Trend-spotting during a global pandemic can be challenging for those of us not immersed in the world of alternative investments. The markets are less predictable, access to credit is reduced and some asset classes are just non-starters. Gareth Morgan (pictured), Senior Associate at Collas Crill, highlights one asset class that has seen little to no adverse effect – life sciences
Life sciences is an amalgam of sub-areas of the health sector, with exciting-sounding names like genomics, neuroscience, bioinformatics, histology and digital health.
It has been a growth sector over the past few decades, generally correlating with global expenditure on healthcare, which itself has trended upwards year on year almost without faltering.
An ageing population, particularly within developed countries such as the UK and US, has led to an explosion of spending on healthcare.
In the UK alone, total healthcare expenditure more than doubled in real terms, adjusted for inflation, between 1997 and 2018, topping £214bn in 2018.
The general consensus in 2019 was that the outlook would be for steady to modest growth over the next three to five years.
But there can be no doubt that the Covid-19 pandemic will have resulted in a significant spike for 2020 as both the public and private sectors invest not only in looking for a vaccine for this virus, but also in preventative measures for future potential pandemics.
Why invest?
From a purely economic perspective, why invest in the life sciences and health sector? A few key drivers are:
• The sector’s potential for substantial capital growth
• The benefit to the local/global community – for example, through new products or improved processes and adding to the overall pantheon of medical and technological expertise
• A lessened effect on life science companies by broader economic conditions than equities in other more traditional sectors
• To diversify or balance an investment portfolio
• To satisfy a demand for ‘high-risk, high-reward’ investments.
The last point is particularly noteworthy. The sector is indeed not without its risks. The types of investment being looked at are often companies looking to commercialise new, often bleeding-edge technologies and products they have developed.
As a result, relative to other sectors, there can be a lower-than-average success rate, and those that do succeed tend to do so over a longer period of time.
Tolerating this high risk can lead investors to high returns – whether through the individual success of the investee company or through the acquisition of some key intellectual property by a larger competitor.
However, investors will generally need to wait longer for those potential returns than the traditional ‘seven-plus-two-year-fund cycle’ – patient capital, as it is often referred to, is required.
Much like investing in environmental and social endeavours, besides the potential for significant profit, investing in life sciences is also arguably something of a moral imperative, with institutional investors increasingly considering it a key component of their broader portfolios.
Here in Guernsey, we have seen a significant uptick in clients coming to us wanting to set up life sciences investment structures, as incubators for new innovations, ideas and technologies and to invest in the growth of tried and tested products.
Guernsey’s protected cell company structure is an ideal vehicle for such structures. Originally created in Guernsey, the protected cell company has in recent years become a flagship investment vehicle, recognised and adopted in multiple jurisdictions around the world.
By operation of law, the protected cell company is a single legal entity able to create several separate and distinct ‘cells’ which, while not being legal entities in their own right, are capable of holding assets and liabilities.
The main selling point of the protected cell company – in the context of the high-risk, high-reward cycle of investing in life science projects – is straightforward: creditors of one cell will be unable to claim against or seek restitution from another cell (and that cell’s assets).
The resulting legal segregation of assets and liabilities between cells in a protected cell company allows the success stories to remain unaffected by those investment projects that never become viable.
If recent global events have taught us anything, it is that the need to invest in health, wellbeing and preventative medicines and technologies has never been more important, or timely.
With the right legal structure in place and a well-regulated jurisdiction to house these investments, we can help our clients to innovate, profit and succeed in these crucial areas.
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• This advertising feature was first published in the October/November 2020 edition of Businesslife magazine