Why EM Healthcare is Ripe for Consolidation

Still, investors need to practice caution, says a managing director from Siguler Guff

For all its complexity, emerging markets healthcare is still attracting investors looking to tap into broad demographic trends that are reshaping developing economies.

“This is an interesting space,” explains Praneet Singh, a managing director from Siguler Guff. “There is the potential for significant upside if you can get it right.”

In the broader emerging markets, which include BRIC countries as well as frontier markets, the healthcare industry represents more than $1.3T and is growing at a rate of 6.8 percent, according to the firm’s data. Within the larger healthcare space there exist at least 50 to 60 distinct subsectors, offering up potential consolidation plays.

Valuations today are on the rise. Combine aggressive expectations from sellers in places like Brazil, India, China, and Africa with their reluctance or inability to use financial leverage, and the pressure to “get it right” intensifies further. Singh emphasizes the need for a lot of study to make an investment in a growth company in an emerging market, specifically the use of broad risk assessment in the market.

“Do you have the requisite skill set?” asks Singh.

The best chance to earn above-market returns appears to be by capitalizing on the idiosyncrasies of each market. During the last two years, Singh says, individual emerging markets have been developing their own different nuances.

“The various emerging markets are starting off as having very different characteristics within their healthcare subsectors and some of these differences are increasing,” he says.

There are two primary drivers for the divergence trend. One is regulation—each market, however small, has its own set of rules. Firms that understand those fundamentals best can use it to their advantage.

The second driver is historical precedent, or, in this case, the lack of it. For instance, in China as much as 80 percent of the treatment and diagnosis happens in hospitals; in India, it’s about 30 percent, says Singh. Then there are differences in ownership structures—in some cases, healthcare is largely a state-run enterprise; in others, private markets prevail.

It will probably take many years, if ever, for these markets to become uniform. For private equity, such lack of uniformity often means an opportunity for information arbitrage and, ultimately, an outsized profit.

To learn more about the disruptive changes happening in healthcare investing now and what to expect in the future, please join Singh and all of our esteemed speakers at Privcap Game Change: Healthcare 2016 in New York on November 17.