Tips for raising capital in health care

NAIROBI — While many low-income countries set their sights on achieving universal health coverage — government spending on health often does not match ambitions. To help fill the gaps, the private sector will play a key role in working to strengthen health systems, according to speakers at the Africa Healthcare Extension Summit in Nairobi last week. In some countries, the private sector already leads health care delivery. In India, for example, about 70% of health services are provided by the private sector. But the potential of many companies is stunted due to a lack of access to financing to help upgrade health care facilities or expand their business model. “Investors want to invest in a management team that has a sound idea that is either working, or is going to work. When they invest, they are essentially backing a team.” --— Salim Hasham, executive chairman, Health Services International During the Nairobi summit, Salim Hasham, executive chairman of Health Services International, a health care investment and management company, and former senior vice president of Johns Hopkins Medicine International, gave tips on how businesses in the health care sector can access financing. Financing options There are several options for accessing funds, according to Hasham: Debt financing. Mostly done through commercial banks. In East Africa, for example, the interest rate a company might pay is between 12 and 14%, he said. In some countries, those rates are capped. Debt, in most cases, requires a guarantor or collateral on specific assets. Development funds that provide debt, such as the Medical Credit Fund. This type of credit is usually for smaller amounts of money, around $1 million, he said. A guarantor or collateral is also required and there are conditions on what the funds are used for. International financial institutions provide both equity and debt. • Debt. There is a “significant” currency risk attached to debt financing because the money is denominated in U.S. dollars or euros. If a company needs to borrow in local currencies in order to convert the funds, payments on servicing the debt can rise if the currency depreciates. The strength of this debt financing is often concessionary, with more favorable terms, such as the duration of the loan and lower interest rates — around 6 to 7%, since health care delivery projects are seen to be contributing to the development of the country, Hasham said. • Equity. Equity takes more time to process than debt financing and there is more documentation needed, as well as currency risks. These institutions seek larger investments. The World Bank’s International Finance Corporation is the largest multilateral investor in health care in lower- and middle-income countries, with investments totaling $4.3 billion over the past two decades. Last month, it launched a $115 million holding company with IFHA-II Coöperatief U.A. to "acquire and integrate targeted health care service businesses in East and Southern Africa." Private equity. A group of financial investors who bring private funds together and invest in the projects of entrepreneurs. Equity brings governance support, financial connections, oversight, and professional support to management. Some risks include professional and ethical standards placed on company executives, the requirement that a board of directors is created — if it doesn’t already exist — that will include representation from the private equity firm, as well as sign off on all key company decisions. Grants. But those are only for non-for-profit institutions. For smaller-ticket items, such as buying an MRI scanner for a company’s facility, it’s better to avoid big institutions and instead look to small credit funds, Hasham said. For big projects, such as expanding the number of hospitals a company owns or expansion into new countries, it’s better to target international financial institutions with a mix of private equity and debt. Before doing that, a company should look at its business plan and risks, and decide whether to move forward. In these circumstances, it’s advised to raise between 30% and 40% of the total costs in equity, and then cover the rest with debt. The company must also demonstrate it can pay both principal and interest payments, as well as maintain enough cash-on-hand. A company should be careful of taking on too much debt. “My preference is to sustain a business without becoming overloaded with debt. I want to be able to sleep at night,” he said. With debt, a company is creating a liability, but with equity it brings the investors on board as a new partner who share in the risk — meaning that the company’s owners lose a portion of their company shares in return for the funds they receive for expansion. “You have to, at some level, understand that you have to let something go in order to bring much more professional value to the company, and to bring in capital for expansion. But there are some risks attached to it,” he said. Bankable business plan, strong management team Before seeking funds, you must have the following, according to Hasham: A “bankable” business plan. This describes to an investor why they would want to invest. The plan should outline the strengths of the business, its potential, an examination of why the business has been successful, what differentiates the company, its profit margins and cash flows and five- to eight-year financial projections. It should also outline specific expansion plans for which the additional funds will be used. Financial institutions and equity investors will also want to know the strength of the company’s management team. A company should not cut corners in human resources and talent retention, he said. “At the end of the day, investors want to invest in a management team that has a sound idea that is either working, or is going to work. When they invest, they are essentially backing a team,” Hasham said. “They have to be sure that the team actually has what it takes.” A strong management team needs to be in place. Especially if the company’s original founder is planning to exit a company, according to Nikhil Pereira Kamath, CEO of the Africa Healthcare Network, the largest dialysis chain across sub-Saharan Africa. Otherwise it could jeopardize the valuation of that the investors will give the company. “If the person who founded the company is looking to leave, you better have just as dynamic of an individual ready to take the helm afterwards,” he said. Private equity firms will also look for a strong record of paying taxes and meeting legal and ethical obligations, Hasham said. “They want to make sure that they can trust the management team — that they have socially acceptable practices,” he said.