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Why is a pension fund investing in high risk digital health?

Some big news in the digital healthcare space this week. Europe’s largest telehealth player KRY has raised €140m in a Series C round led by a Canadian pension fund. But hang on: institutional investors have always favoured a safe bet and regular dividends. So why are they suddenly investing in disruptors?

The Ontario Teachers’ Pension Plan (OTPP) invested through its recently formed Teachers’ Innovation Platform (TIP), which was created in April 2019 with a focus on “late-stage venture and growth equity investments in companies that use technology to disrupt incumbents and create new sectors”, according to its website. KRY is its second investment: the first being Elon Musk’s space exploratory venture SpaceX.

The Canadian pension funds have been interested in healthcare services for nearly a decade. OTPP was apparently interested in buying Synlab back in 2015. The Canada Pension Plan Investment Board (CPPIB) has been Orpea’s largest shareholder since 2013 and PSP Investments holds a 6% share in Korian despite selling about half its shares in July 2019. Quebec-based CDPQ bought a minority stake in France’s largest lab group, Biogroup-LCD, in October 2018.

But the latest investment in KRY is a bold move that’s nowhere near as safe as the examples above. KRY lost €20m against €22m of sales in 2018 and has committed to investing in product innovation, seemingly ignoring profitability for at least the short term. TIP has said it’s taken the bet on tech as insulation against potential trade wars and any upcoming global economic turndown. KRY is unlikely to offer significant dividends any time soon, meaning that TIP is either in it for the long long long long term or at least expecting a public offering in the next few years for a return on investment.

It’s an extremely high-risk investment for a pension fund, albeit a modest one given its total assets, but it might not be the last. CPPIB also has a tech fund and said at the end of 2018 that it is planning to invest between $500m-$1bn in venture capital funds, CDPQ has a dedicated $250m fund just for artificial intelligence and OMERS is investing in a €300m European fund.

Also, remember that Middle Eastern institutional investors have been looking at start-ups for a while: Abu Dhabi’s Mubadala has a $400m fund for European start-ups and Saudi’s sovereign wealth fund PIF was the lead investor in Babylon’s latest fundraising round.

It’s a sign of confidence in digital health across the board. The pensions fund will be looking for their share value to increase if the companies aren’t in a position to pay out dividends because of the losses. We suspect it could be the signal for these digital health groups to take to the public market over the next few years.

See our story on KRY’s fundraising round here.

 

 

 

We would welcome your thoughts on this story. Email your views to Rachel Lewis or call 0207 183 3779.