Africa: Searching for a medical breakthrough

The gap between the needs and investment in African healthcare is a wide one – and, so far, both public and private sources have struggled to bridge it.

Since the African Union’s 54 member states pledged to spend 15 percent of GDP on healthcare in 2001, only six have met this goal, according to the United Nations.

However, a UN report notes there are “more private actors with the capacity to invest in healthcare” than ever before. This hints at a key issue: the continent is yet to find a way to unlock private investment at scale – the IFC estimates Africa needs $30 billion in new investment over the next decade – despite the availability of capital.

“There has been a mismatch between available capital and investment opportunities,” says Felix Olale, co-head and Africa investment team leader at impact investor LeapFrog, which this year established a six-strong healthcare team to invest in sub-Saharan Africa. “A traditional private equity approach is not always the most appropriate way to finance healthcare deals in Africa, which are earlier stage, have a longer gestation period and require longer to realise returns. A hospital investment might require a seven- or eight-year holding period, but most private equity firms would be looking to achieve returns within five to six years.”

Africa’s early stage of development, and the historical evolution of its healthcare market, also deter private capital.

“It’s a hard market in which to deploy capital simply because it’s a nascent market for corporate health chains. It is dominated by old non-profits or individual doctor-owned practices,” says David Easton, direct investment manager at UK development finance institution CDC Group.

Khawar Mann, managing director at Dubai-based investor The Abraaj Group, has seen his firm invest in The Nairobi Women’s Hospital in Kenya and has been particularly active in North Africa, buying and rolling up hospitals in Egypt and Tunisia. “Sub-Saharan Africa comprises less than 1.5 percent of the global healthcare market and 40 percent of that is in South Africa, which does make it a challenging market for firms who don’t have the correct infrastructure in the region to source opportunities,” he says.

In this environment, finding creative ways to access opportunities in the current structure of Africa’s hospital-centric market will be critical to deploying capital, say investors.

“Healthcare opportunities require additional thought towards how the entire health system works, and the value chains that realise profitability and scale. The best deals are the ones that can stand on their own, but within the context of a portfolio of deals that work synergistically to enable scale – for example, investing in a hospital chain, but tying this up with a diagnostics platform and a retail distribution platform,” says Olale.

Youseff Haider, partner and managing director at emerging markets investor TVM Capital, says government-run hospitals have developed as “the centre of gravity for the healthcare market”.

“It’s where you go for your diagnostics tests, IVF, to have your appendix removed. The opportunity in developing markets is the ecosystem around the hospitals, creating standalone facilities with lower capex, higher margins, better value-based competencies and greater ability to scale. Whatever you can take out of hospitals and make standalone you can do at a lower cost and with better outcomes.”

Achieving scale and delivering growth organically, without relying on debt, is also vital to putting money to work effectively.

“A lot of healthcare opportunities in Africa are early-stage – so it’s less about financial engineering and corporate finance and more about about flexible sources of financing coupled with operational capabilities and skills to extract value,” says Olale.

Finding human capital
Jonathan Louw, managing director at Abraaj, which closed its third sub-Saharan fund just shy of $1 billion in April 2015, says the lesson “is that it’s all about scale and bringing world class expertise to these markets”.

“As an investor you have to have a mindset that is able to deliver unlevered growth – because leverage is not that readily available – and to train people. Bringing in the right human capital is key,” he adds.

Finding and training the right people for Africa’s unique healthcare needs is one of the most pressing challenges for investors, with sub-Saharan Africa facing a deficit of 2.4 million doctors and nurses, according to the World Health Organisation.

“The health worker deficit is large and a traditional solution does not exist,” says Olale. “When people say, ‘You need to develop 500 medical schools and develop hundreds of thousands of doctors’ as a solution – that’s just not going to happen. Africa needs health workers with different capabilities to those being produced by traditional medical schools. Ethiopia provides one good example. In a five-year period they were able to train over 50,000 community health workers and as a result saw a dramatic drop in child mortality and an improvement in maternal health.”

Given their global networks and portfolios, private equity firms are in a strong position to bring skills and talent from abroad to underserved markets like Africa.
“In every one of our investments we have clinical partners in the West as a matter of principle to help attract the skills to build human capital,” says Haidar.

Mann at Abraaj, which last year acquired Indian hospital operator CARE Hospitals, adds: “We spend a lot of time thinking about the human capital issue. There are challenges in traditional disciplines such as HR, finance, procurement and distribution and we have sought to address this by leveraging our presence in the Indian healthcare market, especially around knowledge, training and skills development.”

The trend toward leveraging the skill set of the Indian diaspora is increasingly common, says Florent de Boissieu, chief financial officer at Madagascar-based sub-Saharan Africa investor Adenia Partners, which backed Madagascan pharmacy chain Opham this year. “You see many export directors with big brand experience working in Africa,” he says. “At Opham we have two Indian pharmacists who are our market leads for generic products.”

From people skills to deal structures, scale and unlevered growth, private equity firms will need to show creativity to overcome the challenges of investing in African healthcare and deliver much-needed capital. And this creativity will be increasingly needed as population growth and urbanisation leads to lifestyle changes and a rise in chronic diseases.

But it is this mix of lifestyle changes, urbanisation and population demographics which mean African healthcare has an enduring upside. “It is resilient to political crisis or economic downturns. Even in bad times it is a sector that grows,” says de Boissieu.