How Family Offices Should Approach Investment in the Life Sciences and Healthcare Industry

How Family Offices Should Approach Investment in the Life Sciences and Healthcare Industry

The fundraising landscape for healthcare and life science companies has changed dramatically over the past several years. Entrepreneurs and business owners in these industries need to look toward emerging categories of investors to provide the funding that was historically serviced by venture capital firms (VC’s). Corporate venture funds, angels and angel networks, government agencies, and foundations are all actively investing in these sectors and represent newer, non-traditional avenues for raising capital. However, the latest growing trend is the participation of family offices.

What is a Family Office?

Family offices are entrusted with the money of wealthy individuals and families. There are two types of family office: single-family offices (SFO’s), in which a group of financial professionals manage capital for one family, and multi-family offices (MFOs), which invest on behalf of a number of client families.

In the past, family offices have invested in alternative assets, such as VC’s and hedge funds as limited partners. Some SFO’s have formed family investment vehicles that invest as closed VC or private equity funds, while others utilize direct private placements to place a portion of the family’s wealth.

Why have Family Offices Shied Away from the Healthcare Sector in the Past?

Lack of Domain Expertise And Increased Risk

On the whole, families don’t like putting their money into risky ventures. Pharma, biotechnology and medical device development and commercialization are traditionally perceived as very risky areas – not just because of their inherent volatility, but also because of the high level of expertise needed to make sense of whether or not an opportunity is worth investing in. Quite apart from the fact that most of a family office’s wealth will be kept in stocks, as opposed to more illiquid forms, the direct investments that families go for will tend to be in lower risk areas, such as real estate. The family offices that are still interested, but who lack in-house expertise to properly understand the science and business case in healthcare and life science investment opportunities may also choose to invest in a VC-run fund, in order to spread risk.

Family Offices Want to See Impact of Their Investment in a Shorter Time Frame

Ttypically, ater stage investments are met more favorably than earlier stage companies in this cohort of investors. Basic research takes a long time to deliver new treatments to patients, and wealthy families want to see the impact of their investments in a shorter time frame. Based on our Life Science and Healthcare Practice Group’s experience, we believe only 10-15% of family offices consider investing in life science, and will lean toward the later stage opportunities.

Family Offices Tend to Be Secretive and Avoid Publicity

We believe a lack of accessibility of family offices is a big barrier to greater family office investment into life sciences. Opportunities are generally not paraded in front of family offices since entrepreneurs and business owners rarely know of family offices or have deep connections to this investment group. Relationships and warm introductions are a major factor in getting in front of family offices.

Why Should Family Offices Consider Investing in the Sector?

Despite the large majority of family offices (>85%) that avoid investment in the space, the healthcare and life sciences sectors are still seeing an uptick from progressive family offices for a variety of reasons:

  • Unmet need. Several family offices choose to specifically invest in a particular area of unmet need; often a disease that has affected members of their family, such as Alzheimer’s, cancer or cardiovascular disease. Their personal interest drives investment choices.
  • Legacy. Some specialist family offices are often willing to invest in riskier areas if there is potential for involvement in the creation of major disruptors in the form of novel therapies. Families take their legacy into account as well as the potential for financial gain.
  • Evergreen fund. In many cases, any profit made via an investment in life sciences is recycled back into the area of research in an evergreen model. This acts as a form of philanthropy, and also has numerous tax benefits for the family office.
  • Control. Direct investment in life sciences provides the family with a much greater level of control than investment through a VC fund.
  • Avoiding public market risk. The trend towards direct investment is in part due to the market crashes in prior years, when many family offices lost huge sums of money invested in the public market by their registered investment advisors. Investment in illiquid assets is one way of lowering this added risk factor.
  • Passion. Direct investment in life science companies allows families to work directly with scientists who share their passion for advancing unmet medical needs.
  • Outsourcing expertise. Outside consultants who see the potential and have the expertise to perform due diligence within these sectors are actively directing and inviting family offices to this space.

Explore Your Options

The global healthcare and life sciences industry is one of the greatest sources of innovation available today. Life science research has resulted in scores of breakthrough therapies and new methods for the early detection and treatment of disease. The current healthcare and life sciences markets represent a unique opportunity to invest in companies at varying stages of development and risk but with large reward potential.

If you run or are affiliated with a family office and wish to learn how you can get more involved in investing in this space, please contact our Managing Director and leader of our Life Sciences and Healthcare Practice Groups David H. Crean, PhD. here. We can provide additional insight and connect you with groups that can reduce your risk and increase the probability of impact and success.





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