SuperReturn eMagazine: An investor's handbook to reshaping strategies
What are the experts' tips for moving towards a 'new normal'? Hear from our speakers at SuperReturn Europe Virtual on all the hot topics in the industry.
An investor's handbook to reshaping strategies
What are the experts' tips for moving towards a 'new normal'?
There is cautious optimism in the industry as we head further into 2021 and start to move towards a 'new normal' beyond the pandemic.
But what will the industry look like post-COVID and how will this reshape strategies? Sharing their insights with us at SuperReturn Europe Virtual 2021, our speakers looked to answer these questions with a focus on topics including ESG, technology, healthcare and more.
In addition, we take a look a the state of the secondary market as it gains more traction in GP-led deals and is changing the way institutional investors operate in the field. Niche and specialty finance, more front of mind for investors since the pandemic, is also explored in this eMagazine from an LP point of view.
With exclusive interviews and sessions taken directly from the event, we hope you enjoy this SuperReturn eMagazine.
Private equity as a change agent in a world changed forever
What are the fundamental themes accelerated by the pandemic?
To what extent are boardroom discussions today different from last year? Is the private equity industry moving fast enough to be at the forefront of disruption and to help entrepreneurs and family companies deal with transition? Covering wide-ranging topics from ESG to technology and healthcare, hear from senior private equity leaders as they examine private equity as a change agent in a world changed forever.
Featuring:
- Helen Steers, Partner, Pantheon
- Christian Sinding, CEO & Managing Partner, EQT
- David Novak, Co-President, Clayton Dubilier & Rice
- Rob Lucas, Managing Partner, CVC Capital Partners
- Johannes Huth, Partner & Head of KKR EMEA, KKR
Healthcare and Life Sciences post-COVID-19: Reshaping strategies for 2021
Svetlana Fathers, Senior Conference Producer, SuperReturn Series
Over the past few years, Healthcare and Life Sciences have been one of the strongest performing sectors.
They have also shown a remarkable and robust response to the market downturns caused by the global pandemic, with the least impact in overall returns in 2020 and record amounts of capital being deployed by private equity.
While the future of the sector looks extremely promising from an investment standpoint, it is worth examining the implications of COVID-19, the most common pressures, and the shift in investment dynamics following the pandemic.
Healthcare services
Healthcare providers, such as owners and operators of primary healthcare hospitals, retirement and nursing homes, have been hit the hardest by COVID-19. Almost all elective activity, including procedures and appointments, have been put on hold to prioritise the containment and treatment of the virus.
As a result, these companies face a reduction in their revenue and more uncertainty for their financial future. A number of smaller providers simply don’t have the financial resources to survive this temporary interruption in activities as we stay on an uncertain path to the “new normal”.
Based on Q1 2020 market data, Healthcare providers saw a 25% decrease in returns, followed by Med Tech and services with a 12% drop in returns. Biotech and Pharma sectors have proved to be most resilient with a consolidated market value of €1,460 bn and only a 5% and 7% drop in returns respectively.
The pressure is on
Along with the resumption of activity in the Healthcare sector, which was temporarily paused during the pandemic, several other significant developments have taken place.
The COVID-19 pandemic has substantially increased demand for mental health services and solutions from both patients and front-line clinical staff. Consequently, mental health platforms, facilities and other solutions that cater to specific mental health demands that had arisen from COVID-19 are likely to be highly favoured by investors.
Supply chain has also been put under extreme pressures, which resulted in cost, quality, and availability trade-offs. The Life Sciences sector has also experienced high demand for vaccines and therapeutics for COVID-19 and other similar infectious diseases. And due to the over-reliance of manufacturing supply chains on Asia, Life Science companies have been under a lot of pressure.
One of the top priorities for management in Big Pharma companies has been to focus on restructuring API supply chains to reduce reliance on China and India, as well as looking at API manufacturers in lower cost European and other Western countries.
The growth of digital health
In terms of ongoing structural changes accelerated by the pandemic, one of the most important shifts has been towards an increased adoption of digital health solutions. As a result, the digital health sector has seen enormous growth, with telehealth and telemedicine services experiencing huge demands from patients, clinicians, and investors alike.
Increased baseline adoption of telehealth and other digital health solutions is expected to drive a very prominent investment theme with a special focus on offerings across telemedicine, remote monitoring, at-home diagnostics, at-home pharmacy delivery and the like.
The pandemic has brought Healthcare and Life Sciences sectors into the spotlight like never before
Biotech and Pharma
With clinical trial activity on hold, Biotech and Pharma companies are under a lot of pressure from investors to kick-start their development pipelines as things return to normal. From an investment perspective, this means that any company that can ensure that the trials are designed and run more quickly and efficiently will be in great demand.
