Iesan Tsai, Managing Director and Head of Private Investments for Asia-based investment firm Kiri Capital, explains what life sciences companies can do to get noticed by investors and her outlook on market timelines, investing after a pandemic, and top trending technologies, in conversation with Pharma’s Almanac Editor in Chief David Alvaro, Ph.D.
David Alvaro (DA): How would you explain Kiri Capital’s approach, especially in regard to healthcare and devices?
Iesan Tsai (IT): Kiri Capital has a global mandate. The firm draws from decades of business heritage building and operating global businesses in Asia to focus on opportunities where we can add value in technology, education, and healthcare.
On the healthcare side, we are active investors primarily in healthcare services and medical devices, but we also look at investments in contract research organizations (CROs), genomics, diagnostics, and digital health. In biopharma, we prefer to partner with healthcare specialist managers with expertise in the space. We also look for pharmaceuticals and medical devices that can be made more globally accessible to parts of Asia, for example.
We are macrothematic investors in that we see the secular growth trends within healthcare — aging demographics, demand for innovative therapies, expanded healthcare access, and the application of A.I. However, we are guided by an overall vision within the pharma and medical device sector that includes seeking greater efficiency and global access to therapeutics, devices, and disease management, with a focus on improved outcomes and quality of life.
DA: Does your approach influence your sensibility about when to make an entrance or exit?
IT: We actively think about positioning the company for other investors or the next buyer. This means driving positive changes within the company during the investment horizon such that the subsequent buyer can recognize that the investments made in the company are built to last. We look for that across the whole life stage of a company, from venture to buyout, making sure that the investors and the professional management team are there to institutionalize and make positive change.
DA: How would you characterize the overall approach that you and Kiri Capital use to evaluate investments?
IT: We tend to approach every investment with a healthy amount of skepticism. Valuations are very high, and there are many deals floating out there. Successful investments in 2022 and the medium term will likely require greater skill and investor value-add. We also look for other key criteria, such as transformative or breakthrough innovation, a strong commercial team, a viable go-to-market strategy, margin sustainability, and clear strategic value.
It is more important than ever that investors be careful when choosing investment targets. In the current environment, we need to be taking a longer-term view. Whereas we previously looked at investments in a two- to three-year timeframe, we need to be prepared to be more patient during the next cycle.
DA: Is that longer timeframe unique to Kiri or is it trending more generally?
IT: It is trending more generally. A lot of retail investors will assess the market’s momentum with a focus on the short term, no more than two years out. However, professional investors know that lasting businesses are not built overnight and that even a three- to five-year traditional period may not be the right approach. I think investors are waiting longer for distributions before exiting, along with entrepreneurs. That being said, it has been an amazing market for exits, especially for IPOs.
DA: Are investment timelines different for biopharma versus other industries because of the long development cycles that are typical?
IT: They are. However, in biopharma, there are more options for liquidity at various points. Development and approval cycles have actually accelerated, and so has the capital raising process. As a result, the startup environment for healthcare has been significantly democratized and a lot of the founders are more mission-driven. A healthcare investor can come in at various points, which gives him or her the option of pursuing a shorter timeframe. Of course, each investor has their own specific goals.
DA: What’s different about the investment approach and philosophy between the United States and Asia, in terms of priorities or attitude toward risk?
IT: Asia has been a growth market for the last 20 years, and most investors here are very comfortable with minority investing. In the United States and Western markets, a lot of the traditional investors are just becoming comfortable with this, including traditional big buyout shops who have recently pivoted from leveraged buyouts to become comfortable with growth investing.
On the other hand, the PE and venture capital (VC) environment in Asia is still nascent compared with the United States and Europe, with most managers still in the “emerging” category, still working out their strategies, particularly in terms of sourcing angle and operational value-add.
Asia is also tough because of uncontrollable risks such as regulatory considerations, foreign exchange (FX) risk, less developed capital markets, and challenges accessing human capital. Another key difference is that Asian companies are often built around a key founder, whereas, in Western countries, there is more emphasis on building a larger institutionalized team and professional management that can sustain the company. However, because of Kiri Capital’s operating heritage and home-field advantage, we can navigate these challenges more easily. While it is a difficult market, a local partner can optimize success.
