Sh1.1bn hospital buyout reveals curse of Private Equity funds in healthcare

A Mombasa-based private hospital that was bought by private investors in 2021 has plunged into a financial crisis bringing into sharp focus the role of profit-driven private equity funds (PE) in the provision of medical services to Kenyans.

Documents seen by Sunday Nation indicate that Premier Hospital Limited, a specialised hospital based in Nyali, started running into cash problems not long after it had been acquired by Zoscales Partners, a PE fund.

Soon after Zoscales acquired a majority stake in the business, the healthcare provider’s revenues dwindled, its valuation shrunk even as accusations emerged that employees were being fired as the new owners appeared to embark on what PE funds do best — fattening a company for sale. 

The little-known Zoscales cut its teeth in the Ethiopian market by acquiring fast-moving consumer goods businesses. In a classic PE fund take over, soon after Zoscales acquired a 59 per cent majority stake in Premier Hospital, it brought in its own management team. 

The intrigues came into light after local shareholders complained about being kept in the dark with major decisions being made by individuals handpicked by Zoascales, whose record of running a hospital were called into question. 

A letter by the original owners had accusations that as a result, the financial fortunes of the hospital have nose-dived with a lucrative contract it had with the National Hospital Insurance Fund being cancelled. There were also allegations that the hospital had not paid doctors and had issues with rent.

The objective of acquiring a majority stake in Premier Hospital was to bring affordable specialised medical services such as oncology, nephrology and cardiology to patients in Mombasa, said Fred Kambo, one of the local partners of Zoscales in an interview earlier this year.

This was the second healthcare investment, the first one being Pioneer Diagnostic Center, a diagnostic services business in Ethiopia offering MRI, CT scan, X-ray and ultrasound services.

At the heart of this financial crisis is the strategy adopted by most PE funds which is to prepare the company for sale, with little consideration for the long-term development of the business by offering quality services.

PE is ownership or interest in an entity that is not publicly listed or traded. The firm that owns Private Equity is known as Private Equity firm or Private Equity fund. A source of investment capital, private equity comes from firms that purchase stakes in private companies or acquire control of public companies with plans to take them private and delist them from stock exchanges.

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The underlying motivation for such commitments by PE funds is to achieve a positive return on investment (ROI). Partners at PE firms raise funds and manage the money to yield favourable returns for shareholders, typically with an investment horizon of between four and seven years, after which they exit, often leaving behind a shell.

The buyout by Zoscales was at some point plagued with allegations of money laundering, with the Assets Recovery Agency (ARA) in October last year telling the hospital’s CEO that it was investigating the purchase of 123 shares at a cost of Sh425 million and subscription of 172 unissued shares at a cost of Sh625 million.

“These transactions indicate that Premier Hospital Limited is the contracting party while East African Investment Holdings Company based in Mauritius is the contracted party,” read the letter from Fredrick Musyoki, who is in charge of investigations at ARA. The agency did not immediately respond to Sunday Nation enquiries about their initial investigation purchase and subsequent clearance, but a due diligence done by Grant Thornton, an audit firm, also raised tax issues. 

Zoscales Partners acquired a majority stake in Premier Hospital from Ahmed Abdulle Noor and Fardosa Ahmed Abdulle, paying a sum of Sh1.1 billion. The PE fund is led by managing partners Ashenafi Alemu and Jacop Rentschler. Soon after the acquisition, a fallout started between the local and foreign shareholders. Zoscales accused the local shareholders of not disclosing the true valuation of the business, according to a letter seen by Sunday Nation.

But it has emerged that Zoscales, which receives funds from various development finance institutions (DFIs), in a hurry to snap up its latest acquisition, had rushed through the diligence process before the purchase. Issues were later raised about discrepancies in the books of accounts. 

The Sunday Nation contacted the managing partners with specific questions on issues raised in the documents. Mr Alemu did not respond to specific questions but said:

“This is to advise that Zoscales Partners is an international firm with international and credible investors such as the IFC and impact investors who have brought much needed Development Finance Investments in Kenya and Africa, creating jobs and supporting sectors such as Healthcare,” he said.

The managing partner alleged an unnamed “disgruntled individual” they have a dispute with could be behind the claims against the PE fund. He, however, did not respond to the queries raised on the state of the hospital.

