NEPC's Paul Kenney, Jr., CFA was featured in Becker's Hospital CFO Report "Will Strategic Investments in Healthcare be a Short-Lived Trend or the New Normal?" Read more here.
The healthcare industry is constantly evolving – but over the past few years, mergers and alliances, disruptions in public healthcare programs and policy, and new technologies have caused the rate of change to increase dramatically.
In order to maintain a competitive edge in this environment, many healthcare organizations and hospitals are now investing in healthcare-focused private equity funds and/or directly in individual companies. Done correctly, this investment approach can help drive innovation that supports improvements in patient care and operating efficiency while garnering returns.
In late 2017, we surveyed 21 healthcare providers to gather their thoughts on strategic investing. Our survey found that 71% are either actively making strategic investments or considering pursuing them. However, this trend is still in its infancy – the majority of these organizations hold five or less investments. What’s more, our research suggests that, as is often the case, large healthcare providers are leading the charge. Of the 21 organizations we surveyed, 19 had operating assets greater than $1 billion, and 16 had revenues exceeding $2 billion.
In other words, healthcare providers that haven’t yet entered the fray shouldn’t feel they’re late to the game. And for organizations that are considering creating such a program, there are several issues around management, complexity, governance, and performance measurement they should address first. These include:
Should we invest in companies directly or in private equity funds?
Nearly half of the organizations we surveyed do both, and each approach has its pros and cons: investing in funds can provide broad access to companies, while direct investments allow healthcare providers to target specific clinical priorities with greater precision.
However, most organizations – 85% – are concerned by the prospect of evaluating a direct investment. By contrast, just 20% said the same of private equity funds. Determining which approach is best is tied to an organization’s resources and governance structure, with investing through a private equity fund being the easiest to implement.
Should we use a broad-based or more targeted approach?
More than half – 61% – of the survey respondents are currently taking an opportunistic approach, investing across a number of different healthcare verticals. As this trend continues to evolve, we expect organizations to adopt a more targeted approach with a narrow focus on specific clinical goals and needs.
How do we measure success?
Our survey respondents were also more daunted by the prospect of measuring outcomes for direct investments compared to private equity funds. Certainly, in both cases, it’s critical to articulate clear goals, objectives and milestones to gauge the clinical success and financial progress of an investment.
Because direct investments often require additional capital, investors should ensure they have a process in place to assess whether to continue funding the company. That being said, although investing through a general partner may be less workload-intensive, the process of measuring and monitoring the clinical benefits should closely mirror that of a direct investment, which is a nuance to consider.
When evaluating the success of a strategic investment program, it’s important for providers be patient and realistic – financial and clinical benefits often take a long time to appear, particularly for venture-type investments. There will undoubtedly be hits and misses along way, highlighting the need to be able to evaluate the program’s overall impact on the organization.
Who should be responsible for our strategic investment program: our Treasury/Finance or Innovation team?
The short answer is both – though this is easier said than done. Three-quarters of the organizations we surveyed said that the relationship between these teams is limited or modest. And only 25% have regular contact with at least some structure in place, so this is an area we think organizations should be focusing on.
One of the biggest challenges with strategic investments is they require a tremendous amount of coordination between these two teams to put the investments in place and then monitor them. In most cases, the individuals involved in this process have other responsibilities, so their ability to focus solely on an investment or relationship is limited. As these programs evolve, organizations should consider establishing a point person or team to own the process and investments.
Strategic investing may be a nascent trend, but we believe that for larger organization with sufficient resources, it’s similar to investing in alternatives or liability-driven investing – approaches that were once uncommon but are routine today. As the healthcare industry continues to undergo seismic changes, the ability to innovate will be critical to providers’ ongoing success. If healthcare providers can successfully navigate the challenges associated with strategic investing, they’ll likely find it to be a valuable tool to improve patient care, foster innovation, and earn returns.