Lucrative healthcare sector finds investors straddling public/private market divide

While some of the top performing hedge funds and wildly popular private equity funds in recent months are technology-oriented, many others are eyeing the healthcare sector as a place of exciting innovation. For one investment manager, Rod Wong, the past year and so far into 2020 returns have been robust. Indeed, hedge funds in the healthcare space have enjoyed a comeback. Wong’s firm RTW Investments manages $3 billion in the healthcare sector, where he says there are a relatively small number of leading specialist firms that focus on just private, just public or both public and private healthcare investments. In his search for innovation, Wong invests in both public and private companies. The $689 million RTW Innovations Fund, which focuses on medical breakthroughs across a multi-year timeframe, returned 49% in 2019. Wong’s roughly $2 billion flagship fund was up 46% last year and the promise for more growth looms on the horizon. According to the firm, innovation is accelerating particularly when it comes to drug development. The FDA approved 48 novel medicines in 2019, which was the third highest among of drug approvals over the last 25 years. Such trends undoubtedly are pushing interest in healthcare technology on the part of institutional investors as well. This past week, Charlotte, N.C.-based private equity firm Pamlico Capital announced its final close of its Pamlico Capital V at the firm’s hard cap of $1.4 billion in commitments. Part of its strategy is oriented toward the healthcare sector in North America. Some of Pamlico’s portfolio companies include: Chicago-based B2B company Becker’s Healthcare, emerging management services tech provider Digitech and remote patient monitoring company VRI. Company officials at Pamlico say that despite the ongoing debate of healthcare reform in the U.S., that the overall industry growth will likely continue due to the aging of the population, expanded insurance coverage and the desire for more personalized care. “We believe that this environment will create significant opportunities over the next decade for forward thinking business models that are committed to improving the quality of patient care, augmenting the efficiency and visibility of the overall healthcare system and lowering costs,” officials state on the company website. While Pamlico sticks to private equity investments, there a growing number of firms playing both the public and private portions of the healthcare field. Hedge funds D1 Capital Partners, Partner Fund Management and Perceptive Advisors are betting on technology to lower costs in the growing dialysis market as together they financed a company called Outset Medical, earlier this month. The $125 million Series E equity financing round was said to be used in supporting the commercial expansion of Outset Medical’s Tablo Hemodialysis System that is designed to reduce the cost and complexity of dialysis in providing a mobile dialysis treatment option for patients. "We believe in Outset's vision for technology-driven care delivery improvement, and Tablo's ability to disrupt the dialysis market," said Dan Sundheim, founder of hedge fund D1 Capital Partners and one of the lead investors. "With growing focus at the federal level on how to manage Chronic Kidney Disease, which is increasingly prevalent, we believe Tablo is the only device with the potential to transform the delivery of dialysis." It's a big market with more than 550,000 U.S. patients getting treatment several times per week due to kidney failure. These treatments cost roughly $75 billion annually. D1 operates on both the public and private markets spectrum investing in technology, healthcare, industrial and real estate sectors. In terms of providing a benchmark for investors, the HFRI Equity Hedge Healthcare index finished 2019 up 23.41%. Those gains helped equity hedge fund managers rank as the top performing hedge fund strategy last year with gains of 13.9%, which were the strongest gains since 2013, according to recently published figures from HFR.

Lucrative healthcare sector finds investors straddling public/private market divide

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