DA: How do you think the sectors in which you invest and investment approaches themselves have permanently changed as a result of COVID-19?
IT: Regarding processes, the way we do business and invest has completely changed. Initial physical meetings are now instead virtual, which is more efficient and allows for companies to be screened early on. The speed of investments has also likely permanently changed. A couple of deals a year used to be standard — now investments can occur more frequently and close faster. That being said, there has to be a balance. With high valuations and private investors bidding on short timelines remotely, this creates a greater chance of making mistakes.
Regarding the underlying investments, the pandemic largely had a positive effect on the acceleration of digital in the software, consumer tech, and healthtech space. For most other traditional industries that we have invested in (e.g., education, business consulting, healthcare services), most disruptions have been short term, and we anticipate a return to pre-COVID levels.
Healthcare services have obviously been impacted; extreme demand-side shocks have largely subsided, but we will likely continue to see short-term fluctuations due to new variants and pandemic control measures. For the VC/growth side, while the pandemic and open IPO markets have spurred a lot of investor interest in therapeutics, there has been a delay in elective procedures, which has caused delays in clinical trials. Low-interest rates and expensive later-stage valuations have driven many investors to earlier-stage investments. COVID-19 has had the effect of increasing capital flows into the space and increasing entrepreneurship, and consequently we continue to see a high volume of very innovative companies.
This is also a unique time, as industry experts are coming together to address the impact of COVID on public health. Ideally, investors will be able to align and unite to solve global problems. Environmental, social, and governance (ESG) considerations are a lot more relevant these days, which I believe will remain a long-term trend.
DA: Is there now more conservatism or contingencies baked into how people think about investing and growing companies?
IT: There are more contingency plans, but the playbook is evolving so rapidly that it is impossible to predict. In Asia, for example, some older companies were more prepared, because they remembered SARS and knew what could happen so they were able to pivot very quickly; whereas some Western companies were totally caught off-guard, though many ultimately proved to be very resilient, particularly the PE-backed ones.
Going forward, investors need to consider supply chain disruption and whether it makes sense to enter a new geography when travel is limited. Diversification is the key lesson for all investors. There is no need to rely on a single geography, supplier, or customer.
DA: One thing that people in our sector have been talking about a lot over the last year-and-a-half is that Western countries are going to retreat from globalization and seek to reshore API manufacturing in the United States. To what extent do you think the globalization paradigm will really shift?
IT: Many companies, regardless of where their headquarters are located, have had to re-write contingency plans and re-think strategies around entering new geographies, minimizing any future supply chain disruptions and finding ways to diversify revenue base. That being said, the current dynamic remains fluid, so it is difficult to say what is a “new normal.” Contingency plans require a lot of investment; it takes time to source new providers, and margins may compress. That is not something to be taken lightly, but I predict these will be explored more over time.
When looking to enter the Asian markets, seeking local strategic partners to navigate regulatory changes and distribution challenges has always made sense and will continue to remain this way. We do see some parts of Asia poised to benefit from the current environment, including Southeast Asia, which is something we have directly witnessed from Singapore as a regional hub.
DA: What can you tell me about trends you’ve witnessed over the last several years and what you might project going forward, in terms of Western investment into Asia or vice versa?
IT: Strategic cross-border investments may become more difficult in terms of diligence, driving synergies, and exiting from a regulatory and capital markets perspective. From a purely financial perspective, however, the underlying investor demand is still there across both geographies, particularly given the strong secular drivers in China for healthcare, digitalization, and business services. The U.S. PE/VC market is deep, and Asian investors want access. Demand is temporarily muted from the West to Asia as Asia enters a new phase of growth. Rather than accessing these markets directly, most are accessing investments through experienced local managers, for which we have seen an increase in quality and strong demand by limited partners as they flock to quality.
DA: What criteria do you use to evaluate a potential investment?
IT: Kiri Capital is predominantly a growth-stage investor. We mostly play in Series C through E funding. We will look at some early-stage and Series A and B opportunistically. What we focus on in these growth companies is strong technological leadership. We also consider who else has invested and how those sponsors are adding value. Furthermore, we will consider whether there is a commercially minded individual on the management team and the credibility of his or her go-to-market strategy. Many investors will look at the high-level total addressable market (TAM), which informs a lot of the expensive valuations, Kiri Capital tries to be more disciplined by considering the serviceable addressable market. Otherwise, we are focused on high growth, high margins, and capital-efficient businesses. Our current portfolio consists of advertising technology, digital tools, development operations, pharma medical devices, and fintech.
