential for returns offered by developing econo
such as India. As one private equity firm executive explained, “developing countries like India offer [priv
equity] opportunities that developed countries don’t.”[4] Particularly in the case of developing countries, pr
equity firms enjoy the luxury of observing and evaluating budding industries and targeting particular segmen
both have demonstrated past financial success and offer positive signs for future growth. In this capacity, pr
equity firms resemble venture capitalists in that they act by isolating the most promising organizations wit
particular high growth industries and then offering to these firms a guiding hand filled with the financial inje
required to support additional expansion. “With the right capital and professional management, private eq
players in India can invest early, expand companies, and make an impact on entire industry segments.”[5

Comparing India and China as prospective investment venues

Inevitably, the evaluation of private equity investment in India involves consideration of investment opportu
in other developing economies. In this regard, India’s primary competitor for investment funds is its regio
neighbor, China. Considerable recent investment interest has focused upon the potential growth of two k
markets: India and China. “India and China are both vast countries just opening to development, filled w
opportunity and risk for private equity investors. Inevitably, the two countries rising economic fortunes in
debate over which offers the better climate for investment.”[6] As it happens, India enjoys significant advan
over China as a locus for private equity investment, advantages that distinguish it as the preferred investm
 option.

The most significant advantage offered by India over China to private equity investment firms is its superior
pool. “India"s chief advantage over countries such as China is that it offers investors better trained manager
India’s professional population has extensive experience working in global markets and the nation’s emphasi
higher education has resulted in a large pool of management professionals.[8] In contrast, China suffers fro
significant shortage of labor talent, particularly in the field of middle management.[9] This often forces com
to recruit foreign professionals to fill key roles, a requirement that both increases cost and reduces efficiency
suffers from no such talent shortage, a situation largely attributable to the nation’s strong commitment to edu
In fact, India is one country where managerial professionals are often recruited to fill positions within China

China’s labor market also suffers from a very high rate of turnover (12%, which is more than double the av
rate among the world’s top business leaders).[11] Nearly two thirds of all Chinese professionals elect to pu
their careers in foreign nations, further exacerbating the nation’s skilled manager shortage.[12] This shortfa
qualified talent is a significant barrier to sustained economic growth in the Chinese domestic market and,
consequence, constitutes an ongoing deterrent to private equity investment.

Considerations of a growing middle class

India’s talent pool also figures into the consideration of investment into the healthcare segment precisely be
this talent pool reflects the size of the nation’s middle class. Despite its smaller population base, India’s mi
class is roughly the same size as China’s.[13] In addition, middle class families in both nations make roughl
same annual income (US$3,000 in 2005).[14] Therefore, the purchasing power and overall economic activity
two nations are roughly equal and China’s larger population does not confer the significant advantage that w
otherwise appear to be the case. These national middle classes, with their discretionary income consumpt
patterns, are primary targets for new retail and service sector businesses. In India, the middle class, perhap
cultural reasons that extend back to antiquity, has provided robust support for the development of a mode
healthcare system, one that is considerably more advanced than that of China.

Healthcare providers in India are open to foreign investment

Interested private equity firms have received welcoming responses from local medical providers, as many
firms have elected to open investment offices within India’s borders. The decision by Apax Partners to estab
office in India in 2006 reflected corporate recognition of the spectrum of local opportunities available for pr
equity firms. (Apax Partners is a global leader among private equity firms, with investment experience in a v
of sectors, including healthcare, business services, retail sales and media.) Martin Halusa, Apax Partner’s C
Executive Officer (CEO) explained his firm’s decision, citing India’s growing market, and stating, “In view
extraordinary growth of the Indian Market, it is critical that we have a major presence and commitment here
invest in promising Indian companies, and to support the growth ambitions of our portfolio companies.”[15
turn, India’s political leaders have responded positively to such interest. The Apax investment profession
assigned to the new office were personally welcomed by the Minister for Commerce and Industry, Kamal N
[16]

Private equity investment in India intensified in 2007. In the year’s second quarter, private equity firms inje
approximately US$3.2 billion into India’s economy.[17] This figure represented a substantial increase in pr
equity firm investment over that of the previous quarter, a period during which such investment amounted
estimated $760 million.[18] “The drivers of private equity investment in the India market include: consolida
fragmented industries, international expansion, increasing domestic market spending, and continued growt
value-added services.”[19]
Private equity activities are diversified within India. Private equity investment was spread across several ind
to 76 different Indian companies.[20] The two most heavily invested industries were the information techno
and IT-enabled services industry and the banking and financial services industry. Other significant investm
targets were the healthcare, construction and engineering, logistics, and shipping industries.[21]

Current shortfalls in healthcare provision in India

India’s healthcare system is currently overburdened. Nonetheless, it is poised for sustained growth, one expe
achieve a level of care delivery that adequately responds to the enormous demand exerted by the nation’
population. The most current available research establishes an undeniable requirement for additional finan
investment to meet national objectives. The nation’s public healthcare system to date has proven inadequa
meeting the nation’s needs. “India has 1.5 hospital beds per 1,000 people, compared with a ratio of 4.3 bed
developing countries.”[22] The public healthcare system is overcrowded and lacks adequate technological su
particularly in rural areas. Furthermore, the healthcare industry is not limited to patient treatment. The provis
medical services related to pharmaceuticals, nursing and medical education and diagnostics must also expa
meet the needs of India’s population.

