Why foreign investors have not flocked to Brazil – despite deregulation
The Brazilian healthcare market opened up to foreign investment in 2015 – but has yet to see a lot of foreign investment bar a couple of large players. Why is this, what is the best model for operators, and where should they be looking? Healthcare Nova speaks to Brazil-based Marcelo do Ó, managing director at global consultants LEK.
Between 1988 and 2015, foreign investment into the healthcare market was problematical. Loopholes were found for areas like diagnostics where there was no hands-on patient involvement, but clinics and hospitals were out of bounds. It wasn’t until two years ago that Congress removed the limitation that was heavily restricting capital from entering the market.
With, from an investment perspective at least, the Brazilian market deregulated, you might have expected the floodgates to open. But there has only been a comparative trickle of business, with only a couple of large players from aboard have tested the water.
This includes global asset manager The Carlyle Group, which in 2015 made a primary equity investment in Rede D’Or.
do Ó tells us: “What’s happened, after the law changed, is that proportionately very few transactions happened. We saw one major transaction [Carlyle]. We’ve also seen many PE funds trying to scout the market for interesting assets. There were many conversations.”
Consolidation is not straightforward. He explains: “The corporate structure of many of the hospitals in Brazil is complex and involve former physicians who opened up the hospitals and those who inherited from them, the sons and daughters, and they form a small network of shareholders and these individual assets are not easily resolved.”
“So the reason we’ve not seen that many transactions is, firstly, that corporate structure. Secondly, it’s a crude fact a number of these hospitals face challenges in these markets where they have to deal with concentrated payors. In Brazil there are co-operatives – which are payors – and essentially health plans belonging to the physicians in the plan itself. They’ve been in place for many years and in the smaller cities they form small monopolies sometimes.”
These cooperatives are united under the banner of Brazilian work cooperative and health insurance operator Unimed.
Geography, do Ó says, is key. “There are good clinical hospitals, well managed, sitting in challenging areas where there’s an excess of hospital beds and there’s too much competition. The majority of good opportunities are in the South East of Brazil, the state of San Paulo is the most attractive one, but not in San Paulo city.”
As for the most successful model to adopt, do Ó says vertical integration is the ideal. He explains: “We see that the model that is attracting investors is that of an integrated player where a payor has his own hospital. That’s the most attractive situation because you go and buy hospital and bring a health plan with you, and that will help you face the challenge of market concentration. Economists like to call it vertical market failure, when you have this excess concentration, and this is how we see investment actually happening.
“Where someone has vertically integrated between payors and hospital operators – that’s where this problem gets resolved.”
do Ó adds there has been a period of reflection following the change in legislation, explaining: “When I talk to investors and some of the hospitals, it’s clear there’s been a period of learning. The law came in in 2015 and almost for a year everyone sat down around the table. We had funds talking to literally dozens of different hospitals to try to understand and form a thesis of what to do and that’s when we started seeing some of the transactions.”
Although he won’t give details, he adds that he’s aware of three “interesting assets, all integrated” currently being looked at by foreign investors. “We haven’t seen a lot of consolidation, with very few exceptions, of just hospitals”, he adds.
Despite this, margins are good: “Hospital operators should expect something between 15 and 20 % EBITDA margin”.
He adds that the price paid for Rede D’Or is proving to be a hindrance to subsequent transactions.
He says: The [EBITDA] multiple that Rede D’Or was bought for by Caryle was approximately 20 times – so it was very, very expensive, and that created a reference in the market as it was the biggest transaction. PE funds are more used to somewhere in the range of five to seven times EBITDA transactions. They got scared when that happened.
“But this was the market leader with good assets, a lot of potential, sitting in reasonable markets. Carlyle looked into the asset and they knew what they were doing I’m sure.
“But it created a precedent and that’s also another reason why we’re not seeing a lot of transactions. The expectation is to get somewhere close to the same price and they cannot.
“Also I believe the incentive for the owners to sell is not that pressing yet because the consolidation hasn’t been fast enough with very few areas of exception like Rio and San Paulo city. Everywhere else there’s no sense of urgency, but this will materialise – slower than a lot of people would like – but it will happen.”
The long-term signs are positive, says do Ó. He explains: “The market is very large. It’s one of the largest private sector markets for health in the world. It grows double digit. It’s been sustainable even in the crisis – the health market continues to grow despite the last three years.”
But it is impossible to ignore the spectre of political uncertainty looming over the country. Last week Brazil’s President Temer survived a vote that, had it gone against him, would have seen him put on trial for corruption. Opposition representatives in the lower house of Congress failed to obtain the two-thirds majority needed. Temer has said he intends to continue in office but the clamour for an election sooner rather than later appears to be growing and with that clamour, instability will continue to grow too.
We would welcome your thoughts on this story. Email your views to David Farbrother or call 0207 183 3779.
