Strategic LPs: A New Approach In Corporate Health Innovation

By Lucy Parkinson, Director of Research, LSN

Many major corporations seek to be involved in new health innovations—not just pharma and healthcare players, but also large firms in other industries such as tech and telecoms. Traditionally, the role of large corporations in the healthcare innovation economy has been primarily to act as M&A players as well as development and distribution partners. Many corporations also have corporate VC arms that can engage with companies at an early stage, before M&A would typically occur.

Corporations also make financial investments, and LSN Research has increasingly heard that corporations are seeking to put those financial investments to a strategic purpose. Corporations that are limited partners (LP) in a private equity or venture capital fund are seeing a strategic opportunity in these investments.

It’s nothing new for a corporation to invest a portion of their capital in a PE or VC fund. However, in the past this was generally seen as a matter of achieving ROI. Recently LSN has spoken with several venture capital firms that are now specifically focused on working strategically with corporate LPs. These include both new firms formed to act on this strategy and also established firms that have recently raised a new fund solely from corporate investors. The VC then focuses on opportunities that are strategically relevant to the corporate LP; in some cases, the LP may be involved in the due diligence process, or may offer a potential post-investment relationship with companies that could benefit from the corporation’s particular niche expertise in development and manufacturing. The VC stake can act as a bridge between the corporation and the early stage portfolio companies, giving the corporation exposure to new technologies in its field of interest.

So what’s the benefit of this strategy to the large corporations?

• Efficiency and flexibility. Building a strategic corporate VC arm is a difficult task. Acting as a strategic LP in a fund may be much easier for some firms.
• Diversification. A corporation might invest in several different funds in order to reach geographically diverse research hubs or to access different industry sectors. For example, a corporation based in Asia might seek a stake in a fund that will look for investable biotech startups in the USA, or vice versa.
• Finally, it’s possible that as a fund LP, the corporation can keep its healthcare strategy and investment activities somewhat shielded from public view.

Due to these factors, major corporations are increasingly using their LP stakes as a supplement to their innovation sourcing activities. It’s now one of many ways for a corporation to build connections with healthcare innovators at an early stage and to look for potential future partnership or M&A targets. On the other side of the coin, many VC firms are eager to build close strategic ties with a corporate LP in order to achieve exits from their portfolio.