Bangalore: When Pune-based Sahyadri Speciality Hospital was looking to raise funds to back its expansion plans late last year, it found a willing partner in I-Ven Medicare, a subsidiary fund of private equity (PE) firm ICICI Venture, much to the hospital group’s surprise. The more-than-a-decade-old Sahyadri had not considered PE as a route of raising funds and was quite circumspect initially when approached.

Realty check: Rahul Bhasin of Baring Private Equity Partners. Harikrishna Katragadda / Mint

Today, the 300-bed hospital has $36 million (Rs173 crore) in its kitty and aspires to expand to 3,000 beds in a chain spread over Maharashtra in five years.

“We plan to raise another $20 million after 18 months. I-Ven does not have a majority stake in Sahyadri right now, but after the second round, they will own more than 50% of the hospital group. We don’t mind having them as majority stakeholders," says Sadanand Bapat, a director at Sahyadri.

Over the last one year, investors have gone beyond large corporate hospital chains to tap the growing need of health care across India. The investments in stand-alone, specialty regional hospitals have been inspired by expectations of consolidation in the sector over the next three years as well as due to the rising demand of quality health care in the country, particularly in smaller cities.

A study by the Confederation of Indian Industry and McKinsey and Co. earlier this year predicts demand for an additional 750,000 beds (up from the current 1.05 million beds) to meet the increasing demand for in-patient services by 2012, creation of which requires an investment of $24-34 billion. Nearly 80% of this investment has to come from private sources, it said.

Baring Private Equity Partners India Ltd’s managing partner Rahul Bhasin says though the demand of quality health care services will only go up in the country, rising real estate costs will have to be taken into consideration for future projects and, therefore, their viability for investors.

PE firms investing in hospitals, which are revenue generating entities, expect them to become big enough to be merged or acquired by a larger player, or be clubbed together under a holding firm such as I-Ven. Such firms can then go public once they reach a base of 7,000-8,000 beds, becoming a flagship brand on the lines of Apollo Hospitals or Fortis Healthcare. The partner hospitals get a shareholding in the umbrella firm, says I-Ven’s chief executive Anil Panwar.

PE players have invested $538 million across 33 deals in the health care and pharmaceutical sector till September this year, compared with $505 million invested across 34 deals in the whole of 2007, according to data from Venture Intelligence, a research firm.