We have witnessed another market crash in global stock markets and a highly polarised sectoral response, with significant recovery in some sectors and continued depression in others.
However, alternative assets such as venture capital can be somewhat decoupled from immediate macro influences. This is partly due to the nature of the business models that venture funds look to back. These often involve disruption to traditional models or looking for the opportunity that arises from macro influences negatively impacting traditional models.
In addition, by backing smaller, earlier stage companies, these can be more agile in their responses to negative market influences and find their growth niches more effectively, while larger competitors struggle, locked into their incumbent models.
Unlisted investments sheltered from the crisis
The impact of the pandemic on most unlisted investment portfolios appears, so far, to have been modest. For example, many of our private company investments in one of our funds are in early stage life science companies, and these have proven resilient despite short-term disruption from medical laboratories being closed and patients not being able to take part in clinical trials. Indeed, funding in these sectors remains close to near term highs. Other funds we manage are invested heavily in software for businesses and many of these are holding up well.
Over the long term however, there are plenty of business and market opportunities. The pandemic has resulted in a demand for innovation and technology in many sectors, to provide resilience and to service people and industries in their new ways of working. In particularly in software, on-line retail, healthcare and life sciences we expect there to be a lot of capital chasing that innovation over the next five years, whilst some sectors such as leisure, tourism and aviation will struggle and may never recover.
Life sciences and healthcare set to benefit
Covid-19 has resulted in a new way of working and this remote aspect will require improved and enhanced technology to drive it as the population becomes more home-based. We expect to see a massive uptick in the use of technology in healthcare service delivery, particularly in primary care, mental health and follow ups.
In life sciences, the way clinical trials are run will change at a faster rate than before, with the adoption of technology at a much greater speed, shortening sales cycles, and with a greater appetite to innovate and try new, more agile approaches; there was a case for using this technology prior to Covid-19, but now it is becoming a necessity. We have seen the acceleration of between three-to-five years of normal cycle adoption in barely two months, which is great if you are invested in those business models.
These trends are feeding into an overall trend for using technology in the healthcare and life sciences sectors. In the US this is leading to unprecedented levels of investment activity, where digital health investment during H1 2020, according to Rock Health, was at an all-time high of $5.4bn (£4.1bn) and looks set to be a record year.
Game changing investment opportunities
During this period of disruption, we are continuing to see a myriad of innovation coming out of UK universities renowned as the world’s leading research institutions, particularly in the arena of cell and gene therapies. These have been invested in and developed over decades of research funding, and so short-term disruptions, such as the recent pandemic, will have minimal impact on that flow in the long-run.
UK universities excel in life sciences and, in particular, standout on the global stage in high impact innovation in personalised medicines, a particularly strong current theme driven by the need and demand for highly tailored treatments. There are a lot of interesting technologies being developed, especially at UCL, from gene therapies for rare terminal illnesses or blinding eye diseases such as those developed by UCL Tech Fund investee companies Orchard Therapeutics (ORTX) or MeiraGTX (MGTX) to personalised cell therapies for previously incurable cancers.
There are world changing technologies emerging that have been worked on for the last 20 or 30 years, but are now coming to market. We are witnessing a confluence of technologies, building on previous work, and we are seeing the coming together of technologies such as Crispr gene editing, gene vectors and genomic sequencing, all powerful tools for precision medicine.
Prior to Covid-19 there was a lot of liquidity in the private market, with a lot of available ‘dry powder’, capital allocated to funds but not yet deployed. As public equities have crashed in value over the past few months many portfolios, with exposure to both public and alternative assets, have become automatically overweight in alternatives, since re-balancing these assets intrinsically takes time.
Many investors may therefore pause before allocating these funds back towards alternatives such as venture capital. However, some will see the immediate opportunity in high-demand growth sectors such as life sciences, digital health and software-based technologies and others will come back over the mid-term, as drivers such as low interest rates and volatile public markets, force investors to look to alternatives, such as private equity and venture, for their returns.
Andrew Elder is deputy managing partner at AlbionVC and manager of the UCL Technology fund