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Exclusive Q&A: Mark Barnard, Managing Director Of Private Investments At Howard Hughes Medical Institute

by trusted insight posted 2years ago 9883 views
Mark Barnard is the managing director of private investments at Howard Hughes Medical Institute's endowment. Mr. Barnard is responsible for the management of a $5 billion private investment portfolio. Previously, Mr. Barnard was associate director of real estate at MIT and worked in urban planning and development in both the public and the private sectors. Mr. Barnard holds a BA in Urban Planning from the University of Cincinnati, a master’s degree from Harvard University and has completed course work in finance as a special student at the Sloan School of Management at MIT.

Mr. Barnard was recently named to Trusted Insight’s ranked list of the Top 30 Healthcare institutional Investors. He graciously spoke with Trusted Insight on Dec. 10, 2015. The following interview has been edited and condensed for clarity.

Trusted Insight: Let’s begin by talking about your educational background and how it has led to where you are today. I see a logical progression: degrees in urban development and land planning, then you managed MIT’s Cambridge real estate portfolio and now you’ve extended your investment scope beyond simply real estate into private equity, venture capital and commodities.

Urban planning is an unconventional area of study when compared against the totality of the institutional investor universe. Surely that’s been beneficial with respect to the real estate portion of the portfolio. How has your background helped or offered a unique perspective with regard to the other areas of the portfolio?  

Mark Barnard: It was a very long and logical journey. I managed not just MIT’s Cambridge real estate with a team, but also their real estate investment program in pretty much the same format as private equity: long-term, closed-end funds and illiquid assets. So I really had two roles there.

The progression from real estate to private equity was pretty straight forward. When I came to Howard Hughes Medical Institute, I was asked to help build a real estate program, but with the understanding that I would be a generalist and was very interested in being part of the private equity effort. I have spent probably 80% of my time on private equity since the turn of the millennium. There are common threads in investment - market analysis, how the opportunity works, capital structure, people - so it wasn't a major jump. It was like learning two Romance languages, rather than starting over. 

I got a very broad-based educational background, most of which focused on the fact that if you're close to the finance source, you have more control over the outcome. And I like that. 

Trusted Insight: Has your real estate background given you any particular insight that you might not have otherwise gotten if you were from a traditional finance or MBA background?

Mark Barnard: I don’t know how to compare the two, but I've never felt that I've missed anything by not having an MBA. I was always focused on getting things done, even in the planning part of my career. I wanted to do things that actually got built or put in place as opposed to just being on paper, so I was always interested in execution. I would say if anything, I don't get lost in a spreadsheet. I know that there are a lot of other elements that go into a successful investment. 

Trusted Insight: Tell me about the Howard Hughes investment team and what sets you apart from your peer institutions.

Mark Barnard: It's a very small, cohesive investment group of about 15 investment professionals. We have an integrated investment effort, so we speak across asset classes on any particular idea or market opportunity, whether that is long-only, hedge funds, real asset or private equity. I think the integration really helps.

We have specialties in the sense that each of the managing directors here manages a specific asset class, whether that is global equities, distressed assets, fixed income, or in my case, private equity and real estate. We talk a lot and share perspectives. We have a terrific relationship with the board and the investment committees. 

Finally, we have tremendous longevity at the senior level here. I think the five managing directors have roughly an average tenure here of 15 years. I think that continuity of talent has really made a big difference. We're collegial, and we've known each other a long time. There's a lot of mutual respect, but also rigorous discussions about how to approach any market opportunity.

One of the things that incentivizes people here at Howard Hughes Medical Institute, and the investment team particularly, is our mission. It's been very successful; we have employed 25 Nobel Prize winning scientists over the long term. One of the reasons people stick around is not just the positive nature of the intellectual environment here, but because people like the mission of the institute. Everybody cares for the reputation of the institute in a really sensible and important way. 

Trusted Insight: This is a tough market to navigate on the public and private side. Tell me about the portfolio and how it might evolve to adapt.

Mark Barnard: First of all, we support 100% of the spending of the institution. The sole source of support here is from investment earnings. I think that gives us a different view about risk. Volatility is not our friend because our business is to employ top-notch scientists in biomedical research with long-term research projects that are not easy to turn on and off. So we have a slightly different risk profile than some of the other endowments.

I would say that the portfolio is positioned more defensively now than it has been in a while. We have added to our hedged equity program and are at the lower end of our long-only exposure. Within that, there are a lot of strategies that are trying to create alpha. 

There are few easy opportunities anywhere right now. There may be some coming in the debt markets due to the stress in mining and energy. We still have the majority of our assets in alternative investments. We have some strategies that we think can create equity-like returns with less volatility, and some where we expect higher alpha, but are overall still defensive.

