Quality of care

Healthcare investors are abundantly aware of the reputational risks associated with care lapses, and the upside of improving quality.

Boris Zoller, managing partner at Capvis, says that quality of care has improved since his firm invested in Swiss care home operator Tertianum last year. “The framework we have implemented to drive our strategy is based on client benefit being a function of quality of care, satisfaction and innovation,” he says. “You need to be open to innovation and constantly evolving your services, your infrastructure and your methods to be at the forefront of what can be done.”

The challenge is to create value without compromising quality, and to be able to demonstrate quality of care improvements. Greg Belinfanti, senior managing director at One Equity Partners, says: “There are a lot of value-based platforms out there, which is to say that what the healthcare marketplace is looking for is quality alongside cost containment. That means making sure you are getting the right outcomes – and increasing the focus on being able to measure outcomes using the tremendous amount of data we are getting from patients, which should translate into better quality of care at lower cost.”

He points to the benefits of US capitation systems, whereby doctors or hospitals are paid a fixed amount per patient. “There’s a recognition in capitated models that the capitator is able to manage care more effectively from a cost perspective, and is also highly incentivised to get the best clinical outcomes because, in a capitated situation, the worst outcome is to have your patient turn up in ER, the most costly care setting,” says Belinfanti.

Jeff Rhodes, partner at TPG Capital and co-head of the platform’s healthcare practice, says: “Companies that are able to deliver higher quality care at a lower total cost for patients will continue to lead the way.”

He points to TPG portfolio companies like Kelsey-Seybold Clinic, the first accredited accountable care provider in the US, and Kindred at Home, which delivers home health residential care. “Our role is to help these companies scale their models by providing the right combination of technology solutions, emphasis on innovation, and focus on efficiency,” says Rhodes.

R&D

The pace of digitisation in healthcare research and development accelerated exponentially during the covid-19 pandemic, as attention focused on clinical trials and early-stage discovery using biosimulation technologies.

Such advances were not new, but the need to move much quicker, while embracing remote access to patients, has fundamentally shifted the way R&D is conducted.

At the same time, the continued personalisation of medicine and the merits of cell and gene therapy were coming to the fore ahead of the pandemic and are now ripe for investment moving forward.

There is much focus on productivity and return on investment, says Ahmad Sheikh, partner and member of the investment committee at SFW Capital Partners, which invests in healthcare technology businesses. “We look for technologies that are more automated, that give real-time information, or that are more productive than the standard tools that have been around a long time.”

The firm is investing in businesses with tools that can support cell and gene therapy, and in contract development and manufacturing organisations or contract research organisations. In May this year, SFW backed Pion, a provider of tools to help scientists deliver more efficient, early-phase screening of drug compounds, providing critical data in real time. “The market is very frothy right now,” says Sheikh. “There are a fair number of opportunities, but for every opportunity there are 100 buyers. We like to pick our spot and focus on a part of the end-market where we have a different angle.”

Scalability

Mid-market investors can face challenges identifying opportunities of sufficient scale to meet their investment horizons and appetite for risk, while strategies for growth can be hampered by geographical variations in legislation and healthcare systems.

Jan Pomoell, co-head of the health team at Triton Partners, says digital healthcare can be particularly challenging with respect to growth. “When it comes to digital, there are several issues we see in terms of geographical scalability,” he says.

“New digital solutions are generally piloted in one country and, if successful, extended into other countries. However, the IT landscape can vary significantly, meaning that each digital solution needs to be locally tailored. Additionally, several leading cloud storage providers are US-based companies and, due to GDPR regulations, this poses a major obstacle in digitising European healthcare assets.”

Triton invested in Mehiläinen, a leading Finnish healthcare service provider, in 2010 with a strategy to significantly improve its quality and efficiency through investments in digital. They fully exited the business in 2018, having successfully acquired and integrated more than 50 providers to create an extensive national network.

Sofiane Lahmar, partner at Development Partners International, which invests across Africa, says challenges identifying healthcare investment opportunities that make a positive impact include a lack of scale, with many falling below the minimum threshold for large PE funds.

Tie-ups

The rush to develop testing, treatment and vaccinations in response to the covid-19 pandemic has driven a new wave of collaboration among healthcare peers unlike anything seen in the past.

While we have collaborations between the likes of BioNTech and Pfizer, and AstraZeneca and Oxford University, to thank for some of the most successful vaccine breakthroughs, the trend towards tie-ups in the industry is reaching far beyond covid.

Cathrin Petty, managing partner and head of healthcare at CVC, says: “Historically, the healthcare industry has been very siloed, largely because of intellectual property challenges that encouraged people to keep information to themselves. Now, covid has created a kind of open-source environment.

“The partnerships we have seen really would not have happened in the past. That is something we want to build on, and it sets a great example for us in private equity to work more collaboratively.”

Across the US, partnerships within the healthcare space are becoming far more common on a number of levels. Greg Belinfanti, senior managing director at One Equity Partners, says: “In the healthcare space we are seeing an increasing trend towards hospital-based partnership. At Ernest Health, our in-patient rehabilitation provider that acts as a kind of bridge facility from acute care to community care, because not all patients can go direct from hospital to home, we have expanded significantly our relationships and presence in partnerships with local hospitals or hospital systems by establishing joint ventures.”

Kerrin Slattery is a partner in the healthcare practice at law firm McDermott Will & Emery in Chicago and agrees that collaborations between hospitals, health systems and private equity are on the increase.

She says: “Hospitals and health systems are looking for new partners to help diversify and transform their business, and private equity is increasingly investing in entire health systems, exiting investments by selling to health systems, purchasing a division of a health system as either a platform or portfolio company add-on, and engaging in other innovative joint ventures. These creative collaborations result in myriad benefits, suggesting the trend will accelerate in the years to come.”

Universal healthcare

Healthcare is an industry where environmental, social and governance considerations can have a big role to play and where the potential to make an impact through investing in universal healthcare is considerable.

Sofiane Lahmar is a partner with Development Partners International, a leading private equity firm investing across Africa, with $2 billion under management. She says the lack of universal healthcare for much of the world presents “insurmountable obstacles to overcome for the majority of the population, leading to high mortality rates relative to other regions and to the loss of savings and disposable income of the middle and lower classes”.

The need for improvements in healthcare for the mass market population on the continent fall into three categories: affordability, accessibility and quality, Lahmar adds.

“Across Africa in particular, targeting investments that help address the key challenges of the continent – the accessibility, affordability and quality of healthcare – will naturally help towards driving increased impact,” she says.

DPI is focused on investments that address these three core challenges, which in turn have the best chance of creating a positive impact and delivering attractive returns.

At the end of 2020, the firm invested in Kelix Bio, a $750 million pan-African pharmaceutical manufacturer, which will improve affordability of drugs on the continent. “Investing in companies where the ESG standards are below expectations but implementing a strong ESG and impact agenda from day one will not only significantly contribute to the development of the continent, but also ensure that the investment will be fit for sale to a global strategic company or for an IPO on a global stock exchange at exit,” Lahmar says.

Promoting universal healthcare is also in line with goal three of the United Nations Sustainable Development Goals: promoting good health and well-being. In the UK, impact investor Bridges Fund Management is focusing on the ageing population as part of its impact agenda.

Partner Maggie Loo says: “Through our social outcomes funds, we’ve supported a number of programmes that work with people who have multiple long-term health conditions, trying to tackle the social determinants of ill health.”