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Private Biotech and Health Care Funds Won’t Be Immune to a Downturn

A spate of recent health care and biotech-focused PE and VC fund closes may slow to a trickle. But certain subsectors — like telemedicine providers and pharmaceutical companies — could still see investments.

A rash of recent health care and biotech-focused fund closes has led to speculation that the sectors may escape a downturn in fundraising. Experts say they expect things to be a little more complicated than that.  

Although three biotech and health care investment firms — Arch Venture Partners, Flagship Pioneering, and Gilde Healthcare — announced fundraises totaling roughly $3 billion in the span of three days earlier this month, industry insiders say they don’t believe the trend will continue.  

“The pace is a little slow right now,” said Peter Cogan, managing partner at accounting and consulting firm EisnerAmper, by phone on Monday, adding that limited partners are “being cautious in deploying their money.” 

Alan Kosan, senior vice president at outsourced chief investment officer firm Segal Marco Advisors, said he expects to see something similar.  

“We will see private equity firms perhaps extend their investment periods,” Kosan said by phone earlier this month. “We don’t have to put out money tomorrow, but we can line up the capital.”   

According to Cogan, private equity firms are still optimistic that they’ll be able to raise capital.  

“We've heard in the private equity space that there is still capital flowing,” he said. “One of our big clients is expecting to close on a first round in very short order.” 

According to Kosan, private equity funds focused on pharmaceutical companies, telemedicine providers, and medical device manufacturers could be attractive investments.  

“On the health care side, if you’re deploying funds into anything that relates to telehealth, whether that’s device-based or not, you're going to see investment dollars flying out the door,” said Allen Wilen, a partner at EisnerAmper. 

According to Wilen, the move by insurers to pay the same rates for telehealth services that they do for in-person doctors’ visits may stick beyond the pandemic, which would transform the industry.  

“Once the genie’s out of the bottle, it’s hard to put it back in,” Wilen said. “Patients are going to enjoy it.” 

And there’s a newfound push to bring health care manufacturing back to the United States, Wilen added, which could open another opportunity for investment. 

It won’t be all good news for health care-focused private equity funds, however.

“There were a number of small funds that were set up to buy hospitals,” Wilen said. “They are in real trouble now.” 

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The cancellation of elective procedures, which are big moneymakers for hospitals, coupled with increased spending on coronavirus treatment, is causing problems for hospital systems. And the government isn’t likely to step in and help the private-equity-backed ones, Wilen said.  

“When it comes to winning or losing, I don’t see the government having an appetite for bailing out private-equity-backed hospitals,” according to Wilen.  

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