• Health systems will continue to see margins compress and investment pools will need to do more to support on-going operations, sustain long-term asset growth, and fund retirement benefits for systems with defined benefit retirement
  • A strategic, diversified approach to venture investing the illiquid components of hospital operating pools, endowments, and defined benefit pension portfolios presents opportunities for consistent, sustained asset growth.
  • Multiple venture investment strategies exist and a one-size-fits-all approach can result in poor outcomes.

Margin Pressure Not Going Away—Implications for Hospital and Health System Investment Pools

It is no surprise health systems persistently face downward margin pressure—pressure from rising patient costs, increasing wages and insurance costs, expenses associated with defined benefit plans, and an increasing number of Medicare and Medicaid beneficiaries entering into the healthcare system. Industry consolidation and new competitive threats just add complexity to the mix. We often hear from industry investment and finance professionals that such downward margin pressure presents many nuanced and challenging considerations in terms of managing hospital and health system investment pools. How do you balance needs for liquidity with the need for long-term asset growth? Maintaining too much liquidity can limit long-term growth and ultimately impact system credit ratings.

However, the inverse, high illiquidity, can result in similar ratings downgrades and spending limitations in the short-term. Health care investment professionals need to consider multiple liquidity profiles in portfolios to reduce and manage both time horizon risk and illiquidity risks.

Investing in Growth Assets to Sustain Long-term Operations

While there are many broad asset allocation considerations that should be weighed, a thoughtful and diversified approach to venture capital across investment pools’ illiquid allocations can help by providing differing cash flow profiles while delivering the potential for significant long-term asset growth. Access to top managers in this asset

class is crucial, and as the venture capital asset class matures, sub-strategies are evolving that align more toward varying risk and return objectives of institutional investors. In an asset class where all managers are not created equal, and investing in the benchmark often means negative outcomes, understanding the landscape of venture strategies is critical. As it pertains to health system investment pools, significant opportunities exist to apply diversified direct growth and expansion stage venture investing, secondary venture investing, and multi-strategy venture fund-of-funds investing strategies to achieve portfolio asset growth.

Illiquid investments are part of the health care investing landscape. Per Moody’s, systems rated from BBB to AA have median alternative allocations ranging from 6% to 27% for higher rated systems.1 Based on an institution’s unique circumstances and investment requirements, a spectrum of venture capital and growth equity solutions may prudently be considered. In addition to liquidity requirements and asset growth objectives, the overall size of the investible pool of assets and the size of the allocation to the asset class will frame appropriate venture strategies for consideration.

A large institutional investor with higher than average allocations to venture (assume>= 10%) may possess a large investment team able to conduct due diligence on direct venture fund investments. In this case, the investor may consider their ability to access top performing managers. In venture, the investor can be severely punished for picking the bottom quartile, and at the median the investor likely is not making money net of fees.  For  the  twenty  year  period  ending  September  30,  2013,  top-quartile  venture capital funds have exceeded the returns of the median quartile by over 2,700 basis points.2 The top quartile managers are disproportionately responsible for positive economic outcomes. The ability to invest with and alongside the historically best performing managers is a key consideration when thinking about a direct venture investment allocation.

For health systems that do not possess a large investment team or dedicated staff to conduct fund due diligence, another consideration is working with a venture investment solutions provider whereby the institutional investor can leverage the trusted relationships, access, institutional knowledge and investment staff of a partner with deep expertise in the asset class to navigate the manager and venture-backed company landscape.

An investment with a venture solutions provider could take the form of a venture multi- strategy fund-of-funds which invests in venture funds, directly in venture-backed companies, and secondary or tender positions in companies and funds. The multi-strategy fund-of-funds approach may be considered as a core allocation to the asset class as a means to gain exposure across top tier funds and companies throughout the venture eco-system and as a means to mitigate investment risk and smooth J-curve exposure throughout the life of the investment.

Satellite or single strategy exposures may be considered as a means to generate additional portfolio alpha and align investment time horizon with portfolio liquidity needs. For example, secondary strategies, both in funds and directly in companies have the potential to distribute capital back to investors at a faster pace than traditional direct strategies with longer investment time horizons. With secondary investments, the investors are purchasing fund or company interests from existing shareholders often at deep discounts to par. Over the past five years, the venture sector has averaged secondary discounts ranging from 17%-25%.

Direct investment strategies (direct standalone investments or co-investments into venture-backed companies) can serve as a powerful alpha generator. However, the risks can be substantial. Information, access and experience can significantly impact performance outcomes. Sourcing and assessing opportunities possessing the potential to deliver outsized returns is nuanced and requires deep relationships across the venture ecosystem and knowledge of the market to gain access to, successfully select and underwrite direct deals. For this reason, institutions with limited staff may consider working with a partner to gain access to and select high potential direct investment opportunities. Through a partner relationship the investor may discuss risk/return and investment horizon requirements to assess appropriate mechanisms to invest in a direct strategy. Furthermore, a venture partner relationship has the potential to offer a peek over the horizon into leading edge innovations in healthcare IT which may offer strategic insight to the institutional investor’s health system.

In Summary

  • Venture capital has the potential to offer differing cash flow profiles while delivering the potential for significant long-term asset
  • Illiquid investments such as venture capital are part of the hospital and health system investment landscape and can be a valuable means to support portfolio
  • The risks can be substantial, and investors should consider their ability to access information, knowledge of the market, experience investing in the asset class and the appropriate venture capital investment
  • Top quartile venture capital managers have demonstrated the potential to deliver strong net of fee

For additional Greenspring Associates Insights, please visit our blog or contact us at:

1 Source:

2 Source: Venture Capital performance from Venture Economics. Venture Capital Performance represents returns on funds formed between 1993 and 2013, excluding more recent returns so that immature investments do not influence results. IRR represents annualized numbers. Data as of 9/30/2018.

This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for any investment decision in any private investment fund or other vehicle managed or sponsored by Greenspring Associates, LLC or its affiliates, or for any other investment decision.  Recipients are recommended to seek independent legal, financial and tax advice before making any investment decision. The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction. Information and opinions presented have been obtained or derived from sources generally believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. Any forward-looking statements, predictions or projections are subject to known and unknown risks, uncertainties and other factors which may cause actual results or occurrences to be materially different from those contemplated in such statements. The views contained herein are as of the date written and are subject to change without notice. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from Greenspring Associates, LLC.  The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.

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