Emerging markets: Patient business in MENA

The Abraaj Group has used its expertise in healthcare in the MENA region as a springboard to increase a specialist fund.

When the firm reaches final close on its $1 billion Abraaj Growth Markets Health Fund, it will have also reached a milestone. The vehicle is its first exclusively dedicated to healthcare.

The fund will train its considerable firepower into urban areas in South Asia and sub-Saharan Africa. According to the International Finance Corporation, which committed $150 million, the fund’s quarries include healthcare providers, medical technologies and medicine distributors, and retail pharmacies. It is open to investing in acquisitions, and greenfield and brownfield projects.

Abraaj’s emphasis on healthcare is not new. About 30 percent of Abraaj North Africa Fund II, a $375 million vehicle that closed in July 2015 and has a “sliver” yet to deploy, is invested in the sector, according to partner and head of MENA Ahmed Badreldin.

“We have deployed $300 million into healthcare in North Africa over the past couple of years, and before that we invested in IDH, which was our first foray [into healthcare],” he says.

The firm made its initial investment into Egypt’s Integrated Diagnostics Holdings in 2008, and exited 80 percent of its stake through an initial public offering on the London Stock Exchange in 2015.

In contrast to the Gulf, “where you don’t find much happening in healthcare given there are very large groups operating and the market is already quite consolidated, the North African market is still fragmented and consolidation continues to be an interesting theme,” says Badreldin. This applies to hospitals, clinics and diagnostics. Valuations in North Africa are “more manageable” than the Middle East where there is more competition for assets, he adds.

Abraaj is not the only GP active in MENA healthcare investing which recognises a wider opportunity in emerging markets. Dubai-based TVM Capital Healthcare Partners is raising a $300 million vehicle, its third, expanding its remit to invest in South-East Asia and India, as well as MENA.

“We think the opportunity presenting itself in [South-East Asia] now is very similar in many ways to the opportunities we find in the MENA region,” TVM Capital managing partner Helmut Schuehsler told PEI in February.

This geographical spread is a necessity to achieve returns, argues Richard Dallas, senior managing director at Abu Dhabi-based Gulf Capital. “It’s unusual to find an asset with a cost structure you can pare down and make the returns without [incurring] more.”
Healthcare in the MENA region is less cyclical than other plays, due to government commitments to providing services and demographic pressure, according to Dallas. He adds, however that assets are typically “richly priced”.

As well as expanding across emerging markets, GPs need to hone in on growth by leveraging market penetration and demographics and pursuing consolidation to achieve economies of scale, Dallas adds.

And there are risks. Businesses in the sector can depend for revenues on a single payer, most likely a government agency, and government procurement cycles. “Hospitals are complicated to make work,” says Dallas. “Many patients come for the doctor, not the facility. You can end up with difficult-to-scale and asset-intensive businesses.”
Healthcare is highly regulated and socially sensitive, he adds. “Everyone aspires to do it but it’s hard to find the right assets for a PE profile and returns.”

Photograph by Cybjorg, Wikimedia.