In addition, Pharma continues to be under increasing pressure to reduce the time and cost related to bringing new products to market. The Life Sciences space has shown the entire world its remarkable efforts in developing COVID-19 vaccines and treatments, highlighting the potential for faster and lower cost drug development. This has been made possible by utilising technology platforms that leverage data and AI for development of new drugs, as well as repurposing existing drugs and revisiting previous clinical trial data. These technologies are very likely to attract lots of interest from investors.
Interested in finding out more?
We covered various aspects of digital health, including digital therapeutics, Healthcare IT and Technological innovation at SuperReturn Europe Virtual 2021.
A new way of doing business
In summary, dealmakers continue to be cautious and selective, but buyers are looking to take advantage of opportunistic acquisitions. There is a substantial amount of capital available for investment in European companies, and investors are proactively looking for new opportunities. The pandemic has brought Healthcare and Life Sciences sectors into the spotlight like never before, and these are certainly unique times for change, innovation and a new way of doing business.
What are some of the most promising digital innovations in healthcare today?
Hear from the experts at SuperReturn Europe Virtual
Exploring the latest technological developments in healthcare, our panellists delve into how technology is addressing rising costs, changing demographics, evolving regulations, and industry consolidation with digital solutions that increase efficiency, mitigate risk, and enhance customer satisfaction.
From nanomedicine to virtual healthcare, hear from:
- Michael Wieczorek, Partner, Elm Capital
- François Robinet, Managing Partner, AXA Venture Partners (AVP)
- Michael Cole, Managing Partner, Global Neurohealth Ventures
- Alex Slack, Chief Investment Officer, Lauxera Capital Partners
What are some of the most promising technological innovations to invest in?
Health data, privacy and monetization - healthcare IT is a field that is seeing great advances in recent times. Our panel of experts look to examine the opportunities and the concerns surrounding healthcare IT - from cloud based medical records and IT-powered implantable devices to healthcare data use and insurance.
Featuring:
- Charles Boorady, Founding Managing Director, Health Catalyst Capital Management LLC
- Shane Chesson, Partner, Openspace Ventures
- Alexander Frolov, General Partner and CEO, Target Global
- Jean-Marc Patouillaud, Co-Managing Partner, Partech Partners
Healthcare IT: what’s attracting private capital to this sector?
How will the digital revolution change the future of therapeutics and drugs? Can we expect digital blockbusters in the new space of digital therapeutics and digital drugs? Our panel of experienced investors from SuperReturn Europe Virtual discuss what digital therapeutics and digital drugs are, and what the future holds for them in the healthcare sector.
Featuring:
- Regina Hodits, Managing Partner, Wellington Partners
- Baudouin Hue, Partner, Karista
- Markus Müschenich, Managing Partner, Eternity.Health
- Janke Dittmer, General Partner, Gilde Healthcare
Digital therapeutics and digital drugs: what lies ahead?
How risky is it to invest in biotech today? How is the market responding the the large amount of dry powder available? Our venture capital focused panel from SuperReturn Europe Virtual 2021 takes a look at the fundamentals and the latest developments in biotechnology, from investment strategies to the next investments catching their eyes.
Featuring:
- Ben Challgren, Vice President, Top Tier Capital Partners
- Francesco De Rubertis, Co-founder & Partner, Medicxi
- Arthur Franken, General Partner, Gilde Healthcare
- Joe Anderson, Partner, Sofinnova Partners
Is now the time to invest in European biotech?
Niche and specialty finance: the opportunities, risks and finding the right managers
You-Ha Hyun, Investment Director at Perpetual Investors
You-Ha Hyun
Investment Director at Perpetual Investors
You-Ha Hyun leads the private debt program at Perpetual Investors GmbH, a German based single family office. In this role, he is mainly responsible for managing the private debt portfolio and focuses on manager selection across the broad spectrum of the private debt universe. You-Ha has more than 12 year experience in the alternative investment segment having done primary, secondary and co-investments at large institutional organizations such as an insurance company, a public organization and a fund-of-funds. You-Ha began his career in the M&A advisory business at KPMG and is an economist by training.
Already popular before the pandemic, niche and specialty finance have seemingly managed to attract more interest from a wider range of investors since the pandemic.
But do investors really know what the risk and return profiles are like, and how to select managers operating in this field? You-Ha Hyun, Investment Director at Perpetual Investors, shares his insights in our exclusive interview.
Q: Has niche and specialty finance truly kicked off since the pandemic? How big is the opportunity?
