In the Bain & Co. Global Healthcare Private Equity Report 2015, the prominence of early stage investments in the healthcare sector is a recurring theme, detailing how larger funds are continuing the trend of investing down market. Preqin’s Funds in Market online service tracks 99 early stage venture capital vehicles currently in market with a focus on the healthcare industry, either solely or as part of a wider industry focus; these funds are collectively targeting $7bn in commitments.
Early stage healthcare venture capital fundraising has undoubtedly been strong in recent years: 2014 saw the highest ever amount of capital collected for such funds, at $5.8bn. The largest of these vehicles to close was Founders Fund V, which accumulated $1bn in capital commitments, significantly exceeding its $750mn target. The fund focuses on healthcare IT opportunities alongside commitments to other technology-related industries, such as biotech. This fund is the largest early stage fund considering healthcare investments to close in over a decade, a potential indicator of the growing overlap of healthcare and technology investing. The recent boom in wearable healthcare technology is a prime example of this, and the growing movement towards integrated technology and data analytics in everyday life means that the healthcare industry is evolving. Investing early in innovative start-ups that set out to transform the way the industry operates could provide astronomical returns if successful.
So far in 2015, 11 early stage vehicles considering healthcare investments have closed, with aggregate commitments of $1.3bn in capital. The largest fund to close in 2015 YTD is Lux Ventures IV, raised by Lux Capital Management. The fund closed on its target of $350mn and includes healthcare, life sciences, medical technologies and healthcare IT opportunities within its investment preferences. Of the 99 vehicles currently in market, Domain Partners IX is targeting the most capital at $500mn. Once closed, the vehicle will focus solely on the life sciences industry in line with Domain Associates’ wider strategy of investing in innovative companies that seek to advance the understanding of human health.
Though the market continues to look positive for early stage vehicles that consider healthcare investments, it is worth noting that last year saw 45% of such vehicles close below target. This proportion is up from 37% in 2013, and represents the latest in a series of fluctuations in the proportion of vehicles meeting or exceeding their targets, as seen in the chart below. Significant changes were seen between 2010 and 2012, with 2011 the most successful year for fundraising, with only 20% of vehicles failing to achieve their target. So far, 2015 looks promising: 71% of funds closed have met or exceeded their target, a trend that fund managers will hope continues as the year progresses.
With high levels of dry powder leading to increased levels of competition for deals, early stage venture capital vehicles will need to be diligent in identifying lucrative opportunities in their nascent stages. Though a greater level of attention on the healthcare industry could lead to overcrowding among investors targeting the market, the boom in start-ups within the sphere that seek to completely revolutionize the way we approach all aspects of healthcare has opened up a wealth of opportunities for private equity investors.