In both good and bad economic times, people will inevitably get sick and require health care. So when markets are down, health care may be a good defensive play for institutional investors.
“Including wars, depressions [and] recessions, health-care spending keeps increasing,” says Sam Ifergan, founder and chief executive officer of iGan Partners, a venture capital and private equity firm.
Indeed, despite the financial crisis, U.S. health-care spending reached $2.3 trillion in 2008, which represented a 4.4 per cent growth from the previous year. While this was a historical low compared to the previous 48 years, it was still positive.
Generally speaking, the health-care sector has performed well because it has strong underlying fundamentals, says Ifergan, noting that an aging population and a growing global emerging middle class are driving demand. “The fundamentals of health care seem to be leaning towards human beings spending more and more as a percentage of GDP towards health care because it’s a very important part of their lives, obviously.”
But the amount of very large public companies in health care is diminishing because of mergers and acquisitions. As well, a lot of private companies are choosing not to go public due to complexity, Ifergan notes. And a lot more investing is taking place in private companies.
While there are numerous ways to gain exposure to the health-care sector, venture capital is a good option, he says. “Traditionally, venture capital [as an asset class] has outperformed every other asset class over the last 50 years, whether it be real estate investing, S&P 500 [or] other verticals. So that means that something’s going on in the sector that is really interesting.”
The health-care sector is reinventing itself, he adds, as new emerging technologies and digital health care are transforming processes.
The way for investors to access these opportunities when the valuation growth is best is getting in early, either by direct investing or investing via a venture capital firm, says Ifergan. “Now, going direct is extremely complex and a lot of people get burned going direct because they simply don’t understand the nature of the business and the science.”
But like any venture capital play, investing in health-care that way is risky and illiquid. Therefore, it’s important to have a playbook for bringing these concepts to market, making it important for pension plans to look at the teams that are involved.
This can involve looking for teams with experience and access to proprietary deal flows, as well as those with a bench of entrepreneurs, or scientists that can help the entrepreneurs, he says.
Also, investors can de-risk by avoiding binary bets. “For example, if you’re trying to build the next oncology cure using a molecule bio-tech pharma, you can spend billions of dollars [but] if your clinical trials fail they’re worth zero,” Ifergan says.
However, in the case of an investment in medical devices or software platforms, it’s rare the move will be that binary, he adds. “It hardly ever goes to zero unless you really did a poor job. Usually, there is some inherent value in the technology and somebody will buy it.”