Since everyone has a different meaning how to describe specialty finance, I want to emphasize how we categorize this strategy vertical. To us, specialty finance covers segments which are typically not correlated to the corporate credit market. The form of underlying securities can vary and also include equity-like instruments that are somewhat senior in the capital stack or have cash flow patterns that resemble a credit investment.
In our view, this market has been increasingly attracting the interest from the broader set of investors thanks to the attractive return profiles. But if anything, the pandemic rather acted as pause button with priorities – especially during the first lock-down – on the management of the existing portfolio.
Generally, it is difficult to give an exact number of the addressable market since this segment is so fragmented. One of our GPs estimates the music royalties opportunity at $30 to $40 billion over the next five years. In the legal assets space, the addressable market is even estimated in the low three digit $ billion range. Adding this up, we deem this sufficient to attract significant institutional capital, and secular trends will further increase the attractiveness. In this context, we are positioned to benefit from being an earlier mover by building industry relationships and multiple arbitrage.
What kind of returns are targeted and being realised across niche and specialty strategies?
For us to invest, specialty finance investments should produce a risk premium to the corporate credit investments and generate a return in in the high single to mid double digits (net). We further consider whether a strategy generates a cash yield, like royalties, or is exit dependent, like pay-in-kind situations. The data is not as extensive as in private equity or corporate credit markets, but we have observed activities confirming our assessments.
Q: What are the risks associated and does the risk premium make sense to investors?
It is a relatively young asset class, for which one will not find sufficient data. Exit viability is definitely something we assess very carefully, especially since one will need to make a judgement call in the absence of broad evidence for exited investments.
We assess whether there will be any contraction in the exit valuations of the underlying assets, in particular for investments that have a back-ended return profile or are of self-liquidating nature. Additionally, we evaluate whether the potential buyers universe is large enough, providing viable options for the GPs.
Each strategy has to be considered individually and assessed at the deal level. Foremost, the key questions are: What are we buying into? What is the capital used for? Are we buying certain assets or lending against a collateral? How is the asset ring-fenced if it comes to an insolvency? What is the upside? Are there any?
Furthermore, the tax drag for non-US investors may reduce the net return. The question is whether the GPs are able to set up a tax efficient structure due to the size of investments available. Many targeted GPs have fund sizes below $500 million.
Overall, we believe that the available risk premia are attractive given the less mature market.
Q: What does your manager selection process look like?
Given the fragmentation of the speciality finance market, identifying the right GPs is probably more time consuming, but we think if done systematically, the right strategies can be identified. For that, we extensively leverage our network in the befriended family office community or referrals through relationship GPs and boutique or specialized placement agents. Most niche strategies would not make it into the books of the big firms given the limited scalability and the lack of critical size. Therefore, it is a very proactive approach to sourcing.
The due diligence process in turn is not too different from what we would go through for PE or established PD sub-segments. However, for the niche strategies we will place stronger emphasis on the top-down view of the relevant markets: do we understand the premium? Is the market size sufficient? What are the other players active in the field?
Alignment of interest and the terms are important, too. Many GPs in the niche segments do not have the same level of institutionalization and therefore we need to see a path towards a fully institutional quality GPs, if that is not the case yet. Referencing has become more profound these days since travelling is non-existent making it impossible to meet with the GPs in person.
Q: How do you see emerging managers? Are they too risky or worth the leap of faith?
It is worth the leap of faith, but it will not form the majority of our target portfolio. For emerging managers, there is a great opportunity to be a value adding investor for the operational set up. We can bring advice based on our experience of investing in the more institutionalized world.
For us, the expected risk-return profile improves through preferred terms when being one of the first LPs. In some situations, we try to negotiate terms that could reflect founders’ discount, or to be a shareholder at the Management Company level for a limited period. We also consider partnerships through JVs or investing share classes for specific strategies within an open-end structure. This provides the emerging managers with some cushion to fund their operations until they have been able to create a sufficient pool of capital for the strategy.
For emerging managers, there is a great opportunity to be a value adding investor for the operational set up.
How will sustainability and digitalisation shape Europe’s recovery from COVID-19?
Charlotte Ruhe, Managing Director, Central & South Eastern Europe at EBRD
Charlotte Ruhe
Managing Director, Central & South Eastern Europe at EBRD
Charlotte Ruhe is EBRD’s Managing Director for Central and South Eastern Europe, responsible for delivery of business and policy reform in 17 countries from Poland and the Baltic States to Greece. Central and South East Europe includes the Western Balkans and all EU countries of operation of the Bank, and accounts for more than one third of EBRD’s business. She was previously Director, SME Finance and Development, providing finance and advice to SMEs across 26 EBRD countries of operation. Charlotte served as Director for Croatia in Zagreb from 2005 to 2010. Prior to that she led the EU-EBRD SME Finance Facility as a Senior Banker in the Financial Institutions Team.
