“Fixing Our Ailing Healthcare System – Private Equity, M&A To The Rescue?”

          Obama's passage of healthcare reform was not only a boon to those without insurance but will also be for hospitals that previously cared for those patients without any recompense, particularly in the emergency department. We need to look no further than our backyard and see the recent deals by Cerberus Capital Management's affiliate purchasing Caritas Christi for $830M (plus $400M in capital upgrades) and subsequent purchase of several other hospitals in the New England area. If you need further proof just look at Vanguard Health Systems Inc. (2/3 owned by the Blackstone Group) acquisition of Detroit Medical Center for $417M (plus $850M in capital improvements).

          What is it they are seeing that others aren't? Previously non-profit hospital were out of play, no one wanted to go near such a money losing proposition, but with new medical insurance laws coming online these previously pariahs are now being viewed as messiahs. On top of that packages for capital upgrades of substantial size are being attached to these deals indicating these are longer terms deals, not your typical 3-5 year cycle often seen the in private equity world.

          So what is it exactly that organizations like Cerberus Capital Management and Vanguard Health Systems see in these deals? “The fact that these two hospitals, which have struggled over the years and are situated in markets with lower incomes and higher uninsured patients, are targets of takeovers suggests [private companies] are looking at these types of systems as being beneficiaries under the new rules,” said Richard Ciccarone, head of municipal research at McDonnell Investment Management. With 40 million uninsured patients gaining access to insurance we think they are right.

          Going forward it will be necessary to finally tackle the cancer that has plagued our healthcare systems for years and that is cost. With Bush's push for EMR by 2014 we have already seen a surge in interest in healthcare IT organizations but the push for efficiency and cost-cutting in the industry will only accelerate this interest.

“Turning over a New Leaf - Canada Surges in M&A Activity”

After two years in which deal making was down, Canadian buyout and private equity investments were on the rise again in 2010 and now are positioned for a strong 2011. Estimates suggest that close to $5 billion was invested in Canada by its private equity players in 2010, which signaled the first rise for the asset class since 2007. The charge was led by deals like the Canada Pension Plan Investment Board's C$900 million purchase of a 10 percent stake in the 407 toll highway near Toronto. According to data from Canada’s Venture Capital & Private Equity Association, in 2010 there were 130 buyout and other private equity deals closed in Canada, which is up 7% from 2009. Disclosed deal values totaled $5 billion, which was a 21% increase on the previous year. Canadian private equity has snapped back to form in 2010, which puts it in line with private equity developments in North America and around the world last year. But what have the signals from Q1 2011 shown for the rest of the year?

All indications have shown that 2011 will be a strong year for private equity globally, and Canada’s private equity firms will be in the midst of the fray. "Private equity has been on the upswing around the world in 2010," said Gregory Smith, president of the Canadian Venture Capital & Private Equity Association. "And Canadian firms are fully participating in this rising activity. We are convinced that there are significant prospects for future growth." The sentiment that this year could be a great year for private equity seems to be shared by players who say now could be the best time to invest and take advantage of recession-adjusted pricing for high quality assets. Assets, which in an improving economy, would only rise in price as comfort and awareness return to markets. In fact, one could suggest that with the rise in Canadian private equity exits in 2010 (there were 72 exits, as opposed to the 35 exits in 2009), there is a growing desire and readiness to participate in new ventures as private equity and buyout firms realize on investments made in earlier stages of their portfolios. There is also consensus amongst Canada’s private equity community about the relative “return to normal” of credit markets, making for considerable liquidity in the system. Capital is available, with fundraising already exceeding the total amount raised in 2010. So if the capital and confidence are in line for Canada’s buyout players, the only question is, “Where do we go next?”

For starters, one can expect Canadian buyout and PE investors to continue playing a pivotal role in global markets. In 2010 which saw domestic investments at $5 Billion, Canadian investors contributed to international transactions valued at close to $30 billion. Canadian investors have been strong players in international private equity markets, leveraging new opportunities abroad as the global economic environment continues to stabilize.  And while a considerable amount of the domestic deal activity focused on smaller transactions, there is an expectation that investors will be on the lookout for the elusive “megadeal,” which was absent from the list of deals closed in Canada during 2010. There is a sense that there will be a deviation from last year when billion-dollar-plus deals were non-existent, and the Canadian market focused on investments in mid-market businesses located in a handful of industry sectors such as industrial products, oil & gas, and real estate. It will be interesting to see if this strategy is adopted employed again this year, or if investors will pursue opportunities in media, technology, and travel – all seen as great target areas in the coming year.

