Examining Critical Factors for a Private Equity-Backed Health Care Community
ANN ARBOR, Mich.---Some areas of the country have been successful in cultivating a vibrant private-equity investment climate in health care and life sciences, while others have not.
A recent study by the University of Michigan Business School's Center for Venture Capital and Private Equity Finance reveals government funding, university technology-transfer activity and established venture firm infrastructure help to foster a productive private equity-backed health care community. Other relevant factors include the level of science employment and the amount of university life sciences expenditures within a state or region.
The research study, "U.S. Venture Capital and Private Equity Investment in Health Care: An Analysis of Trends and Critical Success Factors in Establishing a Venture-Backed Health Care Presence," was conducted by Neil Lesser, a 2003 MBA graduate, under the direction of David Brophy, the Center's director and associate professor of finance at the Business School.
With data collected from 50 states and the District of Columbia, Lesser measured the relative strength of a state/region from a health care private-equity perspective between 1997 and 2002. Three criteria were used for the measurement: the number of private equity deals in health care, the number of health care companies backed by private equity and amount of dollars invested in private-equity health care deals.
¿The current private-equity investment climate, while still reeling from a two-year collapse (2001 and 2002), has seen health care financings increase to their highest level as a percentage of total invested dollars since 1997," Lesser says.
In 2002, the health care industry represented 27 percent of all venture capital dollars, compared with only 10 percent in 1999 and 2000.
California and Massachusetts led their peers in terms of deal flow, venture-backed companies and venture dollars, which may be attributable to the large number of private equity firms and high level of investment in those two states. Excluding those standouts in some analyses, the study's findings show:
- An increase of $100 million in National Institute of Health funding is associated with the generation of 4.7 private-equity health care deals, the initiation of 3.7 private equity-backed health care companies and the increase of private equity investment in health care deals by $405,000 in the year the funding is received.
- The addition of a private equity firm that invests in health care deals is associated with the production of 5.5 health care deals, two health care companies and $47 million in private-equity health care investment over a six-year period.
- Each startup company launched through a tech transfer office is associated with the addition of two health care deals, nearly two companies and approximately $20 million in health care investment. Extrapolating from the effect of one patent, issuing four patents is associated with the production of one deal, one company and $8 million in investment funding.
- Adding 1,000 scientific workers in a state is associated with an addition of one-half of a health care deal and one-half of a private equity-backed health care company, but has no discernible relationship to the level of private equity investment in health care.
- A university life sciences expenditure of $100 million is associated with increased deal flow, private equity-backed health care companies and invested dollars.
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