PE Fund investing in Hospital

I :  Your client is a PE fund, they are looking to invest in a hospital with the hopes of achieving 25% IRR in the next 5 years. You have to help them evaluate the scenario and come up with suggestion to achieve the same. .

C : Our client is looking forward to invest in a hospital chain or a single establishment and if so where is it located?

I : They are looking to invest in a single hospital in Gurgaon.

C : Okay, what kind of hospital is it? Is a multi-speciality hospital with all medical services available? And is there any particular speciality of this hospital as I am assuming there would be multiple hospital in Gurgaon.

I :  Yes it is a multi-speciality hospital, and your assumption is correct, there are multiple hospitals and even 2-3 in the nearby area, what makes this hospital unique is that they have a large team of doctors and facility to do operations.

C : Okay so our client, the PE fund have they invested in hospital and similar fields in the past?

I : I don’t see how this is relevant to this case.

C : The reason I thought that it would be relevant to this case is that they could leverage their portfolio companies to establish partnerships and values services to boost the business of this hospital

I :  Sounds fair, they have invested in multiple hospitals across India, they also have a big portfolio in the pharma sector and some investment in other sectors such as hospitality and real estate

C : One thing I would like to clarify here as I don’t have enough financial knowledge what does IRR 25% translate to? Is it in terms of business valuation and can a proxy such a profit and revenue be estimated to track this number?

I : You can use IRR of 25% as a proxy by EBITDA growth by 300% in the next 5 yrs

C : Thank you for that information, I would like to analyze this situation by breaking it down into three major segments, financial and operational outlook, and business synergy.

Starting with the financial first since our focus will be on EBITDA which roughly translates to operational profit, I will break it down into revenue and cost. In revenue, we can look into inpatient and outpatient separately, I will start by focusing on inpatient first as the hospital specialised in surgeries

I :  The approach seems good with valid assumptions, you can focus on inpatient first.

C : In order to calculate the revenue of inpatients, I will break it down in to the following formula: Revenue= No of beds * occupancy of beds *no of days a person stays*  price per day (having segregation based on types of rooms) do we have any data on any of these?

I : Yes, the hospital has 1000 beds, average occupancy is about 50% and the price on average paid by any patient in 650000.

C : Okay so that gives us a daily revenue of around 3.25 cr which would translate to roughly 1100 cr per year, which looks a bid odd to me, is it correct or do you want me to recheck my calculations here?

I :  No your calculations are correct, can you quickly give me suggestions to bring this number up

C : In order to achieve the set financial goals of 300% increase the following components can be targeted from the revenue components in short run:

Occupancy: Increase the average occupancy rate of the beds by focusing more on marketing the services offered by the hospital

Type of room: Can focus on increasing the number of patients that occupy single rooms instead of shared rooms and dorms.

Price per day: The average price for the services can also be increased but that may not be a feasible option as it could lead to people choosing the lower category of rooms.

In the longer run :

No of beds: Once enough growth is observed to increase average occupancy to about 80% more beds can be added to further boost revenue

I : Okay, you had earlier mentioned that the PE fund’s portfolio companies can also help in the growth of this business, any recommendations on that front?

C : Certain value-added services can be introduced by leveraging other companies in the portfolio of the PE fund such as having cheaper and more effective latest drugs in partnership with pharma portfolio companies. Using the hospitality portfolio companies they can provide special meals.

I :  Okay, is there anything else you would like to explore while making the final decision to invest in the hospital.

C : Yes, we can look into the exit opportunities such as selling out or shares to another investor or looking to merge this hospital into a bigger chain. One more important area to be considered here would be to perform thorough due diligence on the complete business

I : Sounds comprehensive enough, we can close the case here