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Mr Rentschler, a Swiss national who operates from Kenya and is the other managing partner, did not immediately respond to our questions.

There has been general concern around developing countries that the unregulated takeover of health service providers by PE Funds has always led to consumer fraud, with most of these for profit driven entities engaging in price hoarding which has led to increased prices of healthcare.

The involvement of PE funds has also tended to degrade the quality of services arising from cost cutting measures, job losses and reduced incentive to compete. A report by Oxfam, which was released in June, regrets that there is a push by the DFIs to “financialise and commercialise healthcare” in developing countries with “the patients and carers paying exorbitant, life-changing bills, paying with denial of their rights, and paying with exclusion from care.”

“The winners also deserve attention. They include the private equity firms, notorious for siphoning wealth out of social sectors and driving down working conditions and care standards, with women paying the greatest price,” said Oxfam in the report.

The report is titled; “Sick Development: How rich-country government and World Bank funding to for-profit private hospitals causes harm, and why it should be stopped." 

Nairobi Women's Hospital (NWH) is mentioned adversely in the report, with PE funds’ unbridled pursuit of profit clashing with the Hippocratic Oath taken by doctors — Primum non nocere” (First, Do no harm)."

Before the founder of Nairobi Women’s Hospital, Dr Sam Maina Thenya regained full ownership of the medical facility earlier this year, it was the Private Equity firms that called the shots at NWH.

At first, Germany’s DEG, France’s Proparco and the World Bank’s IFC invested in Nairobi Women’s Hospital in 2010 via the Africa Health Fund. Other investors in the same equity fund included the Norwegian DFI Norfund, the African Development Bank (AfDB), the Southern African Development Bank and the Bill & Melinda Gates Foundation

In 2016, France’s Proparco, the UK’s BII and International Finance Corporation (IFC), the private wing of the World Bank Group, invested $10million, $75 million and $100 – 150m, respectively, in the Abraaj Growth Health Markets Fund (AGHF), which in 2017 bought a 75 percent stake in Nairobi Women’s Hospital. Investors in the same equity fund also included the Gates Foundation and the African Development Bank.

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When Abraaj collapsed, after running into financial headwinds occasioned by fraud, its stake was taken over by Evacare Group, an American private equity fund.

Oxfam documented 37 alleged or confirmed human rights abuses against patients by NWH since 2017, with patients and bodies being detained for nonpayment of hospital bills.

In January 2020 alleged internal NWH communications, dating mainly from 2018, were leaked, exposing the hourly and daily pressure apparently exerted by senior hospital managers on staff to increase admissions and delay discharges to ensure that income targets were met.

“Some of the commentators covering the leaked hospital communications directly blamed the rapid and large-scale injection of global finance via private equity firms into Kenya’s private healthcare market and claimed that the intensified drive for profits had translated into hospital managers being pushed to ‘make money from patients by any means necessary,” said Oxfam in the report.

Kenya’s burgeoning middle class is becoming health conscious and are willing to spend on better medical care. This is combined with the rise of non-communicable diseases in developing countries that usually requires long-term, expensive care.

The size of Kenya's healthcare sector has risen by almost a third from Sh188.8 billion in 2018 to Sh244.3 billion last year, according to data from the national statistician. 

Much of this growth has been due to the increased involvement of private investors including PE funds, attracted by the huge demand for quality medical services by middle class families. Mr Kambo in an earlier interview said their entry into healthcare was to serve a segment of the market that has not been served properly by the current healthcare configuration. 

"In Kenya, one has a situation where there are expensive but good quality hospitals that cater for upper-income patients, and then we have the public sector facilities," said Kambo, who previously worked for collapsed PE fund Abraaj. 

He added: "But there is what we call the missing middle- a shortage of facilities that offer good quality care to the middle class at a reasonable price."

Since 2010, private equity firms have bought significant stakes in Avenue Healthcare, Metropolitan Hospital, Meridian Medical Clinics, Valley Hospital, and many others. 

While the Kenyan constitution has categorized access to healthcare a constitutional right for all citizens, the government, which has limited fiscal space, has done little to increase allocation to healthcare, a devolved function.