With a focus on Central and South Eastern Europe, we take a look with EBRD’s Charlotte Ruhe at how Europe will transition in its post-pandemic recovery, and the opportunities and challenges that will appear along the way that investors should be aware of.
Q. Has European private equity truly grasped the transformative trends of the future including ESG, impact, and all things green?
ESG incorporation into funds has been fundamental to the development of the PE market. ESG matters have “leapfrogged” in CSEE compared to US or even Western markets because the market was seeded by Development Finance Intermediaries. ESG considerations have been integrated into GP investment mandates from the start, with an initial primary focus on governance moving to social and environmental issues as the economy and business ecosystem has matured.
Q. How is digitalisation transforming the private equity industry in Europe?
Digitalisation was already a major trend pre-COVID-19, affecting the future of work and indeed all sectors. No doubt, there will now be an acceleration of this trend. There is no sector untouched by these technology disruptions, albeit with different levels of intensity, opportunity and risks.
Technology – especially digital technology – is opening opportunities to drive competitiveness, inclusion, green growth, integration and resilience. At the same time, technology is also disrupting the way sectors, businesses and consumers function and interact.
The performance of EBRD’s Equity Funds portfolio has proved remarkably resilient given the impact of the pandemic, notably because of the digitalisation embraced by fund managers and companies alike.
This is also a reflection of the fact that CEE is increasingly recognised for its strength as a tech hub and for the calibre of its tech talent. We are seeing a rapidly developing venture capital ecosystem and international exposure through, for instance, the IPO of the e-commerce platform Allegro in Poland and recent unicorns such as the communications platform Infobip in Croatia, the CRM developer PipeDrive in Estonia and the software developer UiPath in Romania.
Digitalisation was already a major trend pre-COVID-19, affecting the future of work and indeed all sectors. No doubt, there will now be an acceleration of this trend.
Q. Is the way forward to invest in secular trends?
The COVID-10 pandemic might act as a catalyst and accelerate the development and adoption of secular trends. Business are adapting quickly to the new environment of lockdowns and remote working in order to continue serving their customers while preserving their employees’ health and safety.
The pandemic has reinforced already existing trends towards online trade, delivery services, contactless/mobile payments as well as cloud services. Similar to most major crises, the unprecedented situation the world is facing calls for accelerated innovation. The proliferation of remote working will also be a major step towards a truly global labour market.
While we do not expect the pandemic to end globalisation, we believe it will lead to a different model of globalisation where a premium will be put on risk-mitigation and higher security. One example is reshoring, which will create new opportunities for economies to compete for FDI, but where the ambition to keep labour costs under control will boost automation.
Historically, infrastructure spending has formed part of stimulus packages and governments will attempt to kill two birds with one stone this time around, simultaneously stimulating the economy and improving sustainability.
What challenges will different sectors in Europe face post-pandemic? What will EBRD be focusing on?
We expect a further contraction before we return to growth, and the view is now that the recovery will be more fragile and gradual than initially expected because of the continuing health crisis and the slow and uneven rollout of the vaccine. However, we expect growth in CEE will be higher than in Western Europe.
The crisis will have longer-lasting and deeper effects. We aim to help our clients Build Back Better, through:
• Reshoring/Diversification
• Digitalisation
• “Tilt to Green”
Q: What opportunities do you see in Central/South Eastern Europe that’s unique to the area?
While economic growth rates are lower than in other emerging markets, so is the risk, meaning it has a place in a portfolio between developed and emerging markets.
To date, the EBRD has supported over 50 fund managers in CEE through more than 100 funds and in total over 780 sub-investments in CEE. Today, CEE-focused fund managers represent over EUR 700 million. These managers have returned EUR 1.9 billion to the Bank, and among those who have raised more than one fund, generated a pooled IRR of 8% since inception, and 12% on liquidated funds with corresponding gross returns of 17%.
CSEE is often overlooked among emerging markets globally due to the size of its opportunity set, its fragmentation and its growth rates. This is reflected in a relatively low investor confidence level and low private equity penetration relative to GDP. While economic growth rates are lower than in other emerging markets, so is the risk, meaning it has a place in a portfolio between developed and emerging markets (penetration is around 20-30% of what it is in Western Europe).
