WHY RISING INTEREST RATES ARE GOOD FOR THE HEALTHCARE INDUSTRY

Interest rates are the reward of deferring gratification, for renting out money that could have been spent today. Economists argue that when rates fall too low, grave consequences follow such as higher inequality and pain for savers. And since credit becomes uniformly cheaper, the riskiest borrowers benefit the most. Looser monetary policy also bumps up valuations of buy outs- particularly the ones relying on leverage- and prolongs the lives of zombie companies whose capital could otherwise be reallocated to more credible companies.

The glory days of 2021 saw global healthcare funding reach $57B of which $29B was invested into U.S. companies. This level of funding undoubtedly created outstanding companies, and even a few unicorns. But we can all agree that in 2021, many VCs flew too close to the sun by inflating both valuations and backing some companies with marginal selling propositions. With $1.4T of unrealized gains sitting in VC funds and close to 70% already marking down their NAVs (Net Asset Value), it seems that reality is beginning to set in.

Here is a look at valuation trends for the first half of 2022:

Seed Stage- These investments have held up better than any other stage to this point. The median deal size and valuations are still growing in 2022. Median seed valuation is now $12M roughly 33% higher than 2021.

Early Stage- This category saw a growth in deal size but a decline in pre-money valuation to $52M representing a 16% drop from first to second quarter 2022.

Late Stage- These companies have naturally been under pressure to justify their high valuations. The median deal size shrank for the first half with median pre money valuation dropping by 10% to $100M.

There is clearly a magnetic pull on central bankers to hit inflation targets and raise interest rates, adversely effecting public markets. Luckily, investor prudence in the private sector has started to mirror that of the public markets. History has shown that it takes 2–3 quarters for the private market to reflect changes in the public sector. In the scenario of continuing interest rate hikes, we applaud investors that practice restraint and discipline, allocating capital where it is best suited. This alchemy can obviously change if the $500B dry powder sitting on the books of PE and VC funds create an itch to play the lottery!