Healthy, Wealthy and Wise

"The first generation starts a business. The second generation runs it. And the third generation ruins it" is an old Chinese saying. And there's global statistics to show for it. Only 13% of the family businesses have survived the third generation across the world. Manipal Group's Ranjan Pai not only bucked the trend but did one better by outdoing his grandfather and father who were illustrious entrepreneurs in their own right. Though Pai is cut from the same cloth, his ability to corporatise and scale up businesses in highly regulated sectors such as education and healthcare makes his success unparalleled.

He started the Manipal Education and Medical Group in 2000 from a rented space in Bangalore, with an initial capital of $200,000 branching out from the family’s non-profit education trust. “I had just come back from the US in 1997 and went to set up a medical college in Malaysia. I was there for three years when I realised that there was a need to set up a central resources group if we need to scale up globally. That’s why I set up Manipal Education and Medical Group,” explains Pai. After Malaysia, the company moved to Dubai, Antigua and Nepal to set up colleges.  

From its humble start, the group has scaled up to nearly a billion dollars in revenue, with the education business bringing in a little more than half of the figure. “He was able to be spot the huge opportunity in the education and healthcare services space early, managing to bring two disparate businesses into one company and scale both of them successfully,” say Mohandas Pai, who is the chairman of Manipal Global Education and is on the board of the hospital business. The group now has three main businesses — Manipal Global Education, which manages the global universities; Manipal Health Enterprises for its hospitals business and Manipal Integrated Services that offers facility management to colleges, hospitals and corporate houses.

When Pai took over the business in 2000, the healthcare business wasn’t not in a great shape and making losses. Apart from their flagship hospital in Bangalore, which was launched in 1991, there was a smaller hospital in Goa. Pai got an offer from a new entrant to buy them out in 2001-02. “That was a wake-up call for us”, Ranjan Pai says. “The group’s focus was on education and the hospitals were run by retired doctors so they didn’t have the rigour of modern healthcare. I told my father either, we get out and focus on education or let me figure out if I can turn the business around.”

His father agreed and the first step Pai engineered was bringing in a professional CEO. He approached R Basil, who was then with Wipro GE Medical Systems. “It was an experiment that worked really well for both of us,” says Basil, who joined as CEO in April 2002. At that time, the business was clocking a revenue of Rs.56 crore, with accumulated losses of nearly Rs.100 crore. “We started with processes, put systems in place, increased the specialties offered by the hospitals and hired professionals which ensured better service and quality levels.” In 2003-04, the hospitals got both the ISO 9001 and National Accreditation Board for Testing and Calibration Laboratories’ (NABL) accreditations.

In 2006, the healthcare business turned to private equity to fund its growth. IDFC Private Equity, which had invested in the group education’s business with Capital International earlier that year, bought a 21% stake in the healthcare business, investing Rs.90 crore, valuing the business at nearly Rs.450 crore. “We were looking to invest in the social infrastructure and the name that repeated came up was the Manipal group,” says Luis Miranda, former chairman, IDFC Private Equity, who was on the board of both the healthcare and education businesses.

Manipal Hospitals then expanded its presence to Vijayawada and Salem by entering into long-term leases with existing hospitals in 2007-08. Besides the brownfield expansion in Goa and Mangalore, they also added a third hospital in Bangalore. Their international foray happened in 2013 when they launched a tertiary care hospital in Malaysia. Manipal also tried the asset light model, moving the assets to a property company. They soon realised that with the high Ebitda multiples the sector was getting, it was better to have all assets under one company. So they merged the companies back in 2015 when TPG invested Rs.900 crore for a 22% stake. Thereafter, the group opened hospitals in Whitefield, Bangalore and Dwarka, Delhi, taking their overall count to 11.

For Manipal, the Fortis deal couldn’t have come at a better time. Manipal Hospitals’ expansion has been protracted. Narayana Health, which came in much later, has managed to expand at a faster pace. If it does go through, the combined entity will have 41 hospitals in India and a global presence across five countries. With an overall bed capacity of 6,567 (11,000 beds including teaching hospital beds of Manipal Hospitals), the Fortis-Manipal combine would be a formidable competitor to India’s largest healthcare provider Apollo Hospitals, which has around 10,000 beds across 70 hospitals. The combined revenue of around Rs.5,230 crore, in fact, puts Manipal ahead of Apollo and the others in the healthcare race in India.

PE investors, who have been associated with the Manipal group before, are confident that Pai would be able to create long-term value for shareholders of the combined entity. “While the brand was around when he started, it was just a single hospital and educational institution which he managed to scale up globally rather successfully. He is conscious of the shareholders’ expectations and would ensure expectations are met,” says Prakash Parthasarathy, the former chief investment officer of PremjiInvest, who invested Rs.200 crore in the group in 2010, exiting with nearly 18-20% return at the end of three years. Within 18 months, the firm again invested $125 million in the education business and $25 million in the healthcare business. Pai has raised more than $700 million from marquee private equity investors such as TPG, Temasek, PremjiInvest, IDFC Private Equity, Kotak Private Equity, Capital International and True North. What’s more, he has also managed to consistently create profitable exits either through buybacks or finding new investors. So it’s no surprise that he and his group have been an eternal favourite with investors.

Pai says the move to bring in external capital has worked really well for the group. “The good thing about having raising private equity is it puts some pressure on the entrepreneur and the management to stay on top of their game. If it is your own company, there is a tendency to be complacent at times. Our transition from being a family owned business to a private equity backed business has also helped us attract better talent.”

Apart from his remarkable fund-raising skills, Pai has a keen eye to spot trends across healthcare, education and technology early. “He has been a very astute capital allocator and investor himself,” says Parthasarthy. In 2011, he and Mohandas Pai set up a fund, Aarin Capital. Till date the fund has invested nearly $100 million across 40-odd startups including the educational app Byju’s where they invested around Rs.50 crore and reported exited with nearly 10x return. “We wanted to experiment with our own capital before we start investing third-party capital. I am an entrepreneur and I know how tough it is being an entrepreneur in India, so I am very empathetic towards them. So now my team doesn’t want me around in the room when they are doing the hard bargaining,” he says with a laugh.

Given Pai’s track record of scaling up businesses and TPG’s global expertise in healthcare, the combine has definite advantages in the Fortis bidding war. But he has to convince the company’s shareholders including marquee investor Rakesh Jhunjhunwala, hedge fund East Bridge Capital and Yes Bank, the firm’s single largest shareholder, with a 15% stake. Pai says he is up for it. “I believe we have made a compelling offer. We are not going to be irrational. We have done our homework and have a good idea about what it takes to fix it. In the hospital business, if you overpay for an asset, then you will never make money. There is definite value in the company but there is a lot of work to be done”, says Pai. “It is up to the investors now whether they would choose an investor who would pay Rs.10-15 more per share or partner with someone like Manipal and TPG with a proven track record. Given that we have spent time understanding the business, we are best suited amongst all the bidders.” While the deal could still go either way, the outcome is unlikely to dent Manipal’s future plans. “If the deal doesn’t materialise, we will look at going public on our own but that’s still about 12-18 months away,” he says.