John McCormick is a partner in the Boston office of Monument Group, an independent full-service advisor and fundraising partner in the alternative investment industry. He joined Monument in 2006 and has investor coverage responsibility in the U.S. and Latin America. He recently corresponded with MMG about the fundraising landscape for health care-focused private equity funds.
Q. What impact has the pandemic had on fundraising by health care-focused private equity funds in 2020?
Health care, as a sector, has continued to be a main priority for limited partners, as investments in the sector have generally outperformed deals in other areas of the economy. This has been the case across most strategies, spanning more general later-stage investments to earlier-stage life science ventures and, more recently, health care technology opportunities.
Attention among limited partners and general partners has certainly increased as a result of the pandemic, as everyone has become more acutely aware of protocols and procedures for everything from lab services focused on vaccine solutions to tracing, treatment or preventive efforts. LPs, as a result, have continued to add health care managers or rotate GPs as newer managers have emerged.
The general fundraising dynamics for private equity also applied to health care managers during the pandemic. Established health care managers were able to gather commitments almost seamlessly for their new funds while emerging managers faced stronger-than-expected headwinds as many investors shifted their efforts away from underwriting brand-new relationships. These investors, while showing interest in health care, did not feel compelled to engage broadly with emerging managers without the luxury of in-person meetings.
Q. What will investors be looking for from health care fund managers in 2021?
The pandemic has shed light on many disparities and, as a result, on opportunities that still exist in the U.S. health care industry, including logistics, distribution, telehealth or care delivery.
“THE PANDEMIC HAS SHED LIGHT ON MANY DISPARITIES AND, AS A RESULT, ON OPPORTUNITIES THAT STILL EXIST IN THE U.S. HEALTH CARE INDUSTRY, INCLUDING LOGISTICS, DISTRIBUTION, TELEHEALTH OR CARE DELIVERY.”
The dynamics for investors seeking health care exposure have not changed dramatically. Some have begun to segment the industry, seeking exposure to specific areas such as services or products, only having recently built out their initial health care exposure. The highly publicized approval process for the varied COVID-19 vaccine candidates has also generated a renewed interest in life science investments. Firms specializing in life sciences have benefited from broad access to public markets for their early-stage product companies much sooner than in the past.
This allows venture capital investors to offload the financing risk to public investors to get potential blockbuster products through the FDA approval processes.
Other strategies generating interest are growth equity managers with a focus on health care technology companies. In particular, virtual diagnostics is a segment drawing interest from GPs, as health care systems have had to adapt to limitations around in-person interactions.
Traditionally, health care has been woefully slow to adapt to new technologies, but these trends are accelerating transformation efforts across the sector.
Q. How is investors’ increasing focus on environmental, social and governance considerations shaping private equity investments in health care?
This focus on ESG principles is still early in its evolution, but for health care-focused PE firms, there is an increased attention on how the operations of their underlying portfolio companies incorporate these considerations and how managers are overseeing and tracking progress through measurement against key performance indicators.
There will certainly be more attention paid to the equal disbursement of treatment given the racial and ethnic disparities that exist in the U.S. system. There is also a more general focus on these underlying principles and how they are being added to the underwriting procedures and approach when assessing potential investments. We see this as becoming mandatory over time as institutional investors continue to press on managers to evolve.