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How Healthcare CIOs Are Investing Capital Through a Public Health Crisis

2021-03-02

Paget MacColl, co-head of the Americas Institutional Client Business within Goldman Sachs Asset Management, shares takeaways from GSAM’s annual healthcare diagnostic, which surveys CIOs of nonprofit healthcare organizations and hospital systems. MacColl is joined by Stefan Strein, chief investment officer for the Cleveland Clinic, who talks about managing a portfolio through a public health crisis and why he’s particularly excited about the investment opportunities in tech and ESG. 

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanged. Goldman Sachs will be discussed, means curly, shaping markets, industries in the global economy and Jake Seaward Colbert of corporate communications. Here at the firm today with special episode willing to talk about the health care industry from an asset management perspective and how large Their institutions and corporations are thinking about deploying capital in this year. So to do that were joined by Stefan Stride, chief investment officer for the Cleveland Clinic alongside PET, but call who is co head of the Americas, institutional client, business within Goldman Sachs Asset Management or Visa Stephan in pageant walk into the programme thanks to transferring ass good. Twenty twenty without major year for changes in the health care industry Padgett from an asset management perspective. What were the two
conversations you had with healthcare clients, as were looking ahead to twenty twenty one sure. So let me start by just providing a little bit of context when we say our healthcare clients were specifically talking about non profit, healthcare organizations and hospital systems and the? U S, envy approximately six thousand hospitals in the? U S about half of those are part of a nonprofit health system and the top ten distance account for about thirty percent of all non profit hospitals in the? U S. So these are organizations that serve tens of millions of patients each year. There all some of the largest employer, so there actually be largest environs. Sixteen states Cleveland clinics a good example about the large superior in Ohio and in many other states there are top three employer so at these organs, decisions are plans are specifically the investment officers who are charged with managing longterm pools of investments as
was pension plans, insurance pools and oftentimes short term liquidity collectively These teams manage more than a trillion and assets and then ass. My incoming returns generated from these investments, help support the operations of the hospital and they might find medical research as well, so in any given year, the returns from these investments bury, but they can be very significant. So in some years their multiples of bee revenues generated from operations this past year at the start of the coded pandemic, we saw elective surgeries, grind to a halt. This is where hospitals receiving- to their revenue, and the sea time. Many of these hospitals, depending on their location, were also facing increasing expenses, so they had personal protection let me give the EU they may have been ordering ventilators or providing additional staff. So these investment pools of capital are very important. These organizations, in terms of maintaining the health of these organisations,
spend a lot of time. This past year talking to clients about how to optimize returns. We talked to them about how to do that in a way that didn't introduce more rest, the portfolio given all the volatility in the markets throughout the past year and alone, same lines. We also talked to clients a lot about managing liquidity to withstand short term operational challenges so person, you did a survey recently of sea ice in the industry, and you published this healthcare diagnostic in you're, trying to understand how they might think about capital this year. What with some of the key take away from that diagnostic and as a time to some of the focus here, as you just talked about sharing this is our third annual diagnostic and we had forty, two chief in an investment officers and treasurers respond. The diagnostic and generally, there were three main aims. I came out of the diagnostic, so the first I would say, I'm the investment friends asked allocations, actually remained largely system with the prior year. I think some of that decision,
to mention the resilience of the portfolios that these investments are built, but they do continue to focus an alternative investments, particularly private equity. In private credit, and we all the saw improved sentiment around hedge funds. Second, I would say in terms of market outlook, no surprise. Respondents were more bearish last year than they had been in the past, so we saw a number of them cited concerns around not achieving return objectives with me zero interest rates. That's no surprise. They also cited concerns around recess in which we had not seen as much in the past, and then we did see continued concerns around operational pressures and the third theme that came up was involved mental social and governance or yes, G and we saw significant increase in the number of respondents shoe have implemented he s g in some way and their investment programme. So this past year, fifty percent of the respondents reported implementing yesterday in their programme. That was up from twenty nine percent two years ago, thanks
TAT its Stefan straight to get you here and Debbie join us today, and we can talk, spinning Finally, about how I see all the major health care organizations thinking about investing decisions, but before you do that, but stepped back for second, this clinic celebrating its hundredth anniversary this February. give us a little overview. What was a mission most founded? What's the matter today how to bobbed and how does that inform how think about investing decisions for thanks very much for the introduction and thanks yet in the entire health care team, for your work on putting out the healthcare diagnostic every year, it's a terrific tool. So a little bit about the cliff and clinics mission. This year, Jake, as you mentioned, were about celebrate our hundredth anniversary. At the end of this month, we were founded in nineteen, Twenty one year in Cleveland as a nonprofit, grew practice with a mission to care for the sick and to improve patient care through research. Energy we remain a community assets with no owners. Investors restock quarters