Trusted Insight: Technology has successfully disrupted some industries to the point of saturation, but healthcare has remained relatively untouched. In what stage of the life cycle is healthcare technology and healthcare ventures on a spectrum of infancy to saturation? How do you see that developing?

Mark Barnard: Healthcare is a broad industry sector, ranging from areas that require a lot of technology to some that don't, so it's hard to characterize it in total. However, I would say that technology’s penetration of the healthcare industry is probably at a teenage stage. 

Innovation has been around for quite a while, whether that's in the device side, communications and technology or managing data, and I think it's accelerating. The industry needs to find a way to do things faster, cheaper and better. The pressure on society for healthcare costs are severe, and so there's a lot of places where technology could really make a difference.

The hindrance to some of the technology applications, at least at the bedside, has been adoption. The medical community can be slow to adopt new technologies; they need to make sure that they're proven and reliable first. However, if you look inside a hospital now, there are less people running around with clipboards and paper than there are with iPads. That's a great thing, particularly if it helps in communication between patients, caregivers and doctors. That's an area that can really get some traction, particularly if some of the new regulations and the Care Act drive a need for efficiency and a goal toward lack of return visits. Long-distance communication between patients and doctors, in terms of bringing care to remote areas, is also likely to accelerate over the next few years. 

It's a very complex industry. Anything technology adoption can do to make it more transparent would be a good thing. 

Trusted Insight: As far as healthcare investing goes, are you investing more on the venture capital side or private equity? Or does it depend on the opportunities as they arise?

Mark Barnard: We approach these things broadly. Within private equity, it really depends on the sector. We’ve learned that biotechnology and drug development is tough in early-stage venture. There has been a migration from firms that were doing early-stage healthcare, particularly in biotechnology and drug development, who have struggled and subsequently tried to move up the life cycle and be later stage. There is now a dearth of capital for early stage development because of that. 

It's helpful that organizations like Howard Hughes Medical Institute support very early-stage science ideas, not for commercial benefit, but just for the sake of science. The NIH, Wellcome Trust and many other organizations continue to support basic research. Growth capital has had some success in private equity healthcare and there are some long-only biotech managers that do very well in the public space, so it really just depends on the strategy and what your risk appetite is. 

I do think that early-stage venture capital has struggled in the area of healthcare. You've seen it unwind a bit with the device sector and with early-stage venture firms becoming more sector agnostic. 

Most of the innovations in healthcare have very long life-cycles, and you've got to have the right capital structure and patient capital to apply in order to be successful. The time factor really makes early-stage venture investing in healthcare, particularly drug development, difficult. I think it matters what sector you're in and what your risk appetite is. There's a lot of different ways to approach it.

Do I think there is a bubble in healthcare startups? I would say no. Healthcare startups have been overshadowed by the unicorns in social media and other internet and e-commerce based investments. Healthcare is the poor step-child. It's harder to find early-stage capital for healthcare startups now.

Trusted Insight: Does this present an opportunity from your point of view if healthcare is being pulled down with the rest of the venture capital market on the basis of an impending bubble?

Mark Barnard: I wouldn't say that early-stage venture in healthcare is overvalued at all. Certainly, late-stage biotechnology or biotechnology in the public markets may be over-valued, and indeed the sector has seen a recent correction as people begin to talk about drug pricing practices. That pressure's going to remain, and we'll see what happens. 

However, early-stage biotechnology is wanting for capital, and usually when that happens, it's not necessarily expensive. The issue is that you have to be willing to have the patience and the capital structure to stay with early-stage venture in the healthcare space for quite a while. I think the time frames have gotten a little more compressed than when we began in the 2000 era, but it's still a very tough place to make money. There is an opportunity; you just have to be willing to take the duration.

Trusted Insight: Where are you looking for sustained growth geographically?

Mark Barnard: If we just use GDP as a factor, the developed economies are growing more slowly. Typically, we like the U.S. in private equity, also pockets of Europe. However, private equity is very well funded at the moment and prices remain high. Good for sellers, tougher for buyers.

India is growing at a pretty good clip right now. It may outpace China near term, but you have to be willing deal with the risks of investing in the Indian market. You have to hope that you can convert that macro- to a micro-level investment return. The same applies to China. There are pockets of growth in the emerging economies; you just have to be convinced that you can convert that into a risk-adjusted rate of return that's better than anywhere else in the developed markets.

I don't think there's anyone screaming "buy" in any of the geographies. We are still focused mostly on the U.S., Europe and those areas that we know well. Within those, we're just looking for pockets of differentiated opportunities. 

Trusted Insight: What trends have you identified in the market of healthcare investing?

