Getting It Right: Belmont & M3 Enter China

            One of the more interesting take-aways from May’s IMAPAC Retirement Living World Conference in Shanghai was that M3 Capital Partners and Belmont Village had announced a partnership to expand into China.  Their partnership builds on many years of successful projects between the two (the last one in January for $210m).  More specifically, the tactics behind what they are doing in China is something we can all learn from.  I am intentionally distinguishing between the idea of “strategy” and “tactics”.  Almost every senior care operator in North America has a nascent strategy for being in China:  the industry is rapidly internalizing the scope of the opportunity, which is leading to various gestating strategic conversations in board rooms.  The difference, at least for now, are those companies like Avalon, Belmont, Cascade, CSC, Merrill and others whose strategy is set – they have made the decision to expand into China.  For them, the question is now tactics:  how, where, when, and what the footprint should be.

Once the strategic decision has been made that these companies want to be in China, the conversation shifts to a tactical one, the first element of which is typically “who” is going to head their early exploratory efforts up.  Given the early status of Belmont and M3’s work in China, I was particular interested in speaking last week with , who is heading up their work in China.  As a Sichuan Chinese native, Tony has a very interesting background (educated both in China and overseas at MIT and Concordia), a combination of deep experience in the financial elements which go into a sustainable and scalable senior care business model (M3 has worked with some of the leading senior living owner/operators in the US and Europe, and importantly an appreciation for the operational issues that go into senior living.  Currently based in Hong Kong, Tony is a good example of the local asset companies will need to invest in years before any actual operating capabilities exist.  His presence speaks to the single-minded focus necessary for senior care operators who want to get into China:  who is going to be your on-the-ground champion?

Answering the “who” can be challenging enough, but then comes the question of what to do next, and when to do it?  I asked Tony “why now … why not just let the industry mature a bit?”  His answer is consistent with what many of the large operators all seem to believe:  while it is early, the industry needs to start refining their models, and the only way to do that is to get started.  Tony shared, “for a US or international operator in China, no matter your size or success, you need to show people in China that you can deliver.”  Tony acknowledged, “While we are looking at very large projects and hope to use our first project as a platform … we need to prove to the Chinese that our model will work through a showcase project.”  If we think about Emeritus’ recent announcement, the relationship Tony is pointing towards aligns with what Emeritus is doing:  build a pilot site, and once that is done (in Emeritus’ case, very early into the pilot), you will find scaling up to be much easier and faster.  In China, the constraint may be less capital and more credibility:  give potential partners something literal they can see (keeping in mind this is an infant industry where such credibility goes a very long way towards incentivizing potential partners), and you increase the likelihood of finding the right partners.

Tony did share that while they see some froth in the industry, he was not too concerned about how this would impact their plans.  As he pointed out, “there is a lot of talk about senior housing from developers, but how many projects are really being built around the country just for seniors with true care services?  If you look at Tier 1 cities, you do not see much high quality dedicated senior housing coming up.  What you do see tends to be very supplemental, and many state-owned developers are also trying to develop pilot projects and they probably care less if their senior housing is profitable or not.”  As a consequence of this, Tony believes smart international senior care operators will find they can differentiate themselves by finding the right partners, and by localizing what has made them successful in their home markets for the Chinese.

The topic of how to find the right partners (something I will be writing about in more detail in an upcoming post) remains a challenge.  Tony added, “A lot of property developers do not build this a service business.  We are spending a fair amount of time educating them and also trying to bring high quality healthcare and education / training to this market, and we need partners who understand the importance of these parts of the business … we need to share the vision.  They cannot have the mindset that selling the services is the same as selling the residential units.”

Tony had some final thoughts on the role of the government that I think bears repeating.  As he sees, while the government has been making progress in the senior care industry (he pointed to potential new land use rights specific to senior housing), they still have a long way to go.  Specifically, a clear regulatory process that is transferable from the Central Government to the municipalities.  Readers of my analysis of what is happening within China’s private hospital and pharmaceutical sectors will appreciate that this disconnect between the Central and provincial / municipal governments remains a core problem within China’s healthcare reforms.  Tony pointed out – and I would agree with this – that while early announcements about approvals are exciting and something to watch, it also would not be surprising to see some early announcements be tempered by other ministries or governmental agencies who throw up a roadblock later down the road.  Readers not familiar with what happened in Beijing with the Beijing International Heart Hospital (BIHH) and its inability to open after not receiving the proper “chops” is a lesson the senior care industry would do well to heed.  Tony added, “commercial approvals are different than approvals from the Bureau of Civil Affairs … what the industry really needs is for the internal divisions [within the Chinese government] to provide us with a very clear approval process.”

These are exciting days for the senior care industry in China.  Undoubtedly, we will all continue to learn lessons from one another, some painful, and others cause for celebration.  Seeing one of the most successful North American operators, Belmont, and their financial partner M3 move forward in China speaks to the general belief that the market is ready.  The question now is what sort of additional due diligence these companies will have to do in order to define explicitly what the market thinks it wants, and then prove their analysis is correct and commercially compelling by delivering against these expectations.  Only then can a viable and scalable senior living industry in China coalesce.