Flip side of Private Equity investments in Indian healthcare

There are concerns about whether the benefits of Private Equity investments will extend beyond the founders to all the stakeholders, including patients, doctors, and other hospital staff.
Generally, the need for PE investments arises due to the hospitals being cash-starved. (Representational Photo)
Generally, the need for PE investments arises due to the hospitals being cash-starved. (Representational Photo)

Indian healthcare boasts of being an attractive destination for Private Equity investments in recent decades. The focus of such investments has been largely on hospitals, although medical devices, manufacturing, etc., are also sought after. Investment momentum has been robust for many leading Indian hospitals. However, there are concerns about whether the benefits of PE investments will extend beyond the founders to all the stakeholders, including patients, doctors, and other hospital staff.

Generally, the need for PE investments arises due to the hospitals being cash-starved. PE firms add value through their networks and strategic partnerships, industry knowledge, and managerial expertise, which may enhance the performance of the investee hospital on key metrics. From the foreign PE investor’s perspective, the motives include expanding footprint in India and profit maximisation. PE firms typically invest in Indian hospitals with a view to grow rapidly within a short period, hoping to realise quick returns on their investments and, in the process, also grow the investee hospital.

The flip side: The success or failure of such PE investments has a definitive bearing on healthcare provided by the hospital. The notion of healthcare as a social and welfare enterprise vis-a-vis the concept of healthcare as a profit-maximising business presents a stark dichotomy resulting in a paradox inherent in such PE investments. Most hospitals seek to grow rapidly, given enormous opportunities for healthcare in India. They would also like to enhance patient-centricity while striving to be financially sustainable. In this context, while PE firms seek to maximise returns on investment, they should also focus on the impact of their services on various stakeholders in healthcare.

After inducting a PE investor, the two organisations typically craft new growth strategies. The investee hospital is under pressure from the PE investor to enhance its performance. Often, these well-crafted strategies falter during execution. While there are many examples of such faltering investments, two recent large acquisitions come to mind: the PE investment in Fortis Hospitals by Malaysia’s IHH Healthcare Berhad group and the acquisition of Max Healthcare by the global investment firm KKR-backed Radiant Life Care. However, these investments did not yield the intended results due to poor strategy execution post the investment.

Various management and cultural issues assume importance when a hospital goes through a PE investment, especially if a foreign-based PE firm acquires it. It could often result in a total change in the top management as well as a revolutionary change in the hospital’s culture. This causes considerable attrition of highly skilled doctors and employees. Due to the inability to manage the post-investment complexity, there have been cases where the PE firms decide on an early exit, plunging the organisation and the key stakeholders into confusion.

The difference in cultures of the investor and investee investor firms could turn out to be vexing to resolve. Post-acquisition, the acquired hospital’s intended mission and purpose often undergo significant change, some of which are perceived by the rank and file as being top-down and unwelcome, often accompanied by the perception of less empowerment and decision-making leeway by doctors and staff. PE investments sometimes lead to the lateral induction of senior staff, who may lack knowledge about the ground realities relating to the hospital and even the country, if such staff are expatriates. Often, the new system that supplants the existing one lacks transparency. Decision-making could become more centralised. The organisation witnesses change for the worse on multiple dimensions, including a sense of belonging, empowerment, etc., resulting in deterioration of doctor-patient interaction, culminating in patient dissatisfaction.

Several not-so-obvious issues arise when investments change hands rapidly, sometimes to undesirable destinations including to countries inimical to India. The frequent lack of due diligence about the investor, the shroud of opaqueness about their operations, and inadequate regulatory scrutiny together pose formidable challenges for these PE investments in the future.

PE investments provide security and avenues for the growth of many healthcare organisations in the country. However, a prerequisite for this goal is the alignment on multiple dimensions, including culture, between the investor and investee organisations. To encourage more PE investments, the two organisations must have deep expertise in realising the intended synergies, thereby transforming the deal into an amicable strategic partnership. It is vital to provide substantial operational and management freedom and flexibility to the investee firm after the investment. Optimum utilisation of funds, improving the quality of clinical outcomes, accreditations, better strategy implementation and robust governance would strengthen the partnership. Finally, policymakers should pay utmost attention to foreign PE investments into Indian healthcare to ensure that the health of the Indian healthcare system is enhanced and unintended consequences such as change of ownership into the wrong hands is avoided.

Geetika Ratna, Raghuram Bommaraju and D V R Seshadri

Faculty at the Indian School of Business, Hyderabad


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