“Hitting the BRIC Wall - Indonesia’s Fight for Inclusion Amongst the Emerging Market Leaders”

                At a recent investors’ conference held by Royal Bank of Scotland Plc, participants voted for Turkey and not Indonesia to be the next country to join the BRIC group of emerging-markets economies, which includes Brazil, Russia, India and China. 35% of respondents favored Turkey, with 23% favoring Indonesia and 16% choosing Mexico, according to a summary of the results from RBS late February. With economic growth among the strongest in Southeast Asia and brightening future prospects for the resource-rich country, economists are determining whether it should be the next country added to the BRIC grouping of global powerhouses-to-be. But uncertainty still remains amongst the analysts of the world. “Should Indonesia be included in the BRIC grouping, or not?”

With 240 million people, Indonesia is the fourth most populous country in the world. It is also the biggest Muslim nation, with a youthful democracy that followed the decades of post-colonial dictatorships under Presidents Sukarno and Suharto that ended in the late 1990s. It is an understatement to say that Indonesia “is doing well” – its economic growth is hit 6% last year after gross domestic product (GDP) rose to 6.2%. There are few who deny that Indonesia will repeat the feat this year, with estimates of year end GDP growth as high as 6.6%. The Jakarta Composite Index, Asia's second-best performing stock exchange after Japan, hit a record high mid 2010 following the appointment of Darmin Nasution as Bank Indonesia's new head, ending a period of uncertainty regarding the country’s central bank. Foreign direct investment (a significant indicator of investor confidence) has continuously grown for the Southeast Asian nation reaching $13 trillion for 2010, a 22% increase on the previous year. And when the 2008 global recession hit, Indonesia weathered the storm with relatively little difficulty due to abundant natural resources, a growing middle class, low levels of government and household debt, and of course, a $690 billion dollar economy (Southeast Asia’s largest). Perhaps this is why Indonesia moved a step closer to investment grade last month when Moody's upgraded its sovereign debt rating to Ba1, putting it ahead of BRIC rival Turkey who is at a Ba2 rating. When Jim O’Neill, global economist for Goldman Sachs produced the BRIC acronym in 2001, he projected that the combined economic size of the four countries would be bigger than all G-7 countries except the United States by 2050 (The other G-7 countries being Japan, Germany, the United Kingdom, France, Italy and Canada). This grouping of countries would be the fastest growing and strongest of the economies outside of the G-7: the leaders of the emerging markets. By this criterion, it would seem that Indonesia is an obvious candidate for this grouping, but there are concerns amongst the economists and analysts who are watching closely.

While a Standard Chartered Bank report released around the same time as the RBS poll results pointed to Indonesia’s political stability and strong economic fundamentals as reasons to invest in the country, it also noted investor concerns. “The lack of trans-Java and trans-Sumatra highways, inadequate power supply and insufficient seaport facilities in the world’s biggest archipelago, has become the biggest impediment to foreign direct investment,” the report said, also noting that these problems limited the nation’s growth to an average 5.1 percent over the last 9 years. Another concern shared amongst investors is perhaps the biggest: Corruption. Indonesia is known for a culture of bribery and kickbacks that has pervaded everyday life - politics, bureaucracy, the legal system, and business. Indonesia’s years of democracy have seen a crackdown on this illegal activity, but new cases involving kickbacks, bribery, and extortion are still frequent and common. In fact, at one point the campaigners Transparency International had given Indonesia the title of “Most Corrupt Place in the World.” Indonesia no longer enjoys this proud distinction (Somalia was the 2010 “winner”), but according to Transparency International, Indonesia still has much work to do, even if it has made progress.

Still, other analysts suggest that Indonesia should be included in the BRIC grouping ahead of Turkey and even Russia, an existing member. Although a nation of 70 million, Turkey and Indonesia share several similarities. Both are moderate Muslim majority nations. Both escaped the global economic downturn. Both are oil and gas producers, although neither is self-sufficient. A big difference is that Turkey is expecting 4.5 percent growth this year, while Indonesia is looking at growth of over 6%. And a senior institutional investor noted recently, “Where else do global investors put their money in Asia after China and India? There aren’t many alternatives. Indonesia’s very attractive.” And for a good number of money managers and economists, the excitement over Russia’s inclusion since the early 2000s has all but died. Economists have cited Russia’s policymaking in the Kremlin, demographic atrophy, endemic corruption, and its heavy and almost singular reliance on its natural resources as reasons why it can’t be trusted as more than a “one trick pony.” And while Indonesia has successfully made strides in its struggle with corruption, Russia seems unable (or unwilling) to do likewise and actually rated below Indonesia in several global corruption assessments. Richard Shaw, Managing Principal of QVM Group, a South Glastonbury, CT investment advisory firm put it best - "Russia is just not a good place to put your money."  

If those voting participants at the RBS investors’ conference were truly deciding, then it would be Turkey and not Indonesia to be the next in joining (or Russia staying in) the BRIC group of emerging market leaders. However, it is Indonesia that will prove most worthy of the BRIC distinction in the coming years, whether it receives the distinction or not.