Government Pensions Move Towards Direct PE Investments in the Healthcare Space

5 Feb

By Danielle Silva, Director of Research, LSN

Government Pensions have been investing in private equity funds for decades, but have now been increasingly moving towards direct investing into companies over the last couple of years. Like family offices, government pensions have suffered over the past two years because private equity funds have by and large displayed discouraging performance. It no longer makes sense for government pensions to continue to pay these managers fees if they are unable to help these pensions attain their mandated return targets. For this reason, government pensions are moving towards direct investments because of their familiarity with the private equity and co-investment space, and are moving towards investing in the life science sector due to the current nature of the M&A space within the sector.

Government pensions have long-term investment horizons. Historically, they have set high percentages for their target asset allocation to private equity funds due to the long-term nature of these investments. Recently, however, many have re-assessed these investments, and since many pensions have dabbled in co-investing in the past, and usually have seasoned private equity specialists in-house, a good number of pensions have moved towards direct investments in order to achieve a better ROI than they would gained through indirect investments in private equity via a fund.

Pensions also have increased control over investment selection by making direct investments. Through direct investing, pensions also have greater transparency regarding how a portfolio company is doing financially. Pensions are thus able to quickly come in and make changes to a struggling company in order to make it profitable again, whereas if they were investing in a company through a fund, they may not know about the financial issue, or may not find out about the situation soon enough to make changes that would rectify the situation. The end benefit is the increased transparency that direct investing affords government pensions helps them to more easily reach their targeted return rate.

Government pensions have been attracted to the life science sector for a number of reasons: One of the most notable reasons is the potential for a large exit; companies that government pensions are acquiring could be great potential merger or acquisition targets for pharmaceutical or large medtech companies. Government pensions, along with many other new investors in the space (such as family offices) have recognized this, and have increasingly started to allocate to the space.

Government pensions are also longer-term investors who have a longer investment horizon than other types of investors and larger allocation sizes, so they have the ability to bring a product from the discovery/development phase all the way to market.

The trend in the space has been towards larger government pensions moving towards direct investments in the sector, because these types of pensions have teams internally that have private equity experience and have had experience with co-investments in the past. Many smaller pensions typically use consultants who chose private equity funds on their behalf; many of these pensions have not yet begun to invest directly within life sciences. Larger government pensions it seems will continue to ramp up their direct investments in the life science space, and perhaps as smaller pensions begin to see the benefits of this strategy, they too will start investing directly in the space with the aid of their investment consulting firms.

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