Mark Barnard: The most notable attempt we made on a strategic level was to invest in biotechnology around the 2000-2001 era. We felt that would be the decade of success in biotechnology. There was a very large inventory of compounds in clinical trials, a lot of unmet need and a demographic trend that all supported a supposed success in following drug developments through trials to launch and sales.

We invested quite heavily as a team into that sector in the early 2000s. There were good management teams available, so all the planets seemed to be aligned. I think we were entirely correct - we were just 10 years too early. All the things we thought would happen then, have happened in the last 10 years, particularly in the last five years. I think that's just the nature of that business. It's hard to get the timing right.

What we learned during that process is that if you can get it right, you can get rewarded, but you have to be patient. We have found places later on in the life-cycle of biotechnology that have been more rewarding, particularly on a risk basis. When we went later in the life cycle of the drug development process and looked to the public markets for companies that had good science but struggled to get financing, we found places to make investment returns that were more compelling. That was a very specific trend that we spent time identifying.

More lately, we've been looking at services and technology in the growth-capital space. We haven't done as much as we would like yet and the sector is pricey, but I still think there's some opportunity there. You may get less than a venture return, but less than venture risk. 

Trusted Insight: What challenges does Howard Hughes Medical Institute and the broader healthcare investment industry face, other than timing?

Mark Barnard: We’ve learned that it's very hard to time any market investing in 10-year closed-end funds. You're bound to miss or get the cycle wrong. So if you've identified the right people and the right sector, you have to stick with it. I think that's a challenge that everybody faces, particularly private investments and certainly in venture capital. You can't just pick the right fund. It's particularly difficult when you want to change your allocation approach. You can't flip a switch and sell those stocks tomorrow and redeploy it without significant cost.

I don't think we face any unique challenge against our peers. It's a crowded market, there's a lot of capital and prices are generally quite high. Quite often people assume that we invest in healthcare because it's part of our corporate mandate, but that’s not the case. Howard Hughes Medical Institute supports biomedical research as a philanthropic mandate, and it's been a successful program. We invest in whatever we think can create a rate of return to support our science effort. We try to avoid any cross-over because we want the scientists to believe that they're working purely for science and not for commerce. We have no real mandate to invest in healthcare. We do it when and if we think we can make a competitive risk-adjusted rate of return.

Trusted Insight: What about the context of foundations in general, what challenges do you face in that regard? Do you find the lack of incoming cash-flow as a challenge?

Mark Barnard: We don't have a particular focus on current income. I think the challenge we all face is that it's a very crowded, well-funded market. It certainly doesn't feel like a moment in time that has tremendous upside, but it’s all relative. You have to deploy capital in the current slower growth environment, in investments that are going to survive. We may have the advantage of being a bit more nimble given our structure and relationship with the board. 

Trusted Insight: What does it mean to you to be at the forefront of new technologies, both on the investment side and on the research side at Howard Hughes? The geek in me wants to get giddy about all the cutting edge technology being developed for medicine. Does that happen to you, or do you try and keep a calm demeanor and a business-minded approach to investments?

Mark Barnard: You've got to do both, right? You want to get excited about an opportunity. You want to think it has scalability and has great promise. You want to believe it's really going to be something that, if it's successful, could address a large market and be profitable. It’s important to not only think it's cool, but that it has a chance of being the best practice or the standard of care or the next major technological innovation. I think that's incredibly important, but you've got to keep a business-minded, analytical, thoughtful head about you so you don't get carried away with the concept and just invest on the basis of a thesis and concepts. 

Over the many years I've been doing this, I’ve been excited about a lot of different things that you just look at and say, "Wow, that's a really great idea!" or "What a novel approach!” Now, we've seen investments in novel approaches and great ideas that have been investment failures. At the same time, we've invested in pretty common, ordinary businesses that have been home runs. You have to be careful when you’re excited about something to also ensure that it makes economic sense and has a high probability of success from an investment perspective. At the same time, don't give up on businesses you don't think are sexy, because there might be an unmet need or a new market or there's something that will spur top-line growth, and it will be a great investment. I think it's a blend of both.

Trusted Insight: One of the goals that Trusted Insight has is to not only connect LPs and GPs globally, but to foster the next-generation and to help accelerate their careers. If you could offer one lesson that you've learned in your career as an institutional investor, what would that be?

MB: It’s important to pay attention and be very analytical about anything you're doing. However, you shouldn’t give up on your instincts, particularly as you gain more and more experience. I don't believe that you can simply live in data spreadsheets. Using your gut and your brain in some appropriate combination is where I've found the most success. Numbers tell you a lot, but they don’t tell you everything. I think you have to be very dimensional about how you look at things. Use both sides of your brain.

To learn more about the top-tier institutional investors, check out Trusted Insight's list of Top 30 Healthcare Institutional Investors