Venture leasing offers capital for tight market

Not all investors are shy of the health care marketplace. LINCCapital Management, an affiliate of the LINC Group of Chicago,received commitments last month of $50 million from institutionalinvestors in support of the LINC Venture Lease Partners fund forcapital equipment financing of emerging companies, involved predominantlyin health care.

LINC is a lessor of medical imaging equipment, largely to hospitals.It also finances and offers management services to imaging centers.The venture leasing fund, though, is not focused at either centercompanies or heavy imaging equipment start-ups.

But there are some imaging and interventional companies amongthe fund's clients. These include:

• Clarus Medical Systems, a manufacturer of endoscopicsurgical instruments for the spinal orthopedic market;

• Serologicals, a monoclonal antibody supplier to manufacturersof diagnostic and therapeutic agents;

• Spectranetics, a laser angioplasty system manufacturer;and

• Spectrascan Imaging Services, a provider of mammographyimaging services in physician offices.

"We are interested in services and products that reducecost or otherwise offer benefits that are more than marginal,"said Martin E. Zimmerman, president of the LINC Group. "Healthcare (products) that simply do certain things a little betterare not going to have the market that they had in past years.However, most people would agree that, in the long term, healthcare will grow and continue to be a profitable sector of the U.S.economy."

Venture leasing is an asset-backed, multi-year financing alternativefor start-up firms that can solve their capital equipment requirementswithout increasing long-term debt or issuing more stock to venturecapitalist investors. Since the risk to the lessor is greaterwhen dealing with emerging companies, venture leases often includewarrants to acquire stock at venture capital price levels, hesaid.

"The advantage of doing a lease is that they (the emergingcompanies) get something that looks a lot like debt and has onlya small equity component," Zimmerman said.

The fact that LINC was able to raise $50 million testifiesboth to continued investor confidence in the future of selecthealth care companies and to confidence in LINC's ability to makethe right investment choices, he said.

Softness in the health care capital markets created by theuncertainty about changes to come in health care and cost-containmenttrends has increased the attractiveness of alternatives such asventure leasing, he said. Venture leasing offers a source of capitalthat can be paid back over time with minimal equity dilution.

Start-up funds are available for health care companies, buta decline in health care public stock offerings has reduced exitalternatives for original venture investors, making them morecautious in picking companies, Zimmerman said.

"The strategy of going public to liquefy an investmentor bring new capital in is not an easy assumption any longer,"he said. "This means many investors are looking at valuationsand investment decisions differently. Marginal (ventures) willfind it much tougher. The best companies will probably go publicwith no problem as they do in most markets," he said.

Investors are less apt to look favorably on health care companies,such as biotechnology firms, that burn off millions of dollarsa year in initial losses when the chances of cashing in throughan initial public offering are lower, he said.

"They will invest in certain select situations even ifthere are sizable current expense or loss levels," Zimmermansaid. "But those companies have to be addressing productsthat make major changes for which there is a major market demand."

There are two alternatives to going public as exit paths fororiginal investors: merging with another company or becoming profitable.Imaging center firms that are building retained earnings throughprofitable operations, for instance, do not have to rely on publicofferings or acquisitions and are likely to stay in business,he said. But, since self-referral restrictions have made it toughfor centers to raise equity, turnaround prospects are dim forunprofitable centers.

The tight health care environment also makes it difficultfor start-up imaging equipment companies. Scanners are expensiveto develop and market, and existing competitors already have productsfor sale that help carry the cost of new product development,he said.

"It is not a great time for equipment companies, althoughagain there are always exceptions," Zimmerman told SCAN."The exceptions will be companies that have achieved breakthroughsin cost or performance versus cost. If you can do something ata much lower cost, certainly there will be people interested."