LP demand seen driving Chinese healthcare buyouts

Investors are looking beyond venture capital funds to gain exposure to Chinese healthcare, but the market needs more local management expertise, industry professionals say.
LP demand seen driving Chinese healthcare buyouts

Limited partners (LPs) invested in early- or late-stage venture capital healthcare funds in China are driving demand for buyout opportunities in the sector in order to eke out additional gains.

The claim comes after a report this month by Bain & Company described 2018 as a “banner year” for healthcare buyouts in the Asia Pacific region, with 88 deals worth a disclosed total of $15.8 billion recorded.

Dennis Kwan, managing director, MVision Private Equity Advisers, said LPs were leading the trend.
“They are at the point that … on paper, most of the [venture capital] funds are performing pretty well, but their DPIs [distributions to paid in capital] must be higher,” he said.

DPI is a type of multiple used to assess private equity performance.

“I think people will need to wait a little bit longer to get money back [from venture capital funds] and so there’s something on their mind – ‘can I take another bet in another so-called VC-ish funds in healthcare?’” Kwan said.

China, in particular, accounted for more than half of the total increase in buyout volumes, the Bain & Company report showed. The country saw almost 40% increase in buyout activities in 2018 from 32 deals in 2017 to 44 last year.

The robust healthcare market is against a backdrop of continuous efforts by the authorities to improve the country's overall healthcare system. Beijing's goal is to raise healthcare spending to 7% as a proportion of GDP by 2020, versus 5.1% in 2015. The OECD average is 8.9%.

“There's a need for that and the Chinese government is doing it,” Kwan said.

China’s total expenditure on both public and private healthcare is projected to almost double to $1.1 trillion by 2020, up from $640 billion in 2015, according to the 2016 Top Markets Report Pharmaceuticals.

Other factors such as succession issues in healthcare companies and carve-out opportunities from state-owned enterprises are also helping to drive the trend. 

Kwan didnt elaborate on the succession issue except to say that some operators were still in the hands of ageing founders. But he did say that many SOEs, in their efforts to stay competitive, were willing to restructure or carve out opportunities – something that had never happened before.


Nonetheless, some observers report a lack of management expertise in the Chinese private equity market to quench the demand for more domestic assets.

“One of the issues with [private equity] in China is probably a lack of management expertise at the GP level,” said Michael Chin, a partner at law firm Simmons & Simmons.

Though the Chinese private equity market has no shortage of capital, funds have probably struggled to generate acceptable levels of returns due to the lack of talent, Chin said.

The issue is also pushing investors to side with larger players who can attract experts as LPs, he said, who are “becoming far more attuned to finding the right talent at that level.”

He said the likes of Hillhouse Capital, Warburg Pincus and TPG – those with sufficient management expertise – as well as players specialising in niche areas of healthcare or life sciences, will continue to deliver value to investors.

That said, simply being a “big” general partner will not be enough in China. “Today if you are a GP operating in China, you must have a local team,” Kwan said. “Local for locals.”

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