any and all of the funds from operations are invested back into the health system to fund new research and education. In this does and continue our long standing charitable efforts some, samples of our mission and action and how the investment office and investment pools support. These efforts include for the fiscal year, two dozen nineteen, which represents our community benefit. Is how we sort of make health care available for all community residents, educate the next generation of health care professionals and fanatical research. We ass. She spent one point, one six billion dollars on community efforts in that fiscal year. We don't have the Taliban What do you want a yet? But my guess is it's gonna be even higher. We invest an operating, an employee, owned, Evergreen cooperative laundry and are using our economic resources in this case word services more than nineteen million power.
of laundry a year to build a stronger local economy. Here in North EAST Ohio, not expansion, no dad cooperative enterprise brought more than hundred new employees to that organization. And, finally, we're. Expanding access to care and advancing medical research include a new research innovation centre that we ve just opened up in Florida, where we have our second clinical hub. We have expansion of our clinical trial efforts at the Louvre Centre for Brain Health in LAS Vegas were opened. A hundred eighty four bed hospital in London next spring and finally, we have expanded to a new cancer centre and right the centre at are facility in October, so a little bit about their investment office. Worse, one simple for three different tools that support the mission in very different ways: we have a long term investment pull, which is approximately eighty five percent of our capital, a traditional defined benefit pension plan and a captive or folio, which is essentially a portfolio that manages the offshore
proprietary, insurance, company assets that we have. We also have an advisory role on the oversight of this annex two fine contribution plans which have grown quite large over the years. So but that's a massive operation in global and scope. How do you think about allocating capital at this point in time? It does what Padgett said about the trends that they picked up in the diagnostic ring. True fur, an organization like yours, so in area diagnostic. It felt like I was really my own internal reports were absolutely aligned with the results of the diagnostic, we're operating in investment portfolios for a service based business. That's boy am oriented and has extraordinary fixed costs and margins. They get dinner every year, We never turn away a patient, and so we also provide a lot of charity care. Liquidity became critically important this year, as you mentioned in your opening as waste, The hospital emptied out in a very short period of time and no new patients coming in.
That scenario was not in any risk model that we had attempted to look out previously and one of the things that we ve done. Is to pursue a more separately mash accounts and our law term for which, as the balance sheet capital and while all investors donor gotta do that. We ve been advantage in that regard and had implemented ass, an age where we can so that we can minimize the impact of decisions of other invest There is on our assets. The other benefit is that we have seen vaguely more transparency and position level detail to feed into our proprietor risk system levers from us amazed that also helps us connect to define it. Those are the enterprise. Personally, I think the return assumptions have to come down from where they ve been in the past decade, you really can have treasure yields where they are, as pageant mentioned, spreads compressed still missing. Dream levels and generate the same return for the institution that expected before, so petitions with a conservative investment strategy lightly. Cleaving panic had to take on either substance
three more risk to get that same return or for the enemy a period forecasts lower absolute returns and they'd otherwise expect to receive from those same ass allocation- and this is the sky, now we ve been having with our own again your leadership team and with our investment committee, both of whom, very engaged in our management of the portfolio and recognise that the balance sheet driven portfolio that supports so many different parts of this global enterprise, care simply ramp up the risk of the portfolio in order to achieve an equity like return that its historically earned from its long term investments cheaper, interesting, a big challenge with tenure, tragic one percent too, as you think but the next phase of the clinic and how you gonna meet patients needs, as the vaccine becomes distributing, hopefully returned to something a little bit more like normal, whatever of innovation and investment are most focused on. So seeing a lot of opportunity and the application of a pie and machine learning for health care, and that is coming
from both our venture capital and our private equity partners, but also comes from other sources around the portfolios. Well, so over them Ten years, the clinic develops of some fairly extraordinary capabilities in a sigh, and they were really on full display during the crisis for But we were able to model the spread of covert nineteen communities as small as a few square blocks, which enabled us to prepare for the provision of care. Mary, was going to need, as the global crisis spread the Billy. apply. I M out of patience and disease is really going to be very critical for humanity going forward, but applying it to our business processes will be the difference between a system that has a positive net margin in the future and one that find it increasingly difficult to stay independent today I am now may be one of the distinguishing factors which health systems survive in the coming year, and which do not its critically important to success.
