Leerink Capital Partners recently raised a new $192 million fund along with Revelation Partners to invest in direct secondaries in healthcare companies. Scott Halsted, managing director at Revelation, explains the strategy and the current environment for healthcare secondaries investments.
Why did you decide to partner with Leerink for this new fund, Leerink Revelation Healthcare Fund I, considering that you had previously raised your own direct secondaries funds targeting healthcare?
This is a classic one-plus-one-equals-three situation. Revelation Partners and Leerink both provide services to the same types of companies, yet we each have unique strengths. Both firms are focused 100 percent on healthcare and working with companies that are the clear emerging leaders in their sector. By working together, we are able to offer a broader set of companies a more comprehensive set of solutions.
What types of healthcare companies do you target?
Leerink Revelation Partners (LRP) invests in all sectors of healthcare. Regardless of the sector, we are focused on companies that have relatively low technology and financing risk. We are looking for companies that can drive to an exit event in three years or less.
How do you help investors, and companies, with their financing needs?
LRP can provide an investor with capital around either a single company or a portfolio of companies. We can generally help in one of two ways. Either an investor needs additional capital to support their investment and they want to remain invested for the upside, or they would like to get liquidity today. In the first situation, LRP can step into the investor’s shoes, providing the capital directly to the company on behalf of the investor. In the second situation, we can purchase an existing investor’s position outright.
How is the current environment for investing in direct secondaries in the healthcare sector?
The environment for direct secondaries in healthcare is driven by the fact that, as a general rule, most emerging growth companies have taken far more time and money to achieve scale than the investors anticipated. As a result, these investors are often over-allocated to a single company and/or they lack the cash reserves to adequately support their portfolio.
LRP provides capital to these investors, enabling them to optimise their returns. An investor can take capital from LRP and leverage all the value they have already created in an investment without having to triage which companies to support and which to let go. These fundamentals have not changed in the last five years.
Within the biotech sector, the robust IPO market has provided a source of alternative financing for private investors, though this has not spread to other sectors such as medical technology. In the last twenty years, venture capitalists have invested over $120 billion in healthcare companies, and a great many of those companies remain private and illiquid.
Who are the main sellers of stakes in healthcare companies these days?
Less than half the time we are buying stakes outright. More often, we are providing capital to an investor to help them maximise their overall returns. That said, we are most frequently interacting with venture capital groups, former employees and founders.
Do you also plan on investing in healthcare fund stakes from LPs with this new fund?
The LP secondary market has very different dynamics and we find it less attractive. While we may structure a deal such that we acquire a position via an investment in a fund as opposed to a company, this is not our primary strategy.