What makes a good investor? It’s a topic as old as investment itself, but will it evolve as Private Equity moves into new horizons such as digital medicine? Find out how MTIP approaches decision making for its investments in companies wanting to revolutionize healthcare.
Do you make decisions with your heart or your head, or sometimes with a little bit of both? Emotions are what make us human but when it comes to investing, they can be tricky. Investing is an emotional experience, there can be a lot at stake, yet it is also a science requiring the construction of a hypothesis around an investment opportunity. “Investing is a test of character,” says Prof. Dr. Thorsten Hens, Professor of Financial Economics and Deputy Head of the Department of Banking and Finance at the University of Zurich. So what makes a good investor?
It’s a good question for anyone but perhaps especially important in the world of private equity which globally, in 2021, raised a record-breaking 700+ billion dollars in capital. This money that backs winners in a field such as digital health, for example, not only provides a return for investors but helps to drive and scale innovation that will change people’s lives, making investment decisions all the more important.
Does the rational choice theory help when making decisions?
Rational choice theory, first expressed by economist Adam Smith in his 1776 book The Wealth of Nations, proposes that individuals make rational choices based