But rather than entrust the $125 million it earmarked for such investments to an outside firm such as Health Enterprise Partners, Ascension decided to go its own way. Ascension's 10-member investment committee recruited venture fund veteran Matthew Hermann as managing director of the new fund, Ascension Health Ventures. Hermann built a team of six investment professionals to ferret out infant companies that provide a benefit to the hospital by improving care quality and improving the patient care experience.
AHV is fully invested and includes more than 20 companies, one of which is Aethon, a manufacturer and seller of hospital courier robots that has achieved a 200 percent compound annual growth rate since its founding in 2001. Based on the success of the first fund, Ascension and Hermann founded a second fund, AHV II, last October, which has $200 million in investment capital. More important, Hermann says, is the fact that the fund also attracted two other large Catholic healthcare systems, Denver-based Catholic Health Initiatives and Newtown Square, PA-based Catholic Health East, as charter partners.
"A traditional fund is focused on one thing: financial return," says Hermann. "Today we have three limited partners that are focused on two things. They want a return, but they also see the strategic value of what we can bring."
Those benefits could include providing an early window into innovative companies that have solutions they expect to sell to the hospital systems themselves. "We can be a partner to help these companies perfect their solutions so that when they do come to market they will be most beneficial to our patients, hospitals and clinicians," Hermann says. "That way we can influence and direct where R&D dollars are being spent in the healthcare arena."
A major goal of the direct involvement of these huge health systems in incubating early-stage healthcare companies is not only return on investment, but also improving the quality and efficiency of healthcare services. "Every person within our limited partnership base is tasked with figuring out how clinicians can spend more time with patients," says Hermann.
In fact, that's one reason Ascension invited other healthcare giants into the fold when it was forming AHV II. With other investors aboard, "we can look at expanding the universe of innovators and really stimulate clinical innovation," Tersigni says. "We need to collaborate and compete-sometimes in the same markets. We have 106,000 employees and the other partners have similar to that, and among those 200,000 employees we have a bunch of mentors. We can stimulate them to think of solutions that I'm not thinking about as I sit here."
Ascension continues to invest in funds of funds and maintains other safer investments, of course, but the system sees the venture funds as having more upside than most of their investments. "I remember asking Matt, 'How quick do I get my $125 million back?'" Tersigni jokes. But AHV is anything but trivial to him. The funds are set up as a separate wholly owned subsidiary, and even compensation is different from that of the health system to make sure the fund is able to attract the most competent and seasoned investment team.
"We made a conscious effort to say, 'Matt, don't let the organization hold you back from what you are trying to do.' The healthcare industry has often taken great things and made them not so great because we've applied a hospital mentality to it," Tersigni says, offering examples of hospitals running nursing homes and physician practices, largely unsuccessfully, in the late 1990s. "We took viable entities and made them run less efficiently because we tried to operate them like hospitals," he says. "AHV had to be out there by itself and not encumbered by the operations of Ascension Health."
Important to the success of both Ascension and the investment group is a "Chinese wall" of separation between the AHV team, its captive companies and the management at Ascension, who decide what solutions or products best help the hospitals achieve their goals of better patient care and greater efficiency.
In addition, the companies that AHV's funds invest in are screened based on Catholic teachings and guidelines. Before AHV can make an investment, each company must complete an investment questionnaire that is reviewed by Ascension's ethics department. "That's a unique risk to our business," says Hermann. However, the investment team at AHV gets comfortable with other risks similar to other venture funds.