India’s government appears to recognize the need for additional investment in the nation’s healthcare syst
While some lingering regulations deny foreign investment opportunities in some of the nation’s industrial se
there are no limitations on foreign involvement in Indian healthcare. This absence of regulation limits th
uncertainty in the investment that might otherwise be created by intrusive government involvement.

Assessing future demand for healthcare services

Demand for quality healthcare is unlikely to slow anytime soon. The health of a population tends to improve
the improvement of economic circumstances, but this improvement in overall health does not necessarily de
the demand for healthcare. In fact, the opposite is more likely to be the case. Several factors increase the like
of even greater public demands upon the nation’s healthcare system. For example, the overall economic gro
being experienced in India is growing the nation’s middle class. In 1996, India’s middle class amounted to
estimated 35 million families; in 2006, this class was projected to be 80 million.[23] This growing middle c
will eventually increase their demands for adequate healthcare and, equally important, will have the resourc
pay for that care. “Higher expectations for good healthcare accompany higher incomes.”[24] Lack of money
developing nations often results in the forbearance of expensive healthcare services in order to fulfill other
needs (e.g., food, housing). However, as earnings increase, individuals gain the discretionary income needed
for healthcare services or, conversely, they acquire better-compensated employment, jobs whose compensa
includes provisions for healthcare benefits. In either case, the improved economic circumstances of individ
workers increase the likelihood that they will seek out healthcare services.

Improving economic conditions contribute to longer life spans. As a consequence, longer-lived individuals
pose demands for increased aggregate healthcare services over a longer period of time. They will also requ
new set of geriatric care, driving the development of this particular segment of the industry.
The inability of the public healthcare system to meet the needs of the population has driven development o
private healthcare provider sector. Private healthcare providers have fared remarkably well within the econ
They enjoy the advantage of planning their locations and specialties to fit the needs of the local inhabitants
addition, they have the advantage of hindsight, to wit, observing provider errors made in the public healthc
sector and avoiding such pitfalls. The next section focuses upon the activities of several of the nation’s b
performing private healthcare providers and their growth plans within the context of acquiring additional pr
equity.
 Major players in India’s healthcare industry
India’s healthcare industry includes several growing private healthcare providers. Many of these firms choo
specialize, electing to focus upon a particular geographic region or a particular healthcare need. Most priv
healthcare providers concentrate in the nation’s urban areas. As a consequence, there is ample room fo
development in India’s largely underserved rural areas. (This section discusses three of the most influential
in India’s healthcare industry. Each of these corporations is developing major future growth strategies and
already received substantial private equity interest.)

Wockhardt hospital chain

The Wockhardt hospitals chain is one leader in India’s healthcare system. Wockhardt is a multifaceted healt
company that specializes in biotechnology and pharmaceuticals. It boasts a market capitalization of US$1.2 b
[25] Originally a research company, it expanded into hospital administration to meet unmet demands flowing
inadequacies in the nation’s public system. Partnering with Harvard University’s Medical International
Organization, Wockhardt boasts “world class clinical expertise and excellent patient care backed by late
technology, multi-disciplinary capability and world class infrastructure.”[26]

Max Healthcare
Max Healthcare is a major private healthcare provider, one that provides modern services to citizens across
country. Max Healthcare has developed a successful financial model, one providing high quality, low cost h
care in urban areas (e.g., downtown Delhi). Patients needing medical attention can visit a Max Healthcare ho
without an appointment and with the expectation of seeing a doctor within an hour. Routine visits at such cl
cost $5.50, well below the average cost of medical visits in more developed nations.[27] Max Healthcare
negotiated some of the industry’s largest recent private equity agreements. For example, in 2004, Max Healt
was the recipient of $10 million from Chrys Capital, a United States-based private equity firm.[28]

To date, Max Healthcare has received more than $30 million from Warburg Pincus. (Warburg Pincus is Ind
single largest domestic private equity investor.[29]) Examination of its most recent activity underlines wha
likely the soundest investment equity opportunities in India. Warburg Pincus has been active in supporting I
healthcare system.[30] Several private investment groups, including George Soros’ Quantum Fund, hav
recognized the strong potential within India’s healthcare system and are negotiating similar agreements w
private healthcare providers.[31]

Fortis Healthcare
Fortis Healthcare is another example of a private Indian healthcare service attracting interest from private e
investors. With 16 cardiac units and a dozen hospitals, Fortis Healthcare is a major private provider of healt
services in India.[32] Fortis was founded by a former pharmaceutical industry executive and is currentl
completing plans for an IPO. Fortis Healthcare has been pursuing its external growth strategy through a
aggressive program of new hospital facilities acquisition. For example, in 2005 Fortis Healthcare acquired E
a regional hospital chain focusing upon cardiac care. This acquisition cost Fortis $127 million.[33] Media re
have highlighted Fortis as actively pursuing additional private equity deals to fund its future growth plans. F
Healthcare has major plans for expansion, including the construction of several new hospitals. This new
construction will be further augmented by the acquisition of several existing hospitals.

