India has become a major destination for  investment opportunities, especially in the field of medicine, the most attractive being the pharmaceuticals, healthcare delivery and medical equipment sectors. This is due to the lower penetration of healthcare infrastructure in India as compared to  that of developed countries and also in relation to the global average.

Healthcare is one sector in the country where there is considerable gap between demand and supply. India needs over 100,000 hospital beds and a several-fold increase in diagnostics centres to achieve India’s 'Health for All' initiative by 2020. However, the Government is currently spending only 1.4 per cent of GDP on healthcare and private players are spending only 3.2 per cent Hence, there are tremendous opportunities for investment in the healthcare space.

Sectors such as pharmaceuticals, diagnostics, hospitals and medical equipment are attracting a robust degree of investment. Private equity (PE) firms are betting big on small- and mid-sized pharma companies to put their bucks on. Considering the fact that at the medical technology sector in healthcare,  players like Philips and GE are buying local companies and investing handsome amounts in research and development, we can fairly conclude that this sector will continue to attract PE investments. The hospital sector also has been  successful in drawing funds due to its capital - intensive nature.

PE funding is termed as smart money as investors bring more than just capital to the table. With their expertise and managerial skill sets, PE investors act as a catalyst for creating enterprise value. However, PE’s main criteria are scalability of business and excellent promoters apart from inherent growth prospects.

Currently, PE funding is vital to the hospital sector as it has long gestation time and requires large one-time capital expenses. With the help of PE funding, smaller companies can look at a larger market, and increased scope of operations. This enables smaller companies to become medium-sized enterprises, and have IPOs over a period of time. PE companies ensure that there is proper corporate governance within the organisation, ensure separation of ownership from management, promote ethical and clean practices and help in formulating a professional business plan as well as monitor its implementation closely. PE firms not only advance growth, but also facilitate the managerial ability of an organisation to deliver better, and in turn increase scalability of the business model.

PE investors are of the opinion that the healthcare sector is driven by favourable demographics, an ageing population, growing lifestyle-related diseases such as HIV, cardio vascular diseases, obesity and diabetes providing an ideal platform for investment. Even more so given the increasing affordability for quality healthcare, growing medical insurance penetration, increasing medical tourism and infrastructure have been quite alluring from investor’s point of view.

A close look at the Indian healthcare industry reveals a surge of activity. This is definitely the beginning of what is foreseen as a rapid growth phase. Emerging segments like single-speciality hospital chains, diagnostic chains, day care centres and medical device manufacturers are set to draw in a significant amount of PE primarily because of the highly scalable business where the promoters are deemed to be dependable and ethical.

Industry experts say that single-specialty hospitals, especially clinics, of late, have become the darling of wealthy investors for reasons like low capital and speedy returns. These hospitals have an ability to expand faster and provide superior returns.

It may be mentioned that the investments required to set up one bed in a multi-specialty hospital would be around Rs 40 lakh, while it would cost, on an average, around Rs 10 lakh to set up a clinic, thereby, making it more attractive for investors. Moreover, a clinic generally starts making healthy profits from the second year of operations, while it would take a minimum five years for multi-specialty hospitals to break-even.

Super-speciality services will be another main focus area for PE investors. Tier II and Tier III cities will continue to attract investors on account of the lower-penetration of healthcare services in these areas.

The healthcare market in tier II & III cities is expected to grow at a CAGR of 15-20 per cent till 2023, approximately five per cent higher than a CAGR of 10-15 per cent for healthcare market in metros. Most importantly, the IRR of hospitals in tier III is almost double that of in the tier I cities.

A tier II & III city hospital generally attains operating profitability in the second and third year of operations, as compared to a tier I city hospital that reaches this stage around the fifth year. Moreover, the payback period in tier II and III cities is approximately five to six  years while it is eight to 10 years in the metros. However, lower income levels and limited insurance penetration leading to lower margins in these cities will steer investors towards innovative business models, i.e. hub-and-spoke model. Moreover, specialization in a particular field is a must as focus on a single discipline business model is currently attracting the investor's eye.

Regional players from the healthcare industry who are intending to expand and brand their businesses are attracting PE funding as investors will always look for profit-making businesses to invest their money. In the long run when the gestation period ends, the hospital business generally remains highly profitable.

In addition, PE firms are now trying to create a niche for themselves in areas that are more capital- intensive. Furthermore, the country will see an increase in infrastructure and economic affluence that will set the stage for ample investment opportunities in the healthcare sector.

According to the data compiled by VCCircle, the total PE/VC investments in the health and life sciences sector from January to July 2012 stood at $530.3 million comprising of 19 deals against an investments of $319.8 million from 26 deals in the calendar year 2011.

Some of the major investments include Advent International’s investment of $110 million in multi-specialty hospital chain named Quality Care India, Government of Singapore Investment Corporation (GIC)’s infusion of $100 million into eye hospitals chain Vasan Healthcare, and Rs 500-crore investment by Olympus Capital Asia

Investments in DM Healthcare, which runs hospitals in India and West Asia.