 "Avinash Bajaj")
Don't want to miss the best from Business Standard?
Matrix Partners, which has two funds of about $300 million each, has invested in five health care companies and will do so in half a dozen more in the next few years. Avnish Bajaj, managing director, explains to Ranju Sarkar why the early-stage venture capital firm is bullish on speciality health care. He was also the founder of Bazee.com, subsequently acquired by e-Bay India. Edited excerpts:
A recent report said you are looking at investing in six more health care companies. Why are you so bullish on health care? Which segments are you looking to invest?
That article you have read was a bit out of context. We have already invested in five health care firms; investing in half a dozen companies is not a big deal; it’s six more. If you look at the areas we have invested in, we are looking at category leaderships in emerging areas. So, in eye care, we have invested in Centre for Sight, the largest player in premium eye care and second largest in terms of a national footprint.
Cloudnine is the largest maternity chain. Enhance is a cosmetology chain. Mewar is an orthopaedic chain focused on tier-II and tier-III markets, which is an interesting emerging area. Meditrinna is a cardiac care chain. Our larger thesis is that speciality health care chains are able to cater to customers better, as well as have a better business model as they are focused on one or two areas and, hence, are more efficient.
Within that, certain things work very well on a standalone basis like eye care, orthopaedics, or cosmetology. In certain things, we find the business model could be more challenged and they work better within a hospital. So, Meditrinna is a DIH (department-in-a-hospital). We would also be looking at medical products, whether they are consumables, implants or devices.
What’s the opportunity in speciality health care? How does it compare with some of the other sectors in terms of returns or payback period?
In all investor surveys, health care emerges as the most sought-after area, hotter than information technology (IT) or IT-enabled services. I can give you the macro statistics but ultimately, it is about translating the macro into micro. We are clearly one of the most under penetrated countries.
People want better health care; people are becoming less tolerant of poor health care interface; they don’t want to go to a government hospital and wait for 10 hours. That’s a massive driver. At the same time, a lot of doctors are branching out on their own. Typically, the best opportunities arrive when there’s an intersection of demand and supply and it makes financial sense.
In hospitals, the gestation tends to be very long. How does speciality health care stack up with investing in hospitals or in other sectors?
In a tertiary hospital, the payback period could be six to nine years. Especially now in some areas like the National Capital Region, which are over-penetrated, so it might take 9-10-12 years and you never make money.
Compared to that, in speciality health care, depending on the business model and how much money was spent, the time to get your money back could be 2.5 to three years. It definitely makes more financial sense.
How is speciality health care more attractive for private equity (PE) vis-a-vis hospitals?
Hospitals generate a return on equity of low-to-mid teens. Speciality health care is in the early 20s, if not higher, depending on the business model.
In the past two or three weeks, the bulk of the deals have been in the health care space. Isn’t there a herd mentality?
I will not disagree that my community has a lot of herd mentality. I can only say we were not part of the herd; we were leading the herd. We started investing in health care in 2010-11. Herd mentality is the bane of our industry. If people are over-investing in a sector (be that e-commerce, hotels or real estate), it creates fundamental problems for the sector, and sector economics are affected. However in health care, people don’t invest in the same speciality. The size of the opportunity is so wide and deep that people invest in different sub-segments.
Similarly, childcare and cancer care have seen two investments.
If you take a macro view, it would look like a lot. But if you go speciality by speciality, it would not be much compared to the depth of the market. It is not like e-commerce where 10 companies have been funded, which are chasing the same customer.
There’s tremendous price-elasticity in all sectors. People want good health care, but at an affordable price. We have seen this in power and aviatoin. But unless these firms charge more, they can’t pay you back in three years. Is there demand at those prices?
Absolutely. I agree there is price elasticity to demand in India. But it applies less to health care and education. If you become blind and Rs 30,000 will give you a good surgery while Rs 20,000 won’t, few would mind paying more. In these sectors, the quality and the clinical outcome is critical. Besides, these speciality chains are offering you higher quality treatment at lower price than what you will get at a big hospital. This is because they run things more efficiently; they don’t have big over-heads. If there are any segments where people are less price sensitive and more focused on the clinical outcome, it is health care and education. That is why these are considered classic recession-proof sectors.
But the story has soured in higher education. Seats are going vacant in engineering and medical colleges…
That’s because of over-supply. If you look at the gap in the market for quality education is in the K-12. That’s where the government needs to understand that K-12 cannot be run as a business venture. Neither can most of higher education.
But most amount of supply has been created in coaching classes, and in higher education. But if you don’t have good quality K-12 education, how will you get people to go to university? In K-12 and higher education, the government can be a huge enabler by putting in some drivers to do it with some profit, within some regulations. It is highly regulated.
You have been investing out of two funds...
We have two funds of about $300 million each. It is about $600 million under management. Fund one is fully invested; we are investing out of fund two, which was effectively raised late last year. We are in a very early stage of investment in fund two.
We invest in consumer technology, which would be internet and mobile sectors. Here, we are traditionally a series A type of VC. Sometimes we do seed or series B selectively. Essentially, we operate like a VC with a typical check size of $2-4 million. In consumer technology, we invest even in unprofitable businesses. Outside of that, we invest in four other sectors: in consumer products and services including retail, health care, financial services, and in education. In these sectors, we invest in existing real world business, which may not be profitable, but close to it. This is what we call early-growth investing, where we would invest anywhere between $6 and $15 million in the first round, which would be the first institutional capital for that firm. In almost all of our investments (95 per cent), we are the first institutional capital for the investee company. Our sweet spot is $10 million – Rs 50-60 crore. In all these sectors, we would have made five to seven investments. We tend to go deep in a sector than investing wide across sectors.
Is there a change in your strategy between the time you started and today?
At a macro level, yes. There has been some finesse. You have to look at the market in which we operate. In those days, 2007-08, when we were investing from our fund one, everyone wanted to make very large investments. The gap in the market extended to Rs 100-crore investment size, which was about $15-20 million. In fund one, we have made investments of those size.
In fund two, there is a change in sentiment; the $20-30 million investment market has become very crowded, and we don’t believe we have that much of an edge versus large PE firms. So that has changed. We do a bit more of early growth stage than growth stage. Growth stage is defined as $15-20 million (Rs 80-100 crore) and early growth stage is defined as $10 million (Rs 40-60 crore).
We would keep investing more given our fund size. Over a period of time, we may invest Rs 100-120 crore in a particular company, but the starting range would be in the $10 million.
Between the two funds, how many investments and exits have you made?
We have made about 35 investments, and two IPOs, and a couple of exits are in the works. Two IPOs in Tree House Education, the largest pre-school chain, and Muthoot Finance.
What has been your investment strategy? Do you invest alone or in a syndicate?
In the past, it has been always on our own. We have nothing against syndicate investing. If you see our model, you will understand why we tend to invest alone. We try to identify emerging areas and try to get to the companies early. By definition, those companies may not have met anyone and we end up developing a lot of comfort. If you look at Tree House, it is a pre-school education theme.
We invested when it was still a tiny company and pre-schools were still emerging as a market. If you look at our investments in health care, they are all emerging themes. The company we invested in maternity space is the largest maternity chain in the country. We look for category leaderships in emerging areas and we try to get those companies ourselves. Therefore, we end up in situations we are investing alone. Not everyone would be excited about those sectors. We always take minority stakes, work with rock star promoters to work towards an exit.