Thus far, Fortis has enjoyed considerable success in courting private equity funding. In preparation for execu
its corporate growth plan, Fortis Healthcare recently brokered a deal with two private investors, the Quantum
of George Soros and Blue Ridge, an investment firm. In the last year, Fortis issued shares to these two fun
totaling in value US$33.3 million.[34] Trikona Capital is likely to announce a substantial investment in For
 the near future.[35]

Current equity investment in India’s healthcare industry

Prospects for growth in India’s private healthcare sector
Continued private equity investment in India’s healthcare system will facilitate successful provider developm
those resources needed to expand operations to meet growing national demand. Private equity investment
likewise support the growth of new and specialized sectors of the healthcare industry. This would include
greater development of geriatric services for the nation’s aging population. Successful healthcare providers
hospital chains would gain the needed financial resources to expand through the acquisition of poorer facil
such investments would go a long way toward modernizing lagging hospitals and medical centers, fitting the
the modern market for healthcare delivery, while functioning under the management of successful organiza
Private equity investment would also spur future medical research, as many hospital corporations are also inv
in the pharmaceutical and biotechnology industry. Given the current state of overcrowding in India’s pub
hospitals, it is clear that the expansion of private operations will guarantee long-term demand for professio
services sufficient to assure an adequate return for investors.

Prospective impact of medical tourism

Medical tourism is another potential source of growth, one that will be driven by the activities of private eq
firms.[36] Medical tourism is the term of art used to describe medical patients seeking care in foreign nati
providers that invariably offer them advantages relating to cost, timing, and quality of care. In the case of Ind
nation’s private system provides high quality medical services at a modest fraction of the cost of compara
services in many developed nations. Furthermore, India’s convenient scheduling system and high quality me
education programs make India the healthcare system of choice among patients considering offshore surger
well as other medical procedures. “Wockhardt Hospitals Group associated with Harvard Medical Internatio
Apollo Hospitals, Escorts Heart Institute, Fortis and Max Hospital are major players attracting internation
patients from US, UK and Canada.”[37] The Wockhardt Hospitals Group has been particularly active in
cultivation of this extension of India’s healthcare industry through its partnership with Harvard Medical Sc
This collaboration has resulted in making Wockhardt’s medical centers among the preeminent centers fo
international medical tourism. Private equity investment would permit Wockhardt to expand its medical cen
acquire new locations, and further prepare the organization for its upcoming IPO. Medical tourism support
healthcare industry by diversifying its consumer base; growth in this area would spur additional jobs for lo
inhabitants and help generate additional funds to further strengthen India’s healthcare infrastructure. Med
tourism’s success within India might spur interest in the reform of healthcare systems within developed nat
which could drive improvements that would benefit foreign populations as well.

Impact of healthcare infrastructure development on other economic sectors

Increased private equity investment in India’s healthcare system will also contribute to the strengthening
industries beyond healthcare. One likely beneficiary is India’s real estate market. Aashish Kalra, the mana
director of Trikona Capital (a United States-based real estate fund) recently noted that in India, “hospitals rai
value of real estate… There’s a tremendous opportunity to create value. This is the fastest growing real es
segment in the country.”[38] Hospitals increase the real estate value of surrounding properties. Individuals
prefer to live near local health centers. Hospitals further enhance local economies by providing many supp
oriented, non-medical jobs for local inhabitants.

Conclusion
Private equity firms in India have preferred to invest in established, fragmented industries by supporting the g
of exceptional companies. In 2007, the most popular areas for investment by foreign private equity firms we
information technology (IT) and finance industries. Private equity firms should reexamine India’s healthc
industry. India’s healthcare system provides an optimal environment for private equity investment. The heal
industry is poised for future growth as demand increases, consonant with the continuing increase of the mi
class’ overall prosperity. The activities of particular industry leaders, notably Wockchardt hospital chain, F
Medical, and Max Healthcare, include active pursuit of growth strategies and preparations for IPOs. Each of
organizations offers an exceptional level of service and value.

The advantages garnered through private equity in the healthcare industry promise
significant returns for investors. Private equity investment into India’s healthcare industry
will support not only the expansion of the country’s healthcare system to local
patients, but also bolster the nation’s growing medical tourism industry. Indeed,
the relationship may be self-reinforcing: expansion of one will likely spur
concomitant growth in the other. Additional industries, including India’s real
estate market,
will also benefit from investment in this sector. India’s healthcare system is a sound
investment target for private equity firms and likewise may become a
paramount factor in private equity investment in India for years to come.