The US-based Ascent Group has launched the $100 million Ascent Medical Technology Fund II, a private equity vehicle to promote the development of the medical technology industry in the Middle East. This is the first fund of its kind in the region.
The Fund will provide venture capital in the region, as well as advance medical innovation and tap invention, manufacturing and clinical strengths in the Middle East, which is recognised as one of the leading emerging research markets in the world. The lead investor is the International Finance Corporation (IFC), a member of the World Bank Group.
Peggy Farley, one of the General Partners of the Fund, explained that the lack of venture capital opportunities in the Middle East had stifled the development of an internationally-viable medical technology industry.
“In the United States, a high proportion of GDP has historically gone towards financing entrepreneurs, physicians, engineers and start-up companies, and we will bring this expertise – and best practice framework – to replicate this success in the Middle East.
“Primarily, the Fund will establish a foundation for a medical technology industry in the Middle East that can compete in the USA and Europe.
“To fast-track this process, we will invest in American companies that have cutting-edge products and services, requiring those companies to use 50 per cent or more of the funds to operate or produce their product or service in the Middle East.
“We will also invest venture capital directly into the Middle East to develop new ideas that arise and create new businesses via the transfer of entrepreneurial know-how.”
Average ROI of 824 per cent
Farley pointed to the outstanding performance of medical technology investments – Ascent medical technology investments have had an average return on investment of 824 per cent year on year, against an average of 100 per cent from traditional equity and capital markets.
“One of the principal reasons for the high returns, beyond selecting outstanding technologies, is a history of successful IPOs from the US medical technology sector, which connects with a wave of IPOs currently being experienced in the Middle East,” she said.
Feeder fund registered in Bahrain
While the fund is based in America and is a Delaware Limited Partnership, Ascent Medical Technology Fund II has set up a sister company, Ascent Medical Technology Middle East Fund Company BSC, which will be a feeder fund registered in Bahrain. Investors can therefore choose to deal directly with the US-based fund, or the Bahrain fund company.
The Fund will have a 10-year life, though Ascent expects to launch another in three years.
A portion of the Fund will be allocated to installing the services required to develop the medical technology industry. These include establishing pre-clinical testing facilities, clinical research organisations, and manufacturing facilities that comply with worldwide regulatory and quality standards.
Transfer of industry know-how also involves a best-practice framework, patents and copyright procedures, increasing business transparency and providing a supportive regulatory environment.
Farley said: “By its nature, medical technology provides short-horizon investments with the potential for exceptional returns, so provides excellent opportunities from a financial point of view.
“However, the Fund will also be working towards the effective resolution of serious global health issues, particularly those that are prevalent in the Middle East such as diabetes and heart disease, through the creation of sustainable private enterprise.”
Jordan already has the potential to develop its medical manufacturing industry, which has made great strides, especially in the pharmaceutical industry, thanks to increased cost efficiency compared with markets such as the USA.
Middle East focus
Other key markets are UAE, Kuwait, Bahrain and Oman, where Ascent has already signed a memorandum of understanding (MoU) with Oman Investment Corporation, where both parties will co-invest in projects in the Sultanate.
Karl Groth, Ph.D., Farley’s Partner in the Fund, explained that the Middle East provided a commitment to healthcare infrastructure, as well as to high-tech manufacturing.
He said: “The region has a sound and liberal fiscal and regulatory environment, coupled with high levels of liquidity and growing local and regional financial and capital markets. The national governments are stable, and increasingly committed to free trade agreements with the USA, and provide a fertile investment landscape.”
High performance of healthcare funds
Healthcare is predicted to be the major driver of the American economy over the coming decade. The industry was responsible for almost $200 billion in worldwide sales in 2004, with approximately 40 per cent of that in the US alone. Products less than two years old – Ascent’s area of expertise – were responsible for 30 per cent of the total sales.
Groth said: “Medical technologies are less capital-intensive and have an exit horizon that is typically much shorter (two to three years) than that of pharmaceuticals.
“The sector has a high proportion of mergers and acquisitions, as major medical technology firms aggressively buy smaller firms to fill out their product lines and to achieve long-term growth objectives. Combined with a recent scarcity of venture capital in this sector, the opportunities – and returns - have increased exponentially.”
During 2001, there was serious retrenchment of funds flowing into venture capital, with a 63.6 per cent reduction worldwide, leading to a gap in adequate funding for many medical technologies.
With a slump in the world's economies leading to an increase in consolidation of businesses, employment and other production costs are reduced, leading to a correlating reduction in the cost of developing a technology. Now, the major economies are all poised for recovery, with the equity sectors of the key capital markets likely to advance dramatically as well.
Groth explained: “In the capital markets, publicly traded medical companies have demonstrated not only a defensive quality, but have shown price increases, at times dramatic, amid generally sluggish stock markets.
“The IPO markets, which declined in 2000, and were extremely slow through 2003, remained open for many medical companies. Moreover, the large medical companies continued, throughout 2001, 2002, 2003, and 2004 to make both large and small acquisitions, both to access new technologies and acquire market share.
“As a result, the profitable harvest of investments in the medical technology field, which is already predisposed to high returns through IPOs, is further facilitated by this environment.”
The Fund will concentrate its investment in the Middle East, specifically the Gulf Co-operation Council (GCC) states and Jordan. Initial harvests from its sister fund have already seen dividends of 240 per cent, and a third fund is likely to be launched in three years, when Fund II is 75 per cent invested.
