What's the difference behind European and US healthcare and life sciences funds?
Uli Grabenwarter, oversees EIF’s activities in Venture Capital, Impact Investing, and Technology Transfer, with EIF being Europe’s biggest Fund-of-Funds Investment platform in these markets. Previously he was responsible for EIF’s strategic development in the equity space and in this context has led the build-up of the Social Impact Accelerator, the first pan-European social impact investing fund-of-funds.
We are the largest venture capital fund of funds in Europe and our portfolio consists of 20% healthcare and life sciences fund investments, with the remaining 80% going to other sectors, predominantly to IT-related funds. We’re obviously Europe-centric, but we keep a very close eye on what is happening in the US, including around returns and performance.
We’ve seen a shift in our portfolio over the past 10 years. Over that period, returns from our European healthcare and life sciences funds outperform IT-related sectors, including on a cash-on-cash return basis. That might surprise some people. In addition, valuation levels in Europe are significantly more attractive, which has increasingly sparked the interest of US firms to invest in Europe.
The success stories in both regions tend to focus around companies that have reached unicorn status – and here, it’s clear that Europe is lagging in numbers. Yet that view isn’t the complete picture. US venture capital funds are much bolder in investing than their European cousins. Portfolio companies there reach the US$1bn+ mark much more quickly and have higher valuation multiples because of generous write-ups in successive rounds.
However, there is a particular observation we’ve made by following company valuations post exit. Unicorns in the US have difficulties in defending their valuations in an IPO or sale. Yet in Europe, they typically expand their valuation multiples significantly at exit and beyond. This is particularly true for the life sciences sectors and explains the attractive cash-on-cash returns our life sciences portfolio delivers.
This is because the healthcare and life sciences funds in Europe are, on the whole, much smaller than those in the US. This means they have to invest their capital in a much more conscious way. Given the scarcity of capital, company management teams also build value with less funding. What seems to be happening in the US is that inflated valuations at entry and then higher unrealised valuations in US portfolios are corrected by the market at exit.
The early-stage life sciences market is still underfunded in Europe – and much more so than IT, where the dynamics have shifted significantly over the past five years. I think that will start to change, although it is most likely that the gap of funding required will be filled by US and Asian venture capital funds as opposed to European institutional investors. That’s because there remains a poorly developed equity culture in Europe – there is still a heavy reliance on fixed rate instruments by institutional investors. This is why the equity capital markets are also underfunded in Europe, especially in the technology sectors.
Absolutely. If we can’t get our act together in Europe to provide funding for companies to reach their potential, it’s entirely natural for companies looking for the capital they need to turn elsewhere, especially if they are looking to grow on a global basis.
The fact of the matter is that the US is better equipped than Europe for capital raising and it’s better equipped for exit channels. We really need to get up to speed here in Europe.
Companies don’t need to relocate if they’re looking to access capital in the earlier stages. We’re seeing more US venture capital funds looking to Europe for opportunities – they can see the attractive valuations here. But US-based VCs will naturally leverage their US networks and exit channels for building values with their portfolios. So the question becomes more relevant at the later stages, at which point companies may be looking at a Nasdaq listing or a strategic tie-up with a corporate. It is here that Europe risks losing out and seeing its best companies re-locate in the US.
I expect there will be far greater attention to the life sciences sector because of the pivotal role it plays in fostering the resilience of our society. The current pandemic is only one dimension. At the same time, we will see the boundaries of life sciences with other technology sectors fall: AI, tech applications in preventive healthcare, big data technologies and others will play a key role in how we will go about diagnostics, drug discovery and therapeutic approaches in the future. To get there, we need a broadening of the VC community, especially in Europe. Europe, in healthcare, largely relies on a dozen of well-established teams which clearly is not enough to serve this sector.
