Opportunity and crisis are uneasy, but frequent, companions. Regardless of the nature of a crisis, there is always an opportunity in it somewhere. The Covid-19 pandemic was no different. While it was a human tragedy on a massive scale, there were unexpected positives for certain parts of the economy.
Hedonova, the new alternative investment fund, has been set up to bring freedom to investors and to seek out pockets of financial growth in an uncertain economy. Alexander Cavendish, CEO, explains, “Our mission is to allow anyone to invest in alternative assets. Clients just make a single investment and that gets diversified into multiple areas.”
Huge demand for investment in medical equipment
One of the areas that saw a huge boom during Covid, and which has continued to grow since, is demand for high-tech medical equipment. Demand for such equipment increased dramatically during the pandemic. This was good for the manufacturers of such equipment, but also for a rapidly expanding medical equipment financing industry that has grown up globally, but is particularly strong in countries with large healthcare chains and hospital groups.
As a recent report by GM Insights revealed, “COVID 19 contributed to increased demand for diagnostic equipment, therapeutic equipment, and patient monitoring systems. Many healthcare facilities were unable to buy the medical equipment immediately through internal accruals and shifted towards medical equipment financing options. This positively influenced the market growth.”
It’s a trend that appears set to continue long after the Covid-19 pandemic. As demand for all sorts of medical equipment booms, so the provision of financing options to support this equipment is also expanding. GM Insights anticipates that for the rest of this decade the sector will enjoy a 7.1% compound annual growth rate (CAGR), fuelled by increasing demand for more sophisticated equipment across both emerging markets and developed economies. It estimates the market in 2021 to have been worth $149bn and expects it to have risen to $275bn by 2030.
While the lion’s share of that will be accounted for by the large hospital groups, a significant amount will also be spent by clinics, diagnostic centres, labs and ambulatory surgical centres (see graph below).
And while demand for all types of equipment is expected to increase, scientific breakthroughs and improved technology means there is likely to be a huge demand for diagnostic and therapeutic equipment (see below).
Hedonova enjoying returns from Asian healthcare investments
Hedonova currently has almost a fifth of its fund invested in financing this kind of medical equipment. As Cavendish explains, “Our medical equipment finance investments are mostly in Asia. The end users are ambulatory services, diagnostic centres and hospital chains. In Asia there’s a culture of having these very large hospital chains, with one company operating multiple hospitals and related facilities.”
And the larger the hospital group, the easier the arrangements are for Hedonova, which buys and owns the equipment, while leasing it back to the end users over a very long-term contract. The precise length of the contracts depends on the kit, but also government regulations, says Cavendish:
“The equipment finance space is dominated by government regulations in each market about how long the hospital is allowed to use a piece of equipment and how long it can be used after you’ve depreciated it on your books.”
He cites the example of the US rail sector, where train carriages can be depreciated over 12 years, but can be used for 40 years. “In most Asian countries, you can depreciate medical equipment such as an MRI machines, over five years. But you can use them for 20. We can benefit from the tax advantages of early depreciation, while the machine earns from a lease for 10 or 20 years.”
Better still than the advantageous tax benefits (which Hedonova passes on to investors in the form of higher returns) are the swift returns on capital from such deals. “We get our money back in about nine to 12 months,” says Cavendish. “After that every year is profit.”
Medical equipment investment comes with some health warning
But financing high-end medical equipment is not without downsides. There are potential hassles and some risks, admits Cavendish. As the legal owners of the equipment, Hedonova remains liable for any issues the kit causes. If a machine stops working or breaks, the hospital may stop paying until it is operational again. And, these being complex machines, this can take time.
Likewise misdiagnoses caused by a faulty machine would also ultimately be the responsibility of the owners. So it’s not hard to see why there are some hefty insurance premiums tied in with such deals, as part of the cost of doing such business.
It also explains why Cavendish says they tend to prefer financing equipment made and supplied by the likes of Siemens and General Electric. “They’re the largest and best manufacturers,” he confirms. “They make what is considered the industry gold standard, and the longevity of their kit is a lot better.”
Very low default risk makes medical equipment attractive
On the upside, most of the equipment that Hedonova supplies through its financing deals is diagnostic equipment, such as MRI scanners. And, from the GM Insights research demand in this area is only going to grow.
It is also an area with a very low default rate, as Cavendish explains: “The risk of default is extremely low. Unless the company’s gone completely bankrupt, they don’t really default on this equipment, because it is their bread and butter income. There is a lot of money in these diagnostic services and doctors make as much as 20% every time they refer or recommend an MRI scan.”
Cavendish confirms that, while the fund has a very wide range of unusual investments – in everything from specialist wine buys to a share of sports image right (you can download an in-depth report by Hedonova on the sports image rights market) – Medical equipment now has the highest allocation within the fund. “It now accounts for some 19% of the fund. Having invested in some other types of equipment finance, we are now exiting our position from these to focus solely on medical equipment. We’re focusing on medical equipment because the returns are way higher. The returns for these investments are the range of 33 to 36%.”
Learn more about Hedonova’s innovative alternative investment fund here.