Schulz has been traveling the country for 10 years selling his ideas and gaining commitments from some of the largest hospitals systems in the country. His first two funds, founded in 1997 and 2001, respectively, are fully invested at approximately $75 million each. They have funded such healthcare household names as CareMedic Systems, which manages Medicare accounts receivable, and Passport Health Communications (from which HealthLeaders Media itself was created back in 2000), which offers tools to manage the healthcare revenue cycle. CareMedic has grown from 80 hospital clients to about 1,600, while Passport Health has grown from serving 40 hospitals at its founding to providing such services to 1,500 hospitals and 2,500 physician clinics and outpatient centers. Another company Schulz's funds incubated, Emageon, a manager of large volumes of medical images, grew out of research from the University of Alabama Birmingham and has grown from just a few hospital clients to more than 600 today.
More than money
Schulz's sales job to potential hospital investors has gotten easier over the years, he says, based on the funds' returns; his second fund is among the top 10 percent of all venture capital funds founded in 2001 tracked by Cambridge Associates. Schulz now has received commitments from 13 investment partners for a third fund with a goal of $125 million initial stake. "Most of our partners have a billion or so in investable assets," he says. "So the thought of making a $5 million to $10 million investment isn't too intimidating."
As for risk concerns, "We don't think it's that risky, but even if it didn't work out it wouldn't move the needle that much." The first two funds are on track to generate returns of 9 percent and 15 percent, respectively. Compared to the first two funds he founded, Schulz says the new fund has "moved up the maturity spectrum," and its companies "are almost all immediately relevant to improving quality and affordability of healthcare for our hospital and health system investors." The two older funds allocated as much as one-third of their capital to biotech life sciences companies.
The change in focus for the third fund came about, says Schulz, because biotech "wasn't as relevant to our partner investors," which include Baylor Health Care System and Cardiovascular Provider Resources, both based in Dallas; Valley Baptist in south Texas; the University of Pittsburgh Medical Center; San Francisco-based Catholic Healthcare West; Premier Health Partners in southwest Ohio; Newport News, VA-based Riverside Health System; Norfolk, VA-based Sentara Healthcare; MemorialCare Medical Centers in Long Beach, CA.; and health insurers Wellpoint Inc., Blue Cross and Blue Shield of North Carolina, Independence Blue Cross in southern Pennsylvania, and Horizon Blue Cross Blue Shield of New Jersey.
Even though the fund's investments might return fourfold, he says, the real payoff is not only the financial return, but also the benefits that can come from adopting the products and services of some of these companies. For example, CareMedic Systems, which was in the first fund's portfolio, offered a much better way of managing Medicare accounts receivable, he says. "If you can take 10 days off a large hospital system's Medicare AR, that blows away anything they could have possibly earned from their $5 million investment in our fund."
Schulz's investors are clearly sold. For the third fund, he has 13 partners, about half of which are return investors from the other funds. And smaller hospitals aren't frozen out; the smallest investment he currently holds from a partner in the new fund is $1 million, which is typically drawn down over five years and is most appropriate for hospitals with debt ratings of single-A or better.
The money is there
Opportunities are enormous for hospitals to get into this game. Moody's estimates that the 700 or so hospitals it rates have almost $125 billion in net cash and investments on their balance sheets. Much of that money has to be invested somewhere, and until very recently, many hospitals have placed the majority of that investment in relatively safe fixed-income type investments.
Until 2001, when St. Louis-based Ascension Health, the nation's largest nonprofit Catholic health system, started its first venture capital fund, much of the system's investments were focused not only in fixed income, but in traditional, safe equities. President and CEO Anthony Tersigni, who was chief operating officer of the then two-year-old system, formed a committee to look at alternative investments with the idea of applying the system's goal of transforming the healthcare system to its investments. "We looked at our portfolio where we were investing hundreds of millions of dollars in publicly traded companies that really aren't impacting healthcare," Tersigni says. "Why shouldn't we take a portion of our investment portfolio and invest in companies that not only will give us an investment return but also the potential to transform the healthcare industry and significantly enhance quality patient care?"