The global pandemic has understandably put health-related investment in the frame and this is an area in many ways particularly suited to a private investment approach. We talk to a US firm about the sector.

It is unsurprising that wealth management houses are focused on healthcare investing when there is a pandemic and a fierce rush for a vaccine and treatments. A few days ago, Swiss private bank REYL & Cie, for example, gave healthcare as one of its two most “overweight” asset positions. (The other was technology. Its biggest underweight is materials.)

Whether driven by tax-funded research and private sector efforts, searches for anti-viral treatments, vaccines and other healthcare are bound to accelerate because of a pandemic that has hammered global economic activity. Healthcare might not always set the stock market on fire – but now it has become hot as health worries have risen.

“There’s going to be a lot of opportunities and it is partly due to the pandemic and more broadly due to macro trends,” Morgan Holzaepfel, partner, primary investments at Adams Street Partners, told Family Wealth Report in a recent call.

She focuses on private market firms rather than those listed on stock exchanges. Freed from quarterly results reporting pressures, such businesses have more leeway to innovate in niche areas. Wealth managers with expertise in understanding such investment opportunities can unearth great value, she said. 

Adams Street Partners, which oversees about $40 billion of assets, recently issued a white paper examining private investment in healthcare. 

Background conditions of global healthcare are strong, that paper, which was co-authored by Holzaepfel and colleague Tobias True, said. “The global healthcare industry has been growing rapidly due to macroeconomic tailwinds that we expect to persist into the future. These tailwinds include several strong demographic trends underpinning the growing need for healthcare: the aging Baby Boomer population, the growth of the middle class, and the increased prevalence of chronic diseases.”

That paper noted, for example, that from 2018-2022, global healthcare spending is expected to increase at a compound annual growth rate of 5.4 per cent, compared with 2.1 per cent projected global GDP growth over that same time period.  The paper also noted that in the last 50 years, global healthcare has never suffered year-over-year falls in growth. On the flipside, this sector needs to keep down costs.

Adams Street Partners says investor interest in healthcare continues to grow. “There’s been even more interest in healthcare not because of COVID-19 but because investors realized we were very late-cycle (in the overall economy),” she said, noting that healthcare tends to be attractive when other, more cyclical sectors such as materials and industrials lag.

Results speak for themselves. Over the past 20 years, the MSCI ACWI Healthcare Index has outperformed the MSCI ACWI Index by 250 basis points.

Technologies of all kinds are changing healthcare, such as how Artificial Intelligence (AI) tools can be used to sift through vast data sets (such as tracking blood samples) without the kind of mistakes humans are prone to make. In a specific case, for example, it can help increase early cancer detection rates. Predictive tools can help anticipate diseases and problems. Technology can also change unstructured data into useful information, she continued.

A dramatic example of technological innovation in healthcare, so to speak, has been the mapping of the human genome. Without computers, this process would have taken vastly longer than has been the case, with huge implications.

“Telemedicine” has been accelerated by the lockdowns and social distancing. “I think standard healthcare will move towards telemedicine,” Holzaepfel said. These technologies do come with cybersecurity vulnerabilities, and resources to fight such attacks will also increase, she said.

Overall, Holzaepfel said, healthcare has shown “astounding” resilience across the business and market cycle, making it an important core or “anchor” asset in a client’s portfolio.

For example, Adams Street Partners’ white paper shows that with portfolios initiated in 2000-2002, healthcare multiples on capital invested was 2.32 times; in 2007-2009 it was 2.22, and in 2013-2016 it was 2.62 times. The capital weighted loss rate ranged from about 22 per cent to 32 per cent over these three periods. 

Her comments come within an industry-wide heightened focus on health and medicine investment. Kames Capital, the UK-based fund manager, recently said in a note: “The COVID-19 pandemic has highlighted issues of insufficient healthcare capacity and resilience, particularly in countries where the sector has seen cuts to spending in recent years.”

“Expect these spending cuts to reverse as electorates demand a more resilient safety net for the day when they come to rely on the healthcare system they have funded. This may require a rethink in terms of some of the social contracts in place between the public and the health sector, especially with regards to the level of private sector involvement in healthcare provision and the size of contribution that individuals expect to make. Focus will also increase on ensuring that public are getting value for money in areas where there is little innovation, like generic drugs and relatively standard equipment and medical procedures,” it said.