The current economic environment, with relatively high inflation rates and a continuing supply chain issues, coupled with the aftermath of the COVID-19 pandemic, has drawn more investor interest and attention to the resiliency of and consistent demand for healthcare services and technology.
At the beginning of 2022, healthcare companies dominated the IPO market. In the private market, meanwhile, leading investment firms such as Bain Capital, General Atlantic, Vistria Group, Thomas H. Lee Partners (THL), Questa Capital, HealthQuest Capital, and Silversmith Capital Partners have remained focused on their strategies and approaches to investing in healthcare.
Prevailing market trends can often influence the decision-making process for investors. For instance, in 2022, behavioral health, healthcare on-demand, and automation were among the most active areas of investment. However, reliance on trends fails to be a comprehensive enough approach.
Chris Gordon and Devin O’Reilly, who head Bain Capital’s healthcare investing efforts, aim to achieve long-term objectives rather than relent to what’s au courant. Following the identification of market leaders in an evolving space, Gordon and O’Reilly tend to try to develop relationships with them over time. O’Reilly has been at the firm for some of its biggest investments, including the acquisition of athenahealth, the Boston-based software company, and AI company LeanTaaS.
Jeff Crisan, who co-founded Silversmith, employs a similar approach. Crisan encourages investors to familiarize themselves with “the entrepreneurs you invest in over months and years, not days and weeks. Find out what makes them tick.” He says the most successful businesses are those that are built by the original entrepreneurs and founders who are able to scale with the business. “Think Bill Gates at Microsoft and Jeff Bezos at Amazon.”
At Vistria Group, investment focuses on “the greater good” of society. The firm was founded by Kip Kirkpatrick and Marty Nesbitt, who share a deep passion for supporting young entrepreneurs and the broader community. And David Schuppan, Senior Partner and Co-Head of the Healthcare Team at Vistria Group, explained on Growth Investor that he wants “to invest in areas where they will have a disproportionate societal impact.”
As for Garheng Kong, the Founder and Managing Partner at HealthQuest Capital, “The way to impact the most patients is to become an investor,” as he stated in an August 2022 Growth Investor interview.
The gravity of healthcare investing is paramount to Joshua Nelson, Managing Director and Head of the Healthcare Group for Thomas H. Lee Partners. Nelson maintains a prudent approach, cognizant that it’s just as important to know when not to invest. According to Nelson, THL teams need to ask themselves, “Do we have a value creation plan for this company, in this area, that we think is going to be compelling, and differentiated from, and a right to win in this business?” In instances where THL and a company do not align on a value creation plan, it’s more than likely not the right investment for THL.
Similarly, Kong at HealthQuest maintains a conservative investing strategy. Despite considering around 1,000 companies a year, HealthQuest only invests in 5–6 companies. The firm looks to invest in companies where they can be long-term, value-added partners. Look at partnerships like a permanent tattoo and invest accordingly.
Deep expertise and knowledge of the industry are crucial to making sound investments. Nelson explains how THL’s teams identify opportunities based on their different specialties. “Be experts in specific areas,” he emphasizes. “This gives each team the knowledge to make informed decisions.”
Central to maximizing any investment effort is having a detailed plan in place ahead of time. Like THL, David Schuppan and Vistria put particular emphasis on not just having a value creation plan in place, but on ensuring there is alignment with the company on that plan. Then, together they can focus on building teams up front and leaning into process, people, and infrastructure. The primary goal is to build up companies for long-term success.
Ryan Drant, Founder and Managing Partner of Questa Capital, specializes in medical devices, healthcare services, healthcare technology, and specialty pharma sectors. Questa is known for seeking out disruptive business models and, as a result, operates using a holistic approach. The firm has a presence on the compensation committee of almost every company it invests in, is involved in board recruiting, holds at least one board seat at each company, and participates in hiring senior management teams.
“It’s important to build out teams,” Robb Vorhoff, Managing Director and Global Head of General Atlantic’s healthcare group, highlighted on Growth Investor. “What differentiates returns and outcomes in our business going forward is, what are we doing with those companies once we’re invested in them?” Vorhoff values layering down from the C-level to enable scalability and improve performance.
Invariably, strong leadership is the foundation of high-performing teams and successful investments. “Entrepreneur leaders should be active learners, engaged in growth, [have a] sense of purpose, [and] empathy for people,” Silversmith’s Crisan explains. “[You] have to be adaptable because the world is constantly changing.”
While not every leader can be a Gates or Bezos, there is a lot investors can do to help their partners level up. “If you’re intentional about your leadership and focused on it, it should be a skillset you can certainly improve on,” says HealthQuest’s Kong. Thus, many of the most successful investment firms encourage continued education and growth for their partners.
For instance, THL operates a Strategic Resource Group, a dedicated team of senior professionals with operating and consulting backgrounds that provides operational support and strategic insights and relationships to its portfolio companies, investing in people to support accelerated growth. Investing is not a stagnant field, and constant development and upskilling is crucial.
If anything, innovation within healthcare has accelerated as a result of the pandemic, and creative, dynamic, and lateral thinking is crucial to growth equity investing in the space now more than ever. Schuppan predicts an increasing interest in and a fast-approaching transformation of home- and community-based care, with major changes to how caregivers treat and care for their patients. Meanwhile, Drant foresees a time in the near future when all devices are connected. In anticipation of the future, THL is working toward making ESG core to who they are, while it has become an increasing area of focus for Bain.
There remains tremendous opportunity in healthcare investing, despite a looming recession, because, as Kong succinctly puts it, “there are a lot of ailments to be cured, and the healthcare system is very large and not the most efficient.” Healthcare is resilient to downturns in financial markets because “people always need it.” Through their strategic investments, healthcare investors have the potential to positively impact the lives of untold numbers of patients while simultaneously enabling the long-term growth and profitability of their portfolio companies.
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