Healthcare in China: a risky operation

The potential of China’s healthcare sector is mouth-watering, and the gaps in the nascent industry put PE in a very advantageous position as an investor. But some of China’s state medical practices may mean potential returns aren’t worth the risk

On paper, China’s healthcare sector looks like a fantastic opportunity. The country’s growing middle class is demanding better medical services and technology, according to Nina Gong, a director in The Carlyle Group’s Asia buyout team; she estimates that China’s preventative healthcare sector alone is an RMB 40 billion (€4.9 billion; $6.4 billion) industry growing at 15 to 20 percent per annum.

What’s more, the international connections of private equity firms are particularly appealing to healthcare companies. Modern healthcare only began developing in the country 10 to 15 years ago, so many companies need help to recruit the management they need, says Elaine Wong, partner at Hao Capital.

After Hao hired an entirely new management team for one of its healthcare IT investments, the company developed a nationwide presence and increased its gross profit margin by 20 percent over a two-year period, she adds.
But challenges remain. The sector only recently opened to foreign investment, and remains highly regulated – while implementation details for some reforms are still unclear, according to Lawrence Wang, managing director of Primavera Capital.

“I’ve seen investments … encounter difficulties because of one policy change,” Gong says.

One of the riskiest subsectors is hospitals. For many years a foreign investor could only own a maximum of 70 percent of a hospital through a Sino-Foreign joint venture (a restriction still not fully relaxed, Wang says). Since many hospitals are state-run, they are particularly vulnerable to rapid changes in China’s policy winds. 

Moreover, hospitals carry a reputational risk because of the One-Child Policy. According to official statistics, Chinese hospitals carry out 13 million abortions a year, and horror stories of forced abortions appear regularly in Chinese and foreign media.

“The hospitals are really where the rubber hits the road on the One-Child Policy,” says Reggie Littlejohn, founder and president of human rights organisation Women’s Rights Without Frontiers. Given the arbitrary local systems of abortion quotas and fines, forced abortions are guaranteed to happen, Littlejohn says – and investors could easily become embroiled in that. “Do you really want to be invested in something that commits human rights atrocities?” 

Private equity hasn’t avoided hospitals altogether, but it has tended to focus on specialty hospitals that don’t offer abortions. For example, according to one industry source, Primavera has invested in a high-end hospital that caters primarily to expatriates and high net-worth individuals, where there is no demand for abortions. 

Most abortions actually happen in state-owned facilities, not private hospitals, Wang adds. “Over all the dozens of deals we’ve looked at, this issue has never come up,” he says.

However, some firms may decide the risks outweigh the rewards. For instance, Actis China healthcare director Jason Zhang says abortion is one issue his firm “doesn’t want to touch”, and has walked away from at least one investment because of it. Every one of its healthcare investments must “always put not only earning money but the patients’ interests as a high priority,” he says.

That’s not always easy when the One-Child Policy is involved.