Japanese investor sees opportunity in Africa’s growing healthcare market

Susumu Tsubaki, CEO of AAIC Investment

Japanese investment firm AAIC seeks to capitalise on the growing demand for medical services in Africa by backing healthcare startups.

Japan’s healthcare system is widely recognised as one of the most advanced in the world, but this wasn’t always the case. In an effort to provide all citizens with sufficient healthcare and reduce the financial burden of medical expenses on individuals, the government introduced a universal health insurance scheme in 1961. This system led to a significant expansion of the medical services sector, and today, Japan’s healthcare sector is respected for its accessibility and high level of quality.

Susumu Tsubaki, CEO of AAIC Investment, expects that a trend directionally similar to Japan’s experience with the expansion of health insurance will occur in many African countries where insurance coverage is currently low but increasing. AAIC (short for Asia Africa Investment & Consulting), a Japanese company based in Singapore, manages two investment funds that back healthcare-related startups in Africa.

Tsubaki believes that the growth of health insurance in the continent will be advantageous for AAIC’s portfolio companies.

Health insurance coverage in Africa is among the lowest globally due to the cost and availability of policies. However, the industry is expanding. In several African countries, the value of premiums written by insurers (gross written premiums or GWP) is growing faster than GDP. For example, in 2020, Ghana’s GWP increased by 13% while GDP growth was only 0.4%. Other countries such as Zambia, Zimbabwe and Mozambique also saw double-digit premium growth rates despite declining GDP in the same year. An earlier study by McKinsey & Company predicted that the continent’s overall insurance market will see a compound annual growth rate of 7% between 2020 and 2025, second only to Latin America.

There has been some progress in expanding universal health coverage (UHC) in Africa. In Rwanda, the Community-Based Health Insurance programme helps low income earners with access to medical care at affordable cost and covers a wide range of health services, including primary care and hospitalisation. It is financed through a combination of government subsidies, employer and employee contributions, and donor funding. The Ghana National Health Insurance Scheme, established in 2003, is regarded as one of the more successful such programmes in Africa and includes primary care, hospitalisation, and specialist care. It is funded through a combination of a 2.5% levy on goods and services collected under value added tax, government subsidies and contributions from employers and employees. However, in countries such as Kenya, health insurance is more limited with only around 20% of the population covered. Insurance is provided through a combination of private and public and private schemes, including the National Hospital Insurance Fund (NHIF). Although these schemes offer coverage for a range of health services, they can be costly for some individuals.

Innovative private sector insurtech and microinsurance solutions are increasingly making healthcare coverage more affordable and accessible to Africans through partnerships with mobile network operators and the use of mobile money or airtime as payment methods. For example, insurtech startup Turaco offers medical and other policies in Nigeria, Kenya, and Uganda with an average premium of around $2 per month. In Nigeria, WellaHealth covers common illnesses such as malaria and typhoid for monthly premiums of just over $1.

From consultant to backing Africa’s healthcare startups

Japanese-born Tsubaki established AAIC in 2008, following a 15-year career as a partner and managing director at Boston Consulting Group and then as CEO of a listed company.

AAIC initially targeted investments in Asia, but in 2013, turned its attention to Africa with a macadamia nut farming and processing operation in Rwanda. Four years later, in 2017, AAIC launched its first Africa Healthcare Fund (AHF1), which raised $47 million. According to Tsubaki, AAIC’s focus on healthcare in Africa is due to high demand for medical services on the continent, the desire of Japanese healthcare companies to expand there, and former Prime Minister Shinzo Abe’s announcement at the sixth Tokyo International Conference on African Development (TICAD 6) in 2016 that Japan wanted to contribute to the region’s healthcare sector.

Africa is experiencing a rise in lifestyle diseases, leading to an increased demand for pharmaceuticals and medical services. The World Health Organisation reports that the continent is facing an obesity problem, which increases the risk of cardiovascular disease, diabetes, and certain types of cancer. Factors contributing to obesity include unhealthy dietary habits, sedentary lifestyles, and a lack of physical activity linked to urbanisation and changing modes of transport. According to Tsubaki, the increasing prevalence of smartphones and internet connectivity is making digital healthcare solutions more feasible for addressing these illnesses in Africa.

In 2022, AAIC introduced its second fund, the Africa Innovation & Healthcare Fund (AHF2), which aims to raise $150 million for investment in the digital healthcare sector, including areas such as teleconsulting and artificial intelligence in medical diagnosis.

Most of the investors, or limited partners, in AAIC’s two funds are large Japanese companies, including Eisai (pharmaceuticals), Ohara (pharmaceuticals), Asahi Intec (surgical and medical instrument manufacturing), and Marubeni Corporation (general trading), to name a few. These companies see their investments as a way to take advantage of Africa’s rapidly growing healthcare industry and potentially sell their products on the continent.

Investment strategy

AAIC, which has invested in over 30 companies, has focused on startups in Kenya, Nigeria, South Africa, and Egypt for its first fund. It currently has offices in these countries and will continue to target them for its new AHF2 fund but is also considering opportunities in neighbouring markets.

Tsubaki says AAIC’s exit strategy varies, depending on the industry. “In the hospital sector, we plan to sell to groups of companies that specialise in this area. In the tech sector, our goal is to either go public in the US or be acquired by other companies in the industry. For investments in the services sector, we plan to sell to Japanese companies, including our investors, that have a strong interest in this field.”

Below is a snapshot of some of AAIC’s investments to date.

Africa Healthcare Network: A dialysis chain

One of AAIC’s investments is Africa Healthcare Network, a chain of dialysis centres to treat people with kidney disease. After discovering a significant shortage of such facilities, founder Nikhil Pereira-Kamath started the business in 2015 with a single clinic in Rwanda. When AAIC invested, the business had three centres; currently it has over 28 facilities in Rwanda, Tanzania and Kenya.

