Since the global crisis of 2008-09, there has been a palpable and growing sense that the world is in the midst of fundamental economic and political change. But, as is the nature of change, the only certainty we have is that there is a lot of uncertainty. We have more questions than answers.
Can we create enough jobs, and the right jobs? Is the financial sector working for society’s benefit, or in its own self-interest? Are markets a force for good, or bound to fail us? Can current political systems handle fast-changing and competing interests?
For private equity practitioners operating in a region that has seen its share of economic and political volatility, these are very real issues that have an impact on the way we raise capital and invest.
Investors and other key stakeholders, including governments, are rightly asking whether we are making a positive societal impact, and how we manage risk.
In the MENA region, as in many emerging markets, job creation, skills development and economic diversification are key issues, and governments are looking to private investors to play a positive role. This provides opportunity for the private equity industry, but also means taking responsibility.
The environment for investment is therefore conducive, but things are not that straightforward.
To build long-term standing with key stakeholders, companies such as ours have needed to ensure that our investments are well-researched and truly address unmet needs.
And since we believe it is good to invest in emerging markets in line with government policies to promote private sector involvement in health care and lift quality standards, we have been willing to work very closely with health care authorities and other key players, such as insurers, to establish a fair and enduring licensing regime for private sector participation.
An excellent example of these dynamics at work is ProVita International Medical Center, which we exited in 2015, that essentially created the long-term care market in the UAE and, with private equity investment, became the foremost provider of acute, ventilated care in the region.
We recognised that nationals of the Arabian Gulf countries were travelling abroad for specialist care, but mostly preferred to be at home, close to their families. To establish a presence, firstly in the UAE, it was necessary to develop a new licensing and payments regime.
To thrive, the company needed to demonstrate that the care provided was as good, and even better than that provided in countries such as Germany and the US.
The process of value creation was therefore holistic — and included building strategic partnerships with world-renowned Spaulding Rehabilitation Network and Joslin Diabetes Center to deliver the highest quality of care. The result was the provision of expert clinical care and therapy through a patient-centric approach, with a three-to-one ratio of carers to residents.
But even showing this value creation is not enough — in today’s uncertain global economic environment, private equity firms need to show investors how they mitigate risks.
One of the greatest risks in emerging market investment is execution risk — the risk that even the best strategy can become unravelled in the detail of implementation. This could be for several reasons, including regulatory uncertainty or a shortage of relevant skills for portfolio companies to tap.
In order to be really successful in emerging markets, private equity investors should be specialists — using deep sector expertise to promote efficiency and good governance, as well as to create new business opportunities.
They should also be prepared to roll up their sleeves and get involved in day-to-day operations.
For example, we are committed to running a strong “operations group” steeped in health care expertise — an accelerator company of 20 people and third-party advisers that supports our growing businesses. It provides general management support, including the provision of management and strategy development, as well as back-office services, such as legal, information technology, marketing, accounting, human resources.
Setting up this ecosystem is a significant investment in itself. But it brings huge value-creating benefits for the companies we invest in, and reduces risk for the company and our investment partners.
It means that in their years of early growth, our portfolio companies are left to concentrate on doing what they do best — providing quality health care services. Economies of scale mean that each company can save time and costs, and still employ high quality specialist skills.
Meanwhile, as investors, we have an excellent view on day-to-day realities and can help to find solutions to any issues the companies may face. This high level of transparency encourages good corporate governance across the company, which is highly valued, especially in an emerging market context.
The focus on motive and risk among institutional investors is only going to grow in the coming years.
While it may be frustrating in the short term, private equity investors must embrace the trend if they are going to successfully raise and deploy capital, in the recognition that making a positive societal impact and addressing risks properly, is not just good practice, but will probably ultimately deliver better returns.
The writer is CEO of TVM Capital Healthcare Partners.