We are looking to add more buyout investments, which are usually more traditional businesses. They must be stable, have recurring revenue, and generate high cash flow. A lot of the buyouts we look at stem from a transition from a founder to a professional management team. We make sure that these companies are well-suited toward institutionalization and look for ways where we can add incremental improvements.
Our main investments to date have been in education, healthcare services, hospitals, business services, and medical devices.
DA: Is the geography of the physical company important?
IT: While we understand that the types of entrepreneurs and surrounding investors are different in Europe versus Asia or Silicon Valley, we are mostly agnostic to location. We look for the best in class within each market — there are great companies everywhere, regardless of where they are based.
DA: What would you recommend for a company that is looking to attract an investor like Kiri Capital?
IT: The first step is to have informal conversations with investors for feedback; that will save a lot of time. Only engage in deeper conversations when you are ready. Most investors have long memories, they will remember what you said in a meeting, take note of your management plan and monitor how those plans have changed over time. If you are hitting your targets consistently, it is likely to your benefit. If they see you pivoting, it could be a red flag, but if you have executed a pivot well, that could be a positive as it shows your flexibility as an entrepreneur.
Carefully consider how you build your company’s cap table. Look for investors who can attract another lead round or other investors. Do your diligence on the investor itself; make sure that they have deep knowledge of your sector, and ask for their track record. Find out if they have exited companies and reach out to those companies for a sense of how the investor performed and interacted.
The other important factor is how build your team. In our experience, companies with co-founders tend to fare a lot better than companies with a single founder and attract more institutional capital. Having a single founder isn’t a no-go, but it is considered much riskier. At some point, it is important to bring in someone who can speak to the investors. This role can be fulfilled by a number of positions; it doesn’t have to be the CEO. It could be a CFO or a team member in business development.
DA: What do you see as the type of company, or the qualities of a company, that would benefit most from an investor like Kiri Capital instead of your peers?
IT: What differentiates us is that we have a macrothematic view of what we consider interesting sectors. When we identify something worth pursuing, we act with conviction. Our Asian heritage and global network — we have a presence across Singapore, Hong Kong, Shanghai, the United States, and London — allow us to act to connect strategic sponsors, limited partners, and customers. We don’t interfere with the business but are present when appropriate.
DA: Would you like to highlight any of the companies in your portfolio?
IT: We are excited by the current developments in one of our portfolio companies, Aleva Neurotherapeutics, which is a Swiss company focused on next-generation deep-brain stimulation (DBS) for patients suffering from neurological disorders, particularly Parkinson’s disease. While DBS is an established therapy, early clinical data from Aleva’s device shows that enhanced directional stimulation can significantly reduce side effects and increase the therapeutic window to widen the eligible patients that can benefit from DBS therapy.
Aleva’s DBS system, called DirectSTIM, includes a rechargeable stimulator and the post-operative imaging ability to view the orientation of electrodes and determine which direction has the best result and which point of contact needs to be activated. After receiving its CE mark, the device is making headway toward commercialization in Europe, starting with a post-market clinical follow-up study in Germany. We are also excited by the potential for Aleva to expand into Asia, given the relative under-penetration of DBS therapies. Recent Chinese healthcare reforms have focused more on domestic brands rather than imports and, as a result, we believe that we have a role to play to help aid the company in entering the Asian market.
DA: What are some of the key trends that you’re keeping your eye on to help determine your strategy over the next five or 10 years?
IT: We are looking closely at the trend of affordability and ensuring that healthcare services and therapeutics are accessible at a lower cost and higher efficiency; anything that can resolve that ongoing problem is beneficial. We are also interested in minimally invasive surgery or technologies that enable those surgeries, to reduce hospitalization and recovery time. Genetic sequencing has been really helpful in democratizing healthcare startups, so we are interested in those applications. Finally, we are watching cancer immunotherapy, as we believe it will continue to be a game changer.