clean advocate in the transition from a feed, a service to bundle, payments and population how the ability to enter into shared revenue risk models it where we proactively manage the health of an entire community it really require There's a lion and I'll tools and applying these technologies to data feeds will help us do everything from a Dennis. I patients who need unplanned intervention to prevent costly, regrettable readmissions to effectively manage patients with chronic conditions and and then to effectively navigate the electronic or medical records to ensure efficiency. Kpi Tran, such as an uptake an average length of stay on a certain hospital or even a floor of a hospital or to implement robotic process, automation too many The data entry functions at our revenue cycle management colleagues have historically perform annually and they ve been under a sort of its color warp speed this past year, as everyone went to work from home,
actually, I've always taken a holistic approach to my work, so creating intentional intersections with the innovation that emanates from the portfolio. Companies funded by our venture capital in private equity partners to the institution comes Naturally, to me it's one of them, Mary Value, added of in House Investment organization that really can't be replicated by any the third party relationships- and personally I find it very great Fine, when our doesn't partners provide technology near portfolio companies that can be applied to the various aspects. Of our enterprises, especially when we might have had to otherwise try to build that ourselves and not found something as commercials. We can buy from an innovative market disruptor one of the best pieces of it. by that I received when I was first story. This job five years ago came from my good friend Jason Climb A memorial swung Katherine, who, I believe, also probably participated in the health care diagnostic
but he told me to make sure that we have people on the team to handle special projects, because at a healthcare institution, there's gonna be a lot of him and he was right. We build that capability into the fabric of our investment office. And for the past several years are one of the key outputs had been managing the connectivity of our investment partners and portfolio companies with the key clinical leaders and researchers who are advancing health care. little back so seven Paget mention that the diagnostic picked up that yes, she was increasingly a big focus for ceos in this space. How do you think about that? The Cleveland clinic assume what we ve been involved with the Esta emission, investing personally myself for fifteen years now, and the implementation of Yes G is really increasingly important to the successful returns and so his mission based investing as a tool. That is true
are increasingly using to drive aspects of their mission that can't be achieved through traditional most. I think that's what Padgett Data really concludes that, like has spent the last year to review what it means to be an anchor and such should in all of the various communities that we serve and that's going to. result in a very different kind of engagement, and we have had, in the past its critical component. that is really impact, investing and with g and not dissimilar to diversity. Inclusion are investment office, really to align, with what we're doing as a global enterprise and not just as a stand alone. Investment office weave existed for about five, now as an investment office inside the chronic, but in relates to diversity. Inclusion efforts has been at the centre of our hiring practices and with our manager selection from the very beginning of our inception in twenty twenty, conducted our second by any old diversity, inclusion survey of our american partners and the result we're very encouraging? I think that when you see
with the land that diversity inclusion is a critical factor in your success First, the inclusion analysis is embedded in the due diligence process there is, we'll work their way into the portfolio this year, we added to our process by creating a statement of purpose for diversity. Inclusion work, as well as for very simple goals, of which we can share with our US partners. They understand the foundation of why we believe DNA and, to a larger extent. Yes, she is and and why were holding ourselves and them accountable for those results, Nancy Interest, A virtuous circle how you can learn from them companies even vested in Padgett. What are you watching in the months ahead. In terms of how institutions steffens reassess or rethink their allocations in a post, faxing world, so Jake, I don't see any small scale changes and how health care chief, investing officers, will invest
