Significant interest has been generated recently over Beijing’s increasing support of private investment in Chinese hospitals. Amid the Ministry of Health’s recently announced goal to increase current level of patient visits to private, for-profit hospitals from 8% to 20% by 2015, and private hospitals being moved to the “encouraged” category for FDI, foreign hospital operators and private equity firms are poised to make a lot of money acquiring underperforming public hospitals and develop private hospitals. But, as more room is made for private investment, an increasing collection of homegrown Chinese private equity firms may be positioned to benefit more than their foreign counterparts. Chinese private equity firms have competitive advantages through regulation, access to funding, and exit opportunities when investing in Chinese hospitals.
Regulation
Local companies receiving foreign capital are treated as foreign invested enterprises (FIE). include (1) obtaining project approval from the National Development and Reform Commission, (2) approval for establishing the FIE through the Ministry of Commerce, (3) incorporating the FIE and obtaining a business license through the Administration of Industry and Commerce, then followed by a number of registration procedures with the bureaus of tax, customs, foreign exchange, and so on. Additional regulations and barriers for foreign investors add to the frustration of China’s already heavily regulated healthcare industry. Domestic investors with capital in Renminbi do not have to deal with this additional red tape and may seem more appealing to hospital operators seeking for capital.
Additionally, FIEs are subject to minimum levels of capital registered with government authorities and an approved amount of total investment. This can have an effect on the firms’ term loans and debt-to-equity ratios. Foreign firms may be dissuaded from investing if the foreign business application processes are not simplified. While this has been a tiresome request for foreign investors in many industries of China, it nevertheless remains to be seen whether Beijing will further facilitate foreign investment into China’s hospitals by deregulating foreign businesses procedures in the hospital sector.
Advantage Renminbi
Beyond the regulatory climate, there has been an increasing trend of investments dealing exclusively in Renminbi. As reported by Cathy Chan of Bloomberg, last year, for the first time, total investments by Chinese PE firms surpassed that of foreign firms in China. Last year also saw investments from foreign funds drop by 45%, while the value of PE deals have doubled since 2009. Foreign currency funds are disadvantaged by currency conversion regulations, the speed of decision-making, and lesser liquidity. Renminbi funds also benefit in access to capital through deep-pocketed Chinese institutional investors. To combat this problem, top foreign PE firms are starting to develop their own Renminbi funds. The Carlyle Group, Goldman Sachs, and Morgan Stanley have all announced Renminbi funds. However, it is still unclear whether foreign firms using Renminbi funds will enjoy the same benefits as domestic PE firms. There are no formal national rules governing private equity in China and much is left to the interpretation of local authorities.
Exit Considerations
Exit strategy is also an important consideration when analyzing investment partners. If being publicly listed in Honk Kong or the US is desirable, foreign PE firms bring expertise in structuring an initial public offering. Conversely, listing domestically in China or a strategic acquisition may be easier with a Chinese PE firm. Chinese PE firms have strong ties to party elite families and state-owned enterprises (Wen Jiabao’s son co-founded the Chinese PE firm New Horizon). The domestic connections a firm has, for example, can accelerate an IPO in Shenzhen, which might otherwise take up to two years. Politburo princelings and other red nobility have been increasingly leaving their posts in multinational investment banks in pursuit of their own homegrown ventures.
In sum, as interest gathers for foreign investment into private hospitals, China’s own private equity firms hold a competitive advantage over foreign firms. Hospital operators and private equity firms must be humble when contemplating a move into China. As the hospital sector increases in attractiveness to foreign investors, so too does its appeal to domestic players. The green light for investment into hospitals should still be approached cautiously and with an understanding that it has not created a level playing field between foreign and local investors.
About the Author
