Dental clinics attract private equity funding

Healthcare, a safe bet in a slowing economy, has been riding a wave of private-equity (PE) investments, and specialized services within the sector are benefiting from the surge.
Private investment in health this year till the middle of September more than tripled through 37 deals worth $797.28 million (around Rs.4,385 crore), compared with 21 deals worth $207.39 million in the same period a year ago, researcher VCCEdge estimates.
Investments in this space started flowing into hospital chains some five years ago, veered into niche offerings such as eyecare and have now seem to have focused on dental clinics.
Mukul Gulati, managing director of Zephyr Peacock India, a PE fund, says he is keen on specialized medical services and not hospital chains.
“The focus in a multi-speciality is dissipated, the management is too distracted in doing 20 things,” Gulati said. “Focus on one or two specialization translates into high returns on investments.”
Dental care in India has typically been dispensed by stanalone clinics but now some firms are trying to achieve economies of scale by starting chains. The market opportunity in India is huge and incubating a fledgling dental chain could be attractive to early stage investors, says Sasha Mirchandani, managing partner at Kae Capital, a PE firm. “It is a capital-light model,” Mirchandani said. “It makes sense for early stage investors to incubate these businesses.”
The country’s dental care services market is growing at a fast pace. Comprising dentists and dental ancillary services, it was worth $739 million in 2010 and is expected to reach $1.3 billion by 2015 at a compounded annual growth rate of 12%, Frost and Sullivan said in a report earlier this year.
Almost half of India’s population has never visited a dentist though at least 70% suffers from dental problems, the researcher said.
It is hardly surprising therefore that more well-known healthcare providers such as Apollo Hospitals Enterprise Ltd and Narayana Hrudayalaya have got into dental services. Narayana Hrudayalaya Dental clinic, started in 2008, has more than 30 clinics in Bangalore and Kolkata.
Sensing the opportunity, specialized firms have started making their presence felt. Alliance Dental Care Ltd, a venture between Apollo and Trivitron Healthcare, is a case in point.
The company is in talks with PE firms to initially raise Rs.25-30 crore and a total of Rs.65-70 crore as it opens 100 clinics, chief executive officer V.S. Venkatesh said.
Venkatesh plans to use the money to add 10 clinics to the venture’s current 22 by March and another 75 in the next couple of years to give it a national presence. Setting up a specialized, well-equipped dental clinic requires around Rs.1 crore and it could achieve break-even in nine to 12 months, he said.
Mydentist, another newcomer incubated by start-up funder Seedfund, is also looking to expand aggressively. The 18-month-old firm started with three clinics in Mumbai and now runs 33.
The firm, which earns a revenue of some Rs.11 crore a year, plans to open 50 clinics by December and 65 by March. Mydentist’s charges are lower than a typical standalone dentist, chief executive Vikram Vora claimed.
The company plans to raise $10 million to fund expansion and has asked Mape Advisory, an investment bank, for help. “Seedfund will stay invested and could invest again,” said Vora.
Mahesh Murthy, founding partner of Seedfund, could not be reached despite repeated calls.
Dental chains seeking private investment have been encouraged by the fact that PE investors have started financing other niche medical services.
In one of the largest PE investments in a healthcare company this year, Government of Singapore Investment Corp. Pte Ltd invested $100 million in Vasan Healthcare Pvt. Ltd, which provides eyecare services, for a minority stake. Bangalore-based NephroLife Care Pvt. Ltd—one of India’s largest renal disease management firms—raised $25 million from New Enterprise Associates and DaVita Inc., the second largest kidney care provider in the world.
Overall, there is huge interest among investors for healthcare services in India, said K. Ramakrishnan, executive director, Spark Capital Advisors (I) Pvt. Ltd, an investment bank.
“The investors’ healthcare investment hypothesis is valid for dental care also. Demand for such services and profitability is not an issue in these firms,” Ramakrishnan said, adding that niche services tend to be light on capital requirements and are scalable.
Since healthcare has become a service-providing industry, patients’ experience of a treatment will determine a winner, according to Amit Sachdeva, director, Axiss Dental, which runs a chain of dental clinics. Even now there is no standardization of rates and fees often depends on the profile of the patient, said Sachdeva. Axiss Dental recently raised an undisclosed amount from PE firm India Equity Partners by selling a majority stake. “These businesses have a slow build-up but are stable and recession-proof,” Sachdeva said. “Their profits only go up with time,” he said.
Axiss Dental operates 17 clinics and plans to add another seven this month. By March, it expects to increase its tally to 32.
Though private funding seems to be easy now for dental chains, some sceptics remain.
Sunil Jain, founder partner at Sprout Capital Advisors LLP, an investment bank, cautioned that exits for investors, particularly through a public issue, would not be easy from such firms. “Revenues per seat are not high for such chains, when compared with mom-and-pop shops,” Jain said. “These revenues are not enough to provide an exit to an investor as an initial public offering would need 400 to 500 clinics.”