The company charges a fee for each dialysis treatment. Patients with kidney failure typically need to undergo dialysis three times per week, often for the rest of their lives unless they receive a kidney transplant. In addition to dialysis, it also generates revenue through the sale of medications and other related medical procedures.

Africa Healthcare Network has targeted countries with adequate public or private health insurance coverage or a large enough cash patient population. “As insurance penetration increases, patient awareness improves, and clinicians are better informed to detect the disease, patients receiving dialysis is expected to increase nearly 25% year over year with an expected 25,000 patients on dialysis within the next five years in the countries in which we operate,” said Pereira-Kamath in an earlier interview.

Tsubaki adds that one of the biggest challenges of investing in healthcare startups is finding businesses that can scale their operations, and he was impressed with Africa Healthcare Network’s ability to standardise its processes and easily roll out new clinics.

Helium Health: Technology solutions for healthcare providers

In 2020, AAIC co-led a $10 million fundraising round for Helium Health, a Nigeria-based company that began in 2016 by offering a digital system for hospitals to replace paper-based patient records. Since then, the company has expanded to other African countries and added a range of services, including a telemedicine platform for remote consultations, a medical billing and practice management system, and a patient portal for accessing medical records and communicating with healthcare providers online. In 2021, Helium Health also acquired Meddy, a doctor booking platform with operations in the UAE and Qatar.

Revital Healthcare: Medical supplies

Revital Healthcare is a medical supplies manufacturer located in a special export zone near Mombasa on the Kenyan coast. One of its flagship products are autodisable syringes, which are designed to only be used once, thereby minimising the transmission of pathogens such as hepatitis B and HIV from one patient to another.

Covid-19 vaccinations have led to a growing demand for these syringes, and demand is anticipated to remain robust due to the roll-out of new malaria vaccines and continuing childhood immunisation. The company is the only auto-disable syringe manufacturer in sub-Saharan Africa prequalified by the World Health Organisation.

The investment from AAIC, announced in December 2021, will be used to enhance Revital’s production capacity and expand into rapid diagnostics test kits for diseases such as Covid-19, malaria, and HIV, as well as laboratory consumables.

Looking beyond healthcare

In addition to investing in pure-play healthcare companies, AAIC has also backed fintech and logistics businesses, including cross-border payments platform Chipper Cash and Kenyan logistics company Sendy. Tsubaki explains that the rationale behind these investments is that they support the healthcare industry. “Logistics of pharmaceuticals is a major challenge in Africa. Also, about 20% of international remittance needs are healthcare related, such as when someone is sick and needs money for treatment.”

A rapidly growing VC industry

Tsubaki says venture capital (VC) in Africa has evolved significantly since he first started investing. According to industry association AVCA, the number of VC transactions recorded on the continent expanded at a compound annual rate of 32% between 2014 and 2021. In the first half of 2022, the cumulative value of VC deals in Africa reached $3.5 billion, an increase of 133% from the same period in 2021. Investing in Africa presents similar challenges to operating in other emerging markets such as India, China or Southeast Asia, according to Tsubaki. He explains that, like in Asia, many African startup founders have a Western education and approach to business, bringing a developed-world perspective as they establish and grow their companies on the continent.

Building bridges between Japan and Africa

Japanese investors have shown growing interest in Africa’s VC industry in recent years. Outfits such as Toyota Tsusho’s corporate VC arm Mobility 54 and Samurai Incubate Africa, founded by Kentaro Sakakibara in 2018, have made significant investments in African startups. Mobility 54, which focuses on transport-related ventures, has invested around $28 million in 14 businesses since its launch in 2019.

Samurai Incubate Africa has stakes in more than two dozen startups, primarily in Kenya, Nigeria, and South Africa, and raised around $18.6 million for its second fund in 2020. Tokyo-based investor Takuma Terakubo, formerly of Samurai Incubate, has also established Uncovered Fund, which launched a $15 million vehicle in 2020 to make early-stage investments in African ventures.

According to a Japan External Trade Organisation survey, about 60% of Japanese companies with a presence in Africa believe the importance of the continent will increase over the next five years. The survey respondents cited expanding populations and markets, the nascent African Continental Free Trade Area, and the “leapfrog phenomenon” as reasons for this expected increase in business opportunities. The “leapfrog phenomenon” refers to the adoption of newer technologies in Africa without going through intermediate stages that were necessary in other parts of the world. Kenya (38%), South Africa (33%), and Nigeria (31%) were identified as the top three African countries of interest, followed by Ghana (22%) and Ethiopia (21%).

Of the companies surveyed, 65% pointed out “development and implementation of regulation or legislation” as a risk for investing in Africa, followed by “political or social instability” (56%) and “financial affairs, financing or foreign exchange” (47%).

When asked to identify Africa’s most promising business sectors for the future. The top choice, selected by 46% of respondents, was the “consumer market”. The next most promising sectors, chosen by 43% respectively, were “infrastructure” and “resources/energy”. Within the “consumer market” category, “food” was the subsector with the most potential, while “electric power” was the top subsector within “infrastructure” and “renewable energy” was the most promising within the “resources/energy” category. Other high-potential industries identified include “medical services and insurance”, “startups”, “smart agriculture” and “water technology”.

“Japan has many excellent technologies. However, most of them are for the domestic market, with little focus on overseas markets, especially Africa. I would like to contribute by bringing these technologies to Africa,” Tsubaki says. Due to the declining birth rate and aging population in Japan, Tsubaki’s hypothesis is that Japanese firms must expand their businesses overseas and cooperate with emerging markets such as Africa in order to achieve future growth.