A less saturated PE market, with a low level of dry powder relative to developed markets, has meant less pressure on purchase prices than in the US or neighbouring countries in Western Europe. Moreover, GPs face less competition and have better access to proprietary deal-flow and primary deals, often straight from first-generation owners. Succession is an opportunity in a region where company founders from the 1990s are coming up to retirement. The region is converging with Europe, with a growing middle class, creating opportunities for consumer goods, services, and healthcare.
The EBRD invests with a double bottom-line target, following sound banking practices, but seeking to have a positive development impact in this region.
Interviews with...
Deep dive discussions with the experts
What's being discussed at SuperReturn Europe Virtual?
Our speakers joined us for a Q&A to talk about their field of expertise.
What's lying ahead for private equity in 2021?
Hugh MacArthur, Global Head of Private Equity at Bain and Company
What should private equity industry leaders keep in mind in 2021 and beyond?
Peter Plaut, Executive Director at Wimmer Financial LLP
How has venture investing changed in the face of the global pandemic?
Stefan Fällgren, Senior Investment Manager - Private Equity at Skandia Mutual Life Insurance Company
How risky is it to invest in biotech? Where are the opportunities?
Francesco De Rubertis, Co-founder & Partner at Medicxi
Institutional investors in the secondaries market: What does the future hold?
Dadong Yan, Portfolio Manager, Alternative Investments at MassMutual
How have institutional investors participated in the secondaries market historically and how has that evolved over time?
Historically, institutional investors such as insurance companies, pension funds, endowments and foundations, and sovereign wealth funds had limited direct involvement in the secondaries market, but rather participated in two main areas.
First, institutional investors provided a large sourcing pool for traditional secondaries transactions given the need or desire of these investors to rebalance portfolios or sell a handful of fund interests.
Second, institutional investors were a source of LP capital for many secondaries managers, providing the underlying dry powder to invest in the subsequent secondaries transactions.
Fast forward to the last number of years all the way to the present
Many large and sophisticated institutional investors started building internal teams to capture secondaries opportunities directly. Clearly that is a well understood trend, with examples across investor types and geographic locations.
Looking towards the future, institutional investors will continue to play a greater role in the secondaries market, except the avenue of participation will become more diverse. Many will continue to be LPs in commingled secondaries funds, while others will continue to pursue direct in-house strategies.
However, other institutional investors will take a hybrid approach and either partner directly with secondaries managers, or provide alternative capital solutions to LPs and GPs directly.
Dadong Yan, Portfolio Manager, Alternative Investments at MassMutual
What types of innovation can institutional investors bring to the secondaries market?
While I’m sure there is an abundance of innovation happening across the institutional investor landscape, there are two main categories to highlight.
1 Institutional investors are expanding their direct capabilities beyond simply purchasing portfolios of fund positions. Many firms have developed internal capabilities to provide highly structured solutions tailored for each specific opportunity, including NAV facilities or preferred equity. Going forward, these transactions can help alleviate a funding or portfolio rebalancing issue, while allowing for the original owner of the fund interests to retain the relationship and exposure to the underlying GPs.
2 Institutional investors will deepen their direct partnerships with secondaries managers and other GPs across private equity, private credit, real estate, and other strategies. For example, an institutional investor can help inject capital at the fund level to augment the investable dry powder for either defensive or offensive purposes. Furthermore, institutional investors can provide holistic solutions at the GP level to help asset managers grow their business, manage succession planning, or invest more in their own funds. While the nuances are abundant and the structuring is complex, bilateral partnerships between institutional investors and GPs will give rise to accelerated innovation.
To summarise, we are still in early stages of innovative partnerships between institutional investors and participants across the secondaries market. Many of these institutional investors bring not only a long-term stable source of capital, but also provide direct relationships, sector specific know-how, and structuring expertise to solve some of the most challenging questions facing the secondaries market.
Dadong Yan
Portfolio Manager, Alternative Investments
at MassMutual
Dadong is the Portfolio Manager of Alternative Investments at MassMutual. He is focused on bespoke investment opportunities and building strategic partnerships with alternative asset managers. Before joining MassMutual, Dadong was an investment professional with experience investing across the capital structure in both public and private assets at Blackstone, Altai Capital, and Coatue Management. Previously, he was an investment banking professional at J.P. Morgan in the Financial Institutions Group.
What does the secondary market look like today?
Jeff Hammer, Senior Managing Director and Global Co-Head of Secondaries at Manulife Investment Management
How has the secondary market evolved and where is it heading next?
Jeff Hammer, Senior Managing Director and Global Co-Head of Secondaries at Manulife Investment Management, walks us through the evolution of the secondary market and shares his thoughts on new developments in the market from GP-led deals to expansion into private credit.
Click the play button to watch the full interview