in a postcard bitter horseback seem world, but much like Colbert has accelerated number of trends in healthcare. Tell him. SAM and other things like that are good examples, but it's also accelerated other trends in how investment genes evaluate and lessen strategies and how they operate. So One evolution that was already under way, but certainly has been accelerated, is specifically seeing investment. Tens incorporate yes, Jizo, so environmental social governance, but also in diversity and inclusion factors in their diligence process. So we now have a lot more data around that our seeing greater standardization, crossed the industry around how to measure these factors so that its last June, and it will continue to lead to a greater understanding around the influence of these factors on an asset managers ability to generate sustainable returns. I think there is one thing that will change and that will ultimately impact investment decisions. The other shift
we will see, is how investment teams operate so step and mention this operating in our mountain buyer. But, like all of us, we ve had to adjust the virtual world, so through the home or other platforms and stuff and his team and other teams we keep hearing from our clients that they have to figure out how to communicate effectively, is achieving better make sure they can effectively evaluate diligence, new managers, annual investment opportunities and their challenge. a they come along with bad, but they are managing through I think that will impact decisions going forward close our little better. My personal angle, the viewer sort of sit at the intersection of finance and healthcare and most people. we're all consumers of healthcare, don't think too much about the finances of health care on a daily basis, but this past year showed us how important it is that all Main medical institutions are strong and vibrant, particularly faced big challenge, a big healthcare challenge, so Stephanie
your interest in health care and investing come from, and how did you end up in a position like the one you today? That's really and quite an interesting full circle as well. So the road to Sir, my current position here, the clinic is really come. nation of a couple of ants throughout my life no proper, really early age, I always had a fascination with investing and shortly after graduating from college, I found myself working and nurse stage a sector, the venture capital business and for about fifteen years. I practice there and seen early stage as a journalist, venture, capitalist and then about fifteen, years in one of my limited partners called me about a new opportunity to join a large private foundation that was selling down its legacy stock in a single company to create a new global portfolio of alternative investments, so I thought that was pretty fascinating, and I migrate over the DAS alligator, which gave me a much broader set of asset classes in which to invest, but in working for
some driven organizations. But now the last fifteen years it's been a great personal challenged to connect the investment programme. with a mission that organization as simply not enough to deliver a strong investment returns to the organization. Our team is part of a girl, we're healthcare enterprise and we're frankly, have the duty to use the insights to come. within the organisation to drive our investment and to bring those innovation and network that reside in our portfolios to meet the clinic, a stronger organization, healthcare side, there are really two connections that drew me here. First is that experience and I had my first venture capital funds, which I mentioned, invested in healthcare. And then there's just a tremendous opportunity, as I see that for innovation and health care, and I saw that of my early twentyth to venture fund. I thought this would be a really interesting place to be for the next decade or two of my career
and the second really was that a member of my family, who was discovered to have very advanced cancer, was misdiagnosed by opposition here in Ohio. This was many years why worked here by my found out her diagnosis and prognosis? I knew that she happened to be in close proximity to Cleveland, but I can I insisted that you get a second opinion here and ultimately she was treated here, but the Cleveland flag. Her life was saved by a truly amazing oncology team at the clinic and she is still walking around today. thanks to their heroic actions. So in a way on here today, because it is a large and exciting portfolio to manage to great professional challenge to envision and recruit a world class team to build out a multi billion dollar portfolio from scratch,
another with established our selves. A kind of feel I had the opportunity to deliver investment returns is gonna, find innovation and world class healthcare for the next generation of patients. Like my family member, experienced, that's very cool talk a little bit that extensive building you took battle world class team, building up a team and bringing both partners. And people even best in the community members into the invest relationship the Sioux building. Team has been a really exhilarating and frankly and exhausting experience, but there is really no effort that all undertaken pay, more dividends and creating a culture of engagement and continuous professional development that attracts the high performing people to a teen. So the focus on, though in it It was really on generating cognitive diversity across every position and function in the organizational charred, and we have achieved that really by recruiting people here very intentionally, so this they too tenants to our model. Everyone has an opportunity to work across the portfolios. Generalists and
