Clarian launches venture capital firm

July 16, 2007

The city's largest hospital system will try its hand at high-stakes investing.

Clarian Health Partners is forming its own venture-capital fund, called Clarian Health Ventures, to invest in fast-growing companies and finance the commercialization of research conducted at Clarian or by its staff.

Clarian's goal is to make better returns on at least part of its $1.5 billion investment portfolio--which it then can put back into its academic and health care operations.

Clarian has hired R. Matthew Neff, an old friend of Clarian CEO Dan Evans, to run the fund. Neff this month left his position as CEO of Senex Services Corp., a medical debt-buying company he partly owns.

Clarian will invest $3 million to launch its venture fund. But Evans said the hospital hasn't determined how much it will put in the fund in the future.

"This is a long-term play. We expect this to be a 20-year play," Evans said. "We expect to give further funds to it, to reinvest returns, and maybe even invite others to participate."

Clarian, which includes Methodist Hospital, the Indiana University Medical Center, Riley Hospital for Children and three hospitals outside of Indianapolis, had $1.6 billion in revenue last year.

The new fund represents an unusual but not unheard of move by a hospital. For example, St. Louis-based Ascension Health, which owns St. Vincent Indianapolis Hospital, started a $125 million venture fund in 2001.

Since its creation, Ascension Health Ventures has invested in health care companies providing innovative products or services, such as specialized drug delivery, highly precise glucose testing or patient monitoring for use during invasive surgery.

Also, the Mayo Clinic started a $25 million venture fund in the late 1990s but scaled it back four years ago because of a downturn in the economy.

"I can't think of any other hospitals that have set up a specific venture-capital fund," said Mark Heesen, president of the National Venture Capital Association. "There are many hospitals that work with local venture-capital firms and might co-invest but don't do it on a formal basis."

The venture-capital idea represents a liberalization of Clarian's investment strategy. While the hospital has made some alternative investments--such as putting money into Circle Centre mall--Evans said he did not recall Clarian's ever participating in venture-capital deals.

But with Clarian's health care business under increasing cost pressures, it decided to look for new sources of revenue.

"That's a real smart move," said John Aplin, managing director of CID Capital, a venture-capital and private-equity firm in Indianapolis. He said venture-capital funds typically return 20 percent to 25 percent per year over the long term.

That's a much better average than the 10 percent the stock market returns annually. But venture capitalists have to promise high returns because it's a riskier kind of investing that ties up investors' money for an average of eight years.

Venture funds invest in privately held companies that the fund's managers expect to grow fast. Out of 10 investments, however, usually only one or two produce spectacular returns. Most of the rest become what venture capitalists call "walking wounded"-viable companies but a net loss for investors. Some companies even go bankrupt.

"It's high-risk investing," said Ken Skarbeck, managing partner of Aldebaran Capital, an Indianapolis investment firm. "It's very dependent on how good the people running things are."

But Clarian's timing might be good, Skarbeck said. Venture capital has been somewhat out of favor as endowments and pension funds have poured money into private-equity and hedge funds.

"There probably are some opportunities out there for people looking to buy low," Skarbeck said.

It's increasingly common for not-for-profit organizations to get into for-profit ventures, said Gene Tempel, executive director of the Center on Philanthropy at Indiana University.

Not-for-profits run on three sources of funds: donations, grants and earned income, which in Clarian's case comes from providing health care services and returns on investments. By setting up for-profit subsidiaries, not-for-profits often can increase their earned income faster.

So museums and hospitals have gift shops, colleges have bookstores, and Goodwill Industries runs retail stores. IU and other schools even offer academic programs called social enterprise--which teach for-profit business skills to students training for philanthropic work.

"It's a much more common thing in nonprofit organizations now," Tempel said, adding, "This is the way many organizations are trying to manage these days."

Evans acknowledged there might be questions about whether a not-for-profit such as Clarian should be getting into for-profit activities. Clarian already has received criticism for building for-profit hospitals in Avon and Carmel.

"I expect there to be questions that can be easily answered," Evans said, adding, "Not-for-profits owning for-profits is as common as rain."

Still, there are risks, Tempel said. Not-for-profits must make sure their for-profit subsidiaries don't grow to dominate their not-for-profit mission--or unnecessarily distract from it. And they must make sure they have expertise to bring to for-profit ventures.

"You really have to make sure that you have the expertise that can manage that enterprise," Tempel said.

That's why Clarian has hired Neff, Evans said. "We are not entrepreneurs."

Neff and Evans are longtime friends, however. They were partners at the Baker & Daniels law firm in the 1980s.

Evans became chairman of the Federal Housing Finance Board under President George H. W. Bush, and Neff served as his deputy.

After Evans and Neff left government, they teamed with former Vice President Dan Quayle and Indianapolis businessman Al Hubbard to create Circle Investors Inc.

Quayle chaired the board and Neff ran the company, which bought up four life insurance companies. They sold the company in 1997, reportedly for $50 million.

Neff has spent nearly the last decade starting and growing Senex Services Corp., which buys bad debt from hospitals, including Clarian.

Neff sits on the board of the Riley Children's Foundation, a funding mechanism for Riley Hospital for Children, which is part of the Clarian system.

"We're friends. We're very good friends," Evans said.

Neff, 52, will start out with only his executive assistant from Senex to help him. However, he plans to hire a couple of finance experts in the next year.

Neff said he did not know what size of investments Clarian Health Ventures will make. He hopes to work with the IU Emerging Technologies Center, a business incubator, and other resources at IU.

By financing some of the medical innovations happening within Clarian, Neff said, the venture-capital fund should make money and speed up improvements to medical care.

"There's a virtuous cycle that can be created, we believe," Neff said.

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