While U.S. providers struggle with managed care and government spending restraints, Latin America offers the next gold rush for healthcare investors.
Central and South America's urbanized population, growing middle class and predominance of private payers make it a target for venture capitalists trying to find companies with potential to become the Latin version of such U.S. giants as Humana or Tenet Healthcare Corp.
Among the first to infuse significant capital in the region was the $59.6 million Latin Healthcare Fund. Based in Washington and Boston, the fund is a joint venture between executives of the former Advantage Health Corp., a Woburn, Mass.-based outpatient and rehabilitative services company that was sold to HealthSouth in 1996, and the Washington-based Global Environment Fund, which provides venture capital for infrastructure improvements in Latin nations.
Since 1997, the private equity fund has announced four deals totaling $30.5 million in Brazil, Chile and Mexico, with the remainder of its money committed to unannounced projects (See chart).
The fund's chairman, Raymond Dunn, former chief executive officer of Advantage Health, compares the region to the "good old days" in the U.S., when hospitals were building facilities and adding services at a rapid clip. The same is true today in parts of Central and South America, he says, where an expanding middle class has increased the population of privately insured patients.
Dunn believes many U.S. companies eyeing expansion in Latin America are investing modest amounts to learn the market before they dive in.
The fund's institutional investors include three U.S. healthcare companies with interest in Latin American expansion: rehabilitative and outpatient provider HealthSouth Corp. and managed-care firms United HealthCare Corp. and Humana (See chart, p. 37.)
"There's no growth left in the United States," Dunn says.
The fund has a five- to eight-year timeline to return money to investors, but Dunn expects some early returns. He says one enterprise expects to be sold to a U.S.- or European-based company within six months. Two of the investments--Chilean pharmacy firm Farmacias Ahumada and hospital chain Consorcio International Hospital--have experienced substantial increases in their share prices of 41% and 66%, respectively, since the fund invested, although liquidity for those investments is low.
The organizers expect to start a second fund by the first quarter of 2001. Dunn's son, Raymond "Jay" Dunn, Latin Healthcare Fund's managing director, is attempting to raise $10 million for a healthcare Internet start-up, BuenaSalud.com.
At the time of the fund's inception, the region lacked an infrastructure of bankers, consultants and attorneys with healthcare experience, says Anne Mathias, the fund's investment officer. "We knew we were basically breaking new ground," she says.
Even some of the fund's investors were initially unaware of the opportunities in Latin America, Dunn says. They plunked down their money mainly based on the track record of Advantage Health, which was sold to HealthSouth at triple the price of its 1992 initial public offering.
Less than three years after the fund's inception, the picture has changed. "There are investment banks and funds that are co-investing alongside us, and there are more international and U.S. funds that are looking seriously (in Latin America)," Mathias says.
Of course, investment in Latin America isn't totally new. A few managed-care companies have already tried Latin ventures with limited success (May 17, 1999, p. 34).
Since 1992, not-for-profit Baylor Health Care System in Dallas has been a shareholder in a Latin venture: International Hospital Corp., which also is in the fund's portfolio.
Baylor Treasurer Jack Hess says the system made the undisclosed investment as a strategic affiliation rather than a moneymaker. For example, he says, Baylor staff provide educational seminars at IHC's Mexican hospitals. Latin America "was an area we had an interest in, but we didn't have the inclination or the money to go building hospitals ourselves. Nor did we feel we had the expertise," Hess says.
The fund has targeted countries with relatively low inflation, stable governments and growing economies. One mitigating factor, Mathias says, is that Latin American healthcare companies rely mainly on private payers, putting them at relatively low risk of government regulation. But in an emerging market, where no one knows just how things will develop, due diligence on local financial and operational partners is critical, Mathias says.
"From a development standpoint, there's more risk (than in the U.S.). You could make the wrong bet," she says.
The best companies are not always readily identifiable. Dunn says the fund looked for three years to find a hospital company in Brazil--one that could use benchmarks to meet the cost and quality demands of that nation's insurers. They finally found Vita, whose executives have advanced degrees in business or administration, some from U.S. universities, Dunn says. So far, Vita has acquired four hospitals in Brazil from a hodgepodge of sources and improved their operations, he says.
Latin American entrepreneurs are looking to the U.S. not only for cash but for expertise. When Dunn and fellow Advantage Health veterans Edmond Charrette, M.D., and Ellen Ferrante began to explore opportunities in Brazil in 1997, Dunn says they were "shocked" to learn there were 600 HMOs in Brazil covering about 40 million lives.
"We realized that almost every single thing happening in Latin America today happened a few years ago in the United States. We found that we could give a lot of advice strategically," Dunn says.
He says the fund wooed Brazil's largest laboratory and diagnostic services company, Medicina Diagnostica Delboni Auriema, by taking its management team to meet with U.S. healthcare executives. The firm's executives received a crash course in mergers and acquisitions from HealthSouth Chairman Richard Scrushy and a briefing on payer-provider negotiations from Humana and United HealthCare officials.
"It's no longer the gringos going down (to Latin America) and managing anymore," Dunn says. "They all have MBAs down there. They have the technology, they have the brains. The one thing we can give them is our experience."