Figure Out Your Cash, Cambridge Associates Urges Health Funds

For healthcare systems’ investment offices, the most pressing issue is staying liquid, according to new research from consulting firm Cambridge Associates.  

These institutions face pressure on every side amid the coronavirus outbreak. Revenue streams like elective surgeries have been canceled; the equities market has fallen; and shoring up with donations will soon become difficult.  

“Providing critical support requires an order of operations, starting with the most urgent actions to a stage where a health system can contemplate and plan for its future state,” according to Cambridge’s report, published Tuesday.  

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The firm’s healthcare team advises that investment offices begin with revisiting cash flow needs and sources and looking at both short- and long-term liquidity sources treasuries. Once they’ve sourced the liquidity necessary, these organizations can consider rebalancing.

“Last month, because of the disarray in the credit market, those accounts may have had some adverse performance,” said Jeff Blazek, head of Cambridge’s healthcare practice. Now things are stabilizing, but organizations should have conversations with their investment managers about whether they can tap those accounts if necessary.  

Some healthcare systems may draw down lines of credit now to ensure that they have liquidity when they need it, Blazek also noted. Even endowments may be up for grabs, according to the report. Investors should be willing to tap long term investment pools now and replenish them later as necessary.  

Of course, there are private equity secondary sales to consider, too. But Blazek views these as a last resort, as they can take a long time to execute. “Some health systems, if they have too many pressure points and they determine that they really need liquidity,” Blazek said. “You’d hope they have other options.” 

Once liquidity needs “for the next number of months” are met, healthcare systems should develop a plan to rebalance their assets to maintain their beta targets, according to the report. “With equities down 20 to 30 percent, if you want to rebalance, you’ll have to source the liquidity needed for a long-term portfolio,” Blazek said. “You have to make sure you have the liquidity you need to still manage the portfolio.” 

Doing so will likely include selling off hedge fund investments and bonds, and purchasing equities, according to the report.  

Blazek noted that previously, Cambridge Associates had written about stress testing healthcare systems. “I never dreamed that this would be the stress test,” Blazek said. “It’s simultaneous: a healthcare hit that’s tied to a market event.”