THE ANNUAL REVIEW 2010 - PEI Media

page 126 private equity annual review 2010
“Expect to see the completion of large sponsor-backed
IPOs in 2011 as solid fundamental performance will
replace deleveraging stories”
healthcare sea change
Dan Mendelson, chief executive officer,
Avalere Health
Private equity professionals wondered
last year just how the outcome
of the mid-term elections
in the US would affect the fate of
healthcare reform in the US, and
how that in turn would change
the private equity opportunity in
the sector.
“Full repeal of the Healthcare
Reform Bill won’t happen. That
said, dominance in the House will
enable Republicans to shape the
substance and pace of reform. Many important payment systems,
including rates for Medicare Advantage health plans, will be
modified through Republican engagement in regulation … the
implementation of cost control measures will continue.
“Reform is meant to create local health care delivery systems
that are more efficient and force a focus on healthcare quality.
Republicans will influence these developments but are unlikely
to disrupt them.
“Because of the changes, attractive investment opportunities
going forward included companies specialising in cost reductions,
evidence-based medicine and reimbursement management. As
government push cost and risk onto providers, there will be
opportunities for consolidation in local provider markets. Finally,
government reimbursement reduction has hit certain healthcare
sub-sectors disproportionately hard over the last few years. Many
of these sub-sectors have nowhere to go but up.”
nothing ventured
Ted Mott, chief executive officer, Oxford Capital
Partners
UK pensions are underfunded by some £2 trillion and need to
take a bit more risk – in terms of investing in earlier growth stage
businesses – to be in a position to benefit from great returns.
“Part of the solution is for UK pension funds to increase
their exposure to earlier growth stage businesses, often those
which are venture-backed by experienced professional teams.
European emerging companies are today on a par with the best
in the US or Asia. These ‘sunrise’ businesses have the potential
to deliver the huge growth which is unachievable from their
established ‘sunset’ cousins. Consider the likes of Autonomy,
Sage, Shire Pharmaceuticals and Vodafone, all of which were
venture-backed start-ups in recent years; businesses in which
pension schemes could have had earlier and more profitable
participation.
“For the majority of pension schemes, a small allocation to
venture investment could help to transform the fund’s future
performance. What’s more, it could also transform the fortunes
of the country, too; we need our best early stage businesses –
many of which are starved of cash – to be encouraged to grow,
to lift the economy out of the mire.”
watch the fund size
Mike Chalfen, partner, Advent Venture Partners Funds
often find they can raise more
capital than they had initially
planned, and while this sounds
like a good thing, general partners
should be careful not to fundraise
beyond their mandate.
“A fund that raises more
capital than it originally plans
might be forced by the sheer
weight of capital to look for larger
investments, possibly more than
an investee needs, probably at
higher prices, often in larger companies – in other words to change
their strategy. If that fund’s team has little experience of these
larger deals, deployment pace for the new, larger fund can be slow.
“This scenario highlights a conflict that is common across the
industry: does a GP’s asset gathering strategy (which drives fees)
distort the investment strategy (which drives returns)? It’s certainly
a question that any investor contemplating committing capital to
a private equity fund should ask.
“The top of the private equity market in 2006-2007 saw the creation
of too many bloated funds. The current private equity overhang is
clearly to be regretted for most stakeholders relying on investment
returns as opposed to firm income to create wealth.” n