Everyone on the team has an equal voice at an equal and our decisions Everyone, I believe on the team is a future ceo in various stages of professional development, and I want people to stay with us for a long time, a decade or more as low staff turnover. is one of the primary keys to high performing a dozen and teams, and so therefore we try to give them as diverse experiences they can possibly have here we encourage investment partners, with the business of the clinic to get engaged as well. We send out fairly regularly communications and our performance. We help them get access to subject matter experts. If there was ever a question about a portfolio company that their diligent saying we invite them to engage in the clinics activities such as annual gala in LAS Vegas the supports our neurological research. We have an annual, I tried to cure cancer were revealed, a team of cyclists running a different blanks, and our investment partners are invited to cycle alongside of us, and we have
them to our medical innovation summit and this year with a little bit different, because we were only able to have a gala in LAS Vegas in everything else that was in person guy cancelled, but we invited them. Weapon hours on various aspects of covered, such as infectious disease issues, vaccine development, an effective treatment therapies as well as safety procedures for Turning to the office, the clinic started a consulting practice. During the current crisis, probably said it up around June or July, and I made sure that all of our best importers had the opportunity engage with them. If it was useful to therefore more many of the underlying portfolio companies that they are responsible for. So we worked really hard to help India the jewels within our partners and, if its applicable, the management team to their polar companies, know that the return of they generate are going to the women clinic and what their being used for. We find that really bring
the mission of what were trying to see and experience every day out to the thousands of portfolio companies and folks inside they invest in partnerships, the folks Goldman Sachs to understand what it is that were trying to do with the assets that we manage so pageant. How about you eve and your way to finance and then somehow into healthcare investing. How did you end up in both those fields? Sure, I guess I'm a because back to my family as well, like snap. So in terms of finance, when I think back, I guess I always knew. I wanted to pursue a career in the markets and investments. My dad worked in the field, some markets on Wall Street. So that's what I knew growing up and it always appealed Maybe- has it seemed dynamic and exciting and constantly changing, and I knew I wanted to be a part of that in terms of
health, I would say my who is at a time of respect for healthcare workers and doctors. My sister is a doctor and she has a masters and healthier policies. I learned a lot from her, but it was really our clients that guided us to focus on the space and seven Jason Kind is actually Jason Klein. Who made a comment to us that he felt that health care see kind of fell between the cracks of the pension world, and the dominant foundation worlds, and they were there. If you asset managers that really understood the unique position that healthcare seo sit in Sunday manage multiple pools of capital within it Ten driven organization- and we do It is an opportunity to start an tap into the right resources of old men. Really our research teams are investment, banking teams, but also our clients, strategy teams within asset management, and so did the item. We convened this group of great see. I was, and we work with them to hopefully help them tackle, bear issues and challenges. Alright, work,
You both for joint today, very interesting discussion, thanks Stefan for joining us, ok, you're driving me Jake. Thank Sarah great! You have you both Concludes this episode of Exchanges Goldman Sachs. Thank you very much for listening and if you want they show. We hope you subscribe and Apple podcast, leave a rating or a common cause, junior later in the week far weekly markets update were leaders round the firm provided could take on the latest in markets. This podcast was recorded on Tuesday figure sixteenth in the year two thousand twenty one thanks All price references and market forecasts correspond to the date of this recording, despite cash, should not be copied, distributed, published or reproduced in whole or in part. The information contained in this package does not constitute research or recommendation from any Goldman Sachs Entity to delay.
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Transcript generated on 2021-07-01.