Over the last two years, COVID lockdowns have dealt on-and-off blows to economies worldwide. But once the pandemic’s effects on the financial system and economy fade, we are set to return to more slow-and-steady economic growth. We at Endeavour Vision believe that healthcare investors have an opportunity to look beyond the shorter-term pandemic-related and geopolitical volatility by investing in scarce, defensive, and uniquely sustainable growth that will remain well-rewarded.
To avert a lasting recession, central banks around the world, among them the US Federal Reserve, bought back assets at a historic pace and scale during the pandemic. This created unprecedented liquidity that enabled governments to deliver a range of stimulus measures. Crucially, much of this liquidity ended up in the hands of investors and consumers. In the US, consumers created a bona fide demand shock and emerged as a key driver of inflation. However, with inflation recently starting to outrun wage growth and the peak expenditure of the US holiday season behind us, this spending spree is bound to come to an end.
Throughout the pandemic, we’ve also seen unusually low US labour participation on top of higher hiring demand. But while an ageing population is the main long-term structural driver of this shrinking workforce, the pandemic also created several short-term challenges to the American labour market, such as workers taking time off to care for their families during lockdowns or taking early retirement following an investment windfall. We expect some of these effects to ease during the year.
We are looking for structural growth to return to favour
As economies were brought to their knees and an abundance of freshly printed money entered circulation, the last two years saw investors favour expensive growth stocks, creating the perfect playground for companies with novel, transformative, often unproven business models. However, with the – transient – bounce back in economic growth and looming interest rate hikes, the premium on such stocks has started to fade. Instead, investors have in late 2021 and early 2022 been favouring value stocks—cheaper shares that only appreciate when the wider economy is on the up. With investor expectations on interest rates settling, the US consumer cooling off and geopolitical uncertainty adding a potential brake to economic growth prospects, we will be looking for investors to turn back to defensive, structural growth investments. Especially in a medium-term environment in which the US and other major economies are likely to return to structurally underwhelming economic growth in the low single digit percentages with astoundingly few higher-growth companies to go around. In fact, only two sectors consistently generate the significant structural growth that investors tend to favour in such contexts: technology and healthcare.
As healthcare investors, then, the key question is: where can we find the best structural growth opportunities in this sector?
How healthcare delivers structural growth
Ageing populations are driving increases in chronic, expensive-to-treat conditions such as cardiovascular disease, cancer, and diabetes. A classic example of structural growth. What is more, healthcare cost inflation has outpaced economic growth for over a decade – which means that healthcare innovation occurs not just despite, but because of spiraling costs. This adds sustainability on top of the structural nature of healthcare growth.
This has never been truer than in the wake of the pandemic, as healthcare budgets are cut rather than increased. And current challenges to the sector are not just financial. Labour shortages are also a growing concern. Healthcare workers have been quitting their jobs by the hundreds every month, disillusioned by the ebb and flow of COVID hospitalizations and the harsh reality of the pandemic.
Investing in innovation
The challenge of scarce labour is precisely what some of Endeavour Vision’s portfolio companies are tackling head-on, including IntelyCare, to name just one. IntelyCare is a tech-enabled staffing company and one of the flagship investments in our latest fund. The company helps post-acute care centres in the US overcome the difficulty of rapidly sourcing qualified short-term staff in a way that puts the needs and preferences of nurses at the core of their matching algorithm. This technology-led approach has enabled IntelyCare to successfully fill shifts at two to three times the rate of traditional staffing agencies, reducing costs by allowing more patients to be cared for outside of expensive hospital settings.
We think that the need to overcome staffing challenges, reduce costs and increase efficiency in the healthcare sector will remain front and centre. In addition to existing investments, we therefore continue to look for additional opportunities in this area. For example, could the labour-intensiveness of clinical trials be addressed by using technologies such as sensors, smart devices, or new diagnostic platforms to replace centre visits with data collection in subjects’ homes? Elsewhere, might we take a more holistic approach to caring for people with chronic diseases by replacing the handholding of healthcare workers with digital tools? Or could we, by moving closer to a healthcare approach in which patients are also consumers, empower people to take more responsibility for their own health? What better way to help reduce pressure on the system’s financial and human resources?