The healthcare sector has proven to be one of the most resilient and therefore attractive sectors for private equity investors in the past few years, and frequently brings with it the added benefit of strong ESG credentials. LPs attracted by the underlying growth fundamentals of healthcare and healthtech like the fact that many assets also intrinsically increase access to quality treatments, improve lives and benefit the public purse.
Luke Düster, chief investment officer at healthcare debt investment firm CRG, says: “The key questions for me as I think about ESG through a healthcare investing lens start with whether the company we are looking at is improving someone’s life – either by extending life or making life easier to live – and that has to be objectively verifiable. The second question is whether the product or service can be shown to decrease the cost of care for the system, and then whether you are increasing access for the patient population.”
He believes that embedding those ESG considerations at the outset makes for better investment decisions overall. “Those three elements are absolutely core to healthcare investing, and they also happen to identify the products and services that will receive reimbursement over the next 10 to 20 years,” Düster says. “There is a conflict between new products and new service offerings and what the system will ultimately pay for over time, but the system does work in its own way to drive towards better outcomes, lower costs and increased access. So what is good from an ESG perspective is also good from a business viewpoint.”
While the drivers of positive outcomes will frequently be aligned, there are still plenty of ESG risks of which healthcare investors need to be mindful. Martin Calderbank, managing partner at Agilitas Private Equity, says: “The private equity industry is very good at being efficient, but one of its biggest challenges can be the misalignment between investor returns and patient wellbeing.
“Companies can struggle to expand their business rapidly while retaining a high quality of care and ensuring patient safety. At Agilitas, we only back healthcare companies where the quality of care is the main dimension of competition, so growing the business and creating better outcomes for end-users go hand in hand.”
He adds that, “while healthcare is a high human-impact industry that aims to deliver the most positive experience for patients”, investors need to be aware of the potential ESG risks. “For example, healthcare companies may test their products on animals, may generate high levels of pollution and may fail to provide access to those most in need. To mitigate these kinds of risks, we have a rigorous investigation process prior to investment that involves conducting extensive due diligence on the business and completing a 66-factor checklist to assess ESG risks.”
“Investments need to be monitored to guarantee the safety and wellbeing of
Christoph Kausch, managing partner at European healthtech investor MTIP, agrees that investments need to be chosen carefully. “Responsible investments in healthcare can be made by choosing investments that particularly contribute to tackling inequality in access to quality healthcare for disadvantaged communities,” says Kausch. “Furthermore, active ownership and engagement with the portfolio companies make sure that ESG factors are being incorporated in their strategy.
“Investments need to be monitored to guarantee the safety and wellbeing of end users by identifying and preventing misleading marketing that puts patient safety at risk and violates patients’ rights due to the misuse of sensitive patient data.”
Kausch says the UN’s Sustainable Development Goals play a major part in healthcare investing. “Goal 3 – good health and wellbeing – is probably the most important one. Other key factors for investment decisions in healthcare are Goal 5, gender equality; Goal 9, industry, innovation and infrastructure; and Goal 10, reduced inequalities.
“The medical sector has a lot to catch up on when it comes to women’s issues and therefore there are huge opportunities. We truly believe in the industry of femtech and targeting gender equality.” One of MTIP’s investments is in a company called Apricity, which is a virtual fertility clinic increasing access to fertility treatments to improve the lives of women.
“The most prescient challenges facing pharma research and development are slow patient recruitment and large numbers of dropouts from clinical trials, causing significant delays and increasing costs for pharmaceutical products to reach the market,” adds Kausch.
“Inequalities and inefficiency in healthcare therefore remain major problems, as clinical trials are lengthy, and subjects are predominantly men.”
Another portfolio company, Trialbee, is helping pharma companies get access to more diverse patient populations so that products can be tested on women, children and different ethnic sub-groups, and treatments can get to market faster.
A joined-up approach
ESG considerations need to be implemented at every step of the investment life cycle. The good news is that from an environmental standpoint, most healthcare companies tend to be decent, according to Düster. “That said,” he adds, “most of the high-growth healthcare companies we work with don’t necessarily have an ESG policy, despite being great companies solving all sorts of problems. So we are… talking to them about setting those policies up, and talking about the metrics they should be following to drive progress over time.”
The UK private equity firm ECI Partners is invested in 4ways, a teleradiology company. 4ways uses tech to allow remote-working radiologists to provide routine, out-of-hours and specialist clinical reporting on diagnostic images to help hospitals deliver more efficient care. As well as reducing costs in the UK’s National Health Service, notes ECI partner Duncan Ramsay, 4ways is having a positive impact on patients’ lives and reducing the carbon footprint of radiology through its remote nature.
Ramsay says: “At 4ways, they were doing quite a lot of interesting stuff from an ESG perspective, but what we often find is that pulling those things together into a cohesive strategy to highlight what they should be focusing on is really valuable. That helps build clarity of understanding for both customers and employees, and by putting things down in a strategy it means they get done.”
ECI has worked with the company on a social values strategy. “They have a set of goals to focus on, like delivering better stewardship of the environment, increasing supply chain resilience and tackling workforce inequalities. That strategy was developed taking into consideration specific alignment with the UN SDGs,” says Ramsay.
“Often, healthcare companies are intrinsically doing something that has a positive impact, and they will often be a benchmark for other ESG-related initiatives going on around the business,” Ramsay adds. “But… building it together around a social value strategy is a useful exercise.”
While good healthcare investments typically have broad positive impacts, investors nevertheless need to pay close attention to their responsible investment priorities.