Healthcare-focused Quadria Capital, which is currently on the road to raise $800 million for its third fund, is looking to hit the first close sometime in the first half of 2023.
The Singapore-headquartered private equity (PE) firm, with an establishment in India, recently amassed $25 million (as much as Rs 204.4 crore) from the Asian Development Bank for its third investment vehicle — Quadria Capital Fund III LP.
The firm is also in talks with the International Finance Corporation (IFC) and US International Development Finance Corporation (DFC) as it gears up to rake in more capital from both existing and new limited partners (LPs).
“We have been fortunate that most of our existing LPs are coming back to the fund, just that they are coming in at different stages. The names that you mentioned are already there in the public domain. Yes, we are in the process of documentation with them,” Amit Varma, Managing Partner at Quadria Capital, told DealStreetAsia in a rather candid interview.
Quadria Capital closed its second fund at $595 million in 2020 and its first fund at $300 million in 2014.
“By the first quarter of this year, we would be fully invested out of our second fund,” said Varma.
Edited excerpts of the interview:
Quadria has been in the headlines recently for raising capital for its eighth fund from investors such as ADB, IFC, and DFC. Who are the other LPs? When are you looking to make the first close?
While I won’t be able to disclose the names of the other LPs we are in talks with, all I can say is we are moving well. Initially, we had targeted to do the first close by the first quarter of this year or the early second quarter. But with the current macro environment, many LPs prefer to commit capital from their 2023 allocation target, instead of last year’s.
So, while it’s difficult for me to give an exact timeline, if all goes well, we should be able to make the final close by the end of this year or early 2024.
With fears of a recession looming large, what are your views on the investment landscape going forward?
Clearly, the macro environment is making LPs more cautious – in fact, they are now taking more time to complete the diligence process and commit the amount they are wanting to [to PE/VC firms].
Whether we are in for a full-blown recession is still a question as the jury needs to be out on that. But yes, the euphoria of 2021 and the first half of 2022 has gone. With the Ukraine war and the Fed’s aggressive stance, things have become challenging, especially for developed markets like the US and Europe.
However, what we are seeing is that dedicated LPs who are sophisticated enough to understand sectoral allocation benefits are not scared to deploy capital in PE-VC firms. The good thing is people are still talking about entering Asia and deploying capital.
You spoke about sectoral allocation benefits. Tell us more about it as healthcare is clearly one segment that’s witnessing huge traction despite the downturn. What’s working in its favour?
Of all the industries, healthcare clearly continues to be resilient to any kind of downturn. In fact, in some ways, COVID has done the sector a favour because people have realised that you cannot segregate healthcare from economic reality. So, there is clearly an LP base that is very focused on allocating the under-budgeted Asian healthcare more money, and they’re asking for impact parameters to be defined explicitly.
So, the short answer is funding will get done in our part of the world. But most of us who are GPs have to be a bit more patient.
What was unique last year was by the time we hit the second half of 2022, most of the LPs were already out of allocation. They had already deployed capital. So, when GPs like us started raising capital, they asked us to wait till 2023.
What is your view on South and Southeast Asia vis-à-vis the global market?
Well, nothing’s changed in South and Southeast Asia. If you take a decent healthcare company and leave them alone, they typically grow at a 10-15% CAGR revenue year on year, and the trend continued even in 2022.
Our profitability has not been impacted. In fact, 2022 was a bumper year when it came to EBIDTA and profits for most of our portfolio companies.
Opportunities are still rife in this part of the world as there is so much under-allocation to the healthcare sector that it is going to take a decade of a continuous flow of funds to make a difference.
It’s also clear that most governments, whether in Southeast Asia or South Asia, realise that they don’t have the ability to do public funding.
So, an interesting pivot that we’re seeing is that be it India, Indonesia, Malaysia, the Philippines, or Thailand, governments are trying to provide universal public insurance to enable patients to go for private care. There is an acceleration in this trend.
Moving to Quadria, you have already been active in countries such as Indonesia, Vietnam, Malaysia, and Singapore in Southeast Asia, besides India in South Asia. You were also looking at options in Thailand and the Philippines. What is the progress there??
Our strategy is to deploy capital in the ratio of 50:50 in both Southeast Asia and India. Yes, we have done deals in Indonesia, Vietnam, and Malaysia, besides Singapore. We have also looked at various targets in Thailand and the Philippines, but nothing has been sealed yet. We continue to be very, very optimistic about these two countries, and we hope to invest in them from our third fund.
What will be your investment approach from the third fund? Which are the sectors within the larger healthcare umbrella that you are betting big on?
Let me take you through Quadria’s overall investment strategy. We are a growth private equity provider. So, the sweet spot for our investment cheque sizes is somewhere between $75 million and $150 million. Having said that, we can go beyond $150 million because we also have co-investment allocation by LPs.
We like to take significant minority positions, all the way up to majority in each of the portfolio companies we invest in.
From that perspective, nothing has changed. We have never made more than 7-10 investments from a particular fund because we believe that allows us to spend more time with each of our portfolio companies. That strategy also remains the same.
But, what we’ve done uniquely in this fund is that we have created an internal value optimisation team. These are a bunch of ex-healthcare consultants and healthcare operators who are now embedded within the investment teams and can provide assistance to our portfolio companies that go beyond the financial bit.
Stepping back to the sectors we care about, they would be services (mainly hospitals and labs), growth pharma, medtech and consumables (companies that make products like diagnostic tests, masks, gloves etc), and consumer health (anything which is directly linked to the patient).
Apart from these, COVID has also brought to the forefront two more sectors. One is health tech, and the second is insurance and innovations in health insurance.
Now, if we are asked to divide the fund corpus, we are looking to deploy 30% into services, about 30% into life sciences, and 40% would go into the remaining sectors that I spoke about.
Talking about healthcare, consolidation seems to be the buzzword in Asia. Your comments, please.
I’ll go back a bit as the pandemic has clearly brought out a differentiation between the good and not-so-good healthcare companies.
While the not-so-good companies started to feel the pinch during COVID times, the good ones became great because they were able to pull off the veracity of the balance sheets. Now, that’s where the concept of consolidation is beginning to come in.
Going forward too, you are likely to see a lot more consolidation because the weaker ones are now available at a reasonable valuation. I want to be cautious here. Valuations in healthcare have not come down. We have not seen any drop unlike in tech, where everything’s available cheaper. There may be a point here or there or one multiple here or there. But, right now, healthcare valuations continue to command a premium, especially in Asia. And that’s because of a scarcity of good quality assets.
Everyone’s realising the bigger you are, the better it will be. So, clearly, consolidation signals the trend of how hospitals are wanting to be bigger in scale.