Investment in the Central and Eastern European (CEE) healthcare market is booming. Data gathered by The Lawyer and CEE firm Kinstellar from more than 100 corporate bodies and financial investors shows that respondents were overwhelmingly positive about investment opportunities in the region – 93 per cent of those surveyed said it is a strong time to be investing.
In September, representatives from 16 law, consulting and accountancy firms met in London to discuss what’s next for this emerging market.
The data shows that CEE countries are expected to receive the third-largest volume of healthcare investment in Europe after the UK and Germany. This places CEE nations ahead of some with far greater economic strength such as France, Italy and Spain. For the countries involved, this will prove to be a literal lifesaver.
The number of people aged 65 or above in Poland is expected to rise by three million over the next 20 years. That will mean eight-and-a-half million people above that age threshold which, if left unchecked, will place a major strain on the region’s healthcare systems.
However, the CEE is experiencing a rise in wages resulting in more disposable income than ever before. The Legatum Prosperity Index showed that the region is 4.2 per cent better off than it was 10 years ago. By this metric, it is ahead of Latin America or MENA.
Finding your niche
It’s important for investors to understand the market they’re going into. For anyone looking to break into CEE healthcare, it is a very interesting climate.
The market is much more fragmented and isn’t owned by a few, large entities. There are many companies across myriad countries facing different regulations in each one. In that sense, CEE is a challenging market, but it can be worth your while if you’re ambitious enough.
“Traditional ‘pharma’ is a big boys’ game,” says Value4Capital managing partner Bill Watson. “Now, it’s about ‘elective’ procedures versus ‘core’ surgery. People have greater confidence in elective surgeries than they did, particularly in countries like Romania.”
When Watson is talking about ‘elective’ versus ‘core’ surgeries, he’s talking about voluntary procedures. People have more money now and they’re prepared to spend it on better quality healthcare.
While this trend continues, investors will see the benefit in having a large, high-quality asset base from which to consolidate.
“What helps is that healthcare tends to be a national business,” says Jeffries managing director Ashwin Pai. “This makes it easier to grow your asset base. For example, dental is an attractive space. There are similar dynamics where you’ve got strong, organic growth in the retail healthcare space for investors to move into.”
“To me that is a natural opportunity and it doesn’t seem to have been taken advantage of yet,” responds Kinstellar co-head of private equity Anthony O’Connor. “So, why is no one taking advantage of it?”
It’s a good question. Anyone capable of answering it will put themselves in a very lucrative position.
A helping hand
Data from the report shows that in the next 18 months venture capital funds are expected to be the most active investors in the CEE, with 60 per cent of respondents also saying that non-CEE based investors have excellent opportunities where they didn’t exist before.
As healthcare businesses in the region grow, so too do the size of funds eager to invest. Unsurprisingly, this correlates with the size of the market.
Poland, as the most populous nation and largest beneficiary of EU structural funds, was named by 53 per cent of respondents as the biggest investment market. Turkey was a distant second, although not a CEE nation, with 11 per cent of the vote while the Baltic States came third with 9 per cent.
Perhaps the clearest indicator of growing interest in the CEE healthcare market came in February this year. Geneva-based Unilabs acquired Alpha Medical, a CEE medical diagnostics company operating in Slovakia and the Czech Republic, from Mid Europa Partners in its first venture into the region. While no initial venture comes without risk, it shows that there is an appetite and, maybe more importantly, capital to invest.
“You need that momentum to start,” says Pai. “I think it’s just a matter of time. Some countries have regulatory battles, but in Eastern Europe you need one of the private equity funds. That’s tough work.
“You need a lower market private equity fund to build the platform and sell that a mid-market fund and then you get some of the bigger ones coming in to do that.”
The relationship between fledgling business and small private equity funds becomes vital. They’re able to get these healthcare businesses off the ground and they spring up in some unlikely places.
“There are smaller private equity funds that will try to do the hard work,” says International Finance Corporation investment officer Ladan Pazhouhandeh. “In Serbia, there’s a MediGroup which has started a platform of consolidation around the country, they’re really doing a lot of work.
“It’s slow to turn around, though. They had a small hospital, only 60 beds, and this still hasn’t broken even, but they have a strong outpatient model. They’re starting to get more subscriptions, in terms of private pay. For people that want to skip the lines of the public sector, it’s affordable.”
Hesitancy from the US
The news isn’t universally good for this market, though. While there is an interest for investment, American investors still hold cagey views of the CEE.
The perception at the roundtable was that American investors are hesitant to move into the Europe healthcare market as a whole; even the UK and Germany are looked at cautiously.
“My degree is in finance, but now I’m a marketer. I’m selling a product,” says Watson. “If I go on a tour to the US, everybody there’s wondering whether they should even invest in Europe, and when I say, ‘Well what about Poland?’ It becomes a very short meeting.
“The challenge is to convince these US guys why they should take any currency risk when their domestic PE businesses have been returning a nice 12-15 per cent growth for 40 years.”
The benefit to investors for America, of course, is that it is one market. To get into Europe, you’ve got myriad different regulatory bodies and a range of different cultures to work with.
“In pharma, if you crack America, you’ve cracked a huge market,” says Linklaters corporate partner Aisling Zarraga. “If you think you’ve cracked Europe, you might have cracked Spain, but then you’ve still got France, Italy, Germany. They’ve all got hugely different systems. It’s another jump to central and eastern Europe and then Turkey, too.”