Investing in healthcare, including hospitals, insurers and MedTech firms, make for excellent “all weather” investments i.e. investments that achieve capital gains in all types of investing environments. Fundamental forces have long made healthcare such a compelling investment: an ageing population, the rising prevalence of chronic disease, the continuous development of innovative drugs and devices, and a still fragmented delivery system that is ripe for innovation, disruption and consolidation.
The population of the GCC region is estimated to jump by 6.6 million to 61.6 million people, 17 per cent of whom will be 50 years old and above, by 2022. This will exert pressure on the existing healthcare system, and therein lies the opportunity for healthcare companies to rapidly scale up their offerings and meet the demand.
Healthcare expenditure in the Middle East amounted to US$76.1 billion (AED279.5 billion) in 2017 and is expected to reach US$104.6 billion (AED384.2 billion) in 2022, according to a report by Alpen Capital. In the GCC region, healthcare spend is projected to rise by 6.6 per cent year-on-year – faster than the global average – with the UAE forecast to account for 25 per cent of this growth by 2022. Unsurprisingly, the region is attracting attention from industry leaders, investors and corporate buyers globally.
Historically, the governments of the GCC have provided strong leadership in continuing to evolve the provisioning of healthcare services in the GCC to address gaps in supply and quality. However, many governments have come to realise that continued heavy investment in healthcare is an economic ordeal, as costs continue to outpace GDP. In times when sustainable investment opportunities are limited, new avenues are always welcome.
The UAE and Saudi Arabia are likely to dominate the sector with a projected combined share of over 80 per cent of the regional healthcare expenditure in 2022. The governments of the two countries have demonstrated their intent to improve their respective healthcare spaces in their national transformation plans, the UAE Vision 2021 and the Saudi Vision 2030, respectively. This top-down focus on healthcare has provided an impetus for growth. Government programmes ranging from public private partnerships to regulations are designed to foster the inclusion of private sector providers to both relieve the burden on the public sector and become a source of diversification and growth of a knowledge-based economy.
Risks and returns
The intensifying public discussion on healthcare and the complex web of regulations across the region make it a challenging investment field. Investors cannot go in blindly – they require a technical understanding of the scientific and regulatory developments in the respective markets.
In a high-valuation environment, investors and PE funds can’t rely on multiple expansion alone to generate returns. When funds can execute a credible plan for margin growth immediately after they acquire a target, they can create a virtuous cycle of value creation.
Apart from playing the long game, investing in the healthcare space is also not completely about returns. Certain investments could fall under impact investing – that is, investing in companies, organisations or funds with the intention to generate measurable social or environmental benefits in addition to financial returns.
As indicated by the earnings per share growth across the sector in the region, which currently stands at 24 per cent, healthcare is poised to remain a high-yield investment domain. Historically, stocks in the sector have performed favourably in the regional indices, recording an average return of double digit returns over a multi-year period.
When funds can execute a credible plan for margin growth immediately after they acquire a target, they can create a virtuous cycle of value creation.
The exit opportunity
Identifying the right time to exit is the cornerstone of any investment strategy. Traditionally, private equity firms have made way for corporate buyers and other healthcare groups seeking expansion, whether geographical or sectoral.
For instance, the acquisition of Abu Dhabi-based Al Noor Hospitals Group by South Africa’s Mediclinic in 2015 boosted underlying revenues to AED1.77 billion in one year, representing a 35.54 per cent growth. Similarly, NMC Health acquired a 70 per cent stake in CosmeSurge and related businesses for US$170 million from Emirates Healthcare Group, and an 80 per cent stake in Riyadh-based Al Salam Medical Group for US$37 million.
Keeping an eye on the growing consolidation will enable funding institutions to diversify their investments across the sector, thus staying relevant and competitive.
References available on request.