The attraction of private equity to Nigeria’s healthcare industry has waned, with most businesses struggling to achieve the scale sufficient to hold investors’ confidence in their operations.
More capital deals are favouring fintech, agritech, property tech, and mobility tech over healthcare due to the low product or service penetration volume, leaving investors unsure of returns, analysts say.
The business side of health in Nigeria is still subdued by small middle class size and a largely poor population frustrated by soaring inflation, food prices and crippling out-of-pocket expenditure on health.
The few deals chasing the industry are often led by health tech and pharmaceutical manufacturing, Abimbola Adebakin, founder and chief executive of Advantage Health Africa, told BusinessDay in an interview.
“More private equity is coming in but it is still a tiny fraction compared to the total amount available as well as compared to what is being raised in other countries outside of Africa,” Adebakin said.
“The problems may be because our unit economics are not yet making sense. So if you fund a healthcare company, how will you recover your money? In fintech, some people are doing 40,000 transactions daily. In health tech, to do a thousand can be hard.”
Africa attracts just one percent of the total venture capital investment globally, and Nigeria leads the largest share of the 33 percent controlled by West Africa, according to a report by African Private Equity and Venture Capital Association.
CardinalStone Capital Advisers (CCA), a West African private equity fund manager, invested $6 million in AfyA Care last year in one of the few investments that settled in healthcare.
CCA cited AfyA Care’s capacity to scale and understanding of the industry across hospital care, health insurance, and health tech.
Health Capital Africa, formerly Flying Doctors Healthcare Investment Company, is using its venture capital arm to raise pre-Series A funding for startups in fintech and healthtech.
Ola Brown, its founding partner, said the company has invested in about 30 startups in fintech and health tech, with about $800 million in healthcare, clean energy and clean water infrastructure projects across Africa.
BusinessDay analysis shows that over $18.4 million was invested between 2019 and 2022 into health businesses including Lifebank, 54gene, Helium Health, Mdaas Global, Lifestores and the Oncology Department of Lagos University Teaching Hospital, among others.
However, analysts say Nigeria’s lot could be better.
Improved economies such as the United States, where the healthcare sector captures close to 20 percent of the GDP, have seen acquisition of healthcare providers by private equity firms surge. There is accelerating interest in new frontiers like home health, skilled care, behavioural health and value-based care.
Nearly 800 deals worth more than $100 billion were recorded in 2018 as tech-based healthcare firms were valued at 17.1 times earnings on average, compared with 14.9 times across the industry, a 2019 Mckinsey analysis of opportunities in healthcare shows.
Some efficient healthcare tech companies perform as much as 23 to 25 times entreprise value/earnings before tax, depreciation, and amortisation.
In India, healthcare services is one of the leading industries gaining scale as market share is increasingly transferred from subscale or family-run businesses to larger players with greater access to capital and technology.
Its pharmaceutical and healthcare providers segment recorded 213 percent investment growth between 2015 and 2017, according to Mckinsey.
The industry was estimated to hit $372 billion in 2022, with the hospital industry projected to rise to $132 billion by 2023, up from $61.8 billion in 2017, data from FDI India shows.
Nigeria has opportunities for such investment attraction with the rising incidence of non-communicable disease from cancer, to hypertension, diabetes and chronic kidney disease, to mention few.
“If the issue of scale can be tackled and synched with other indices for growth, more health operations can attract such investments in Nigeria,” Femi Ogunjimi, partner at CCA, a Lagos-based private equity firm, said in an interview.
He identified poor scale as the biggest limitation of hospitals and related businesses in Nigeria.
“The largest private hospitals in Nigeria have 250 beds at most whereas private hospitals in China and India have upwards of 2,000 beds. Those hospitals are operating at a scale that allows them to provide quality healthcare at an affordable cost,” Ogunjimi said.
Other analysts suggest the government must fix bottlenecks such as reducing costs of imports, foreign exchange availability, unclogging of the port system if it must solve ease of doing business in Nigeria’s healthcare.
Private equity is an investment capital contributed sometimes by pension funds, and private individuals, which is pooled together and managed by investment professionals.
According to McKinsey insights, private equity-friendly healthcare-tech investments must be scalable. To keep up with growth, companies must have the capacity for rapid increases in the number of jobs and users. To help the solution evolve as it scales, the company should have a clear road map for R&D, product improvements, and technology initiatives.
Similarly, the nontechnical components of the business must also be able to accommodate growth. To support increased demands, the company must have the ability to increase infrastructure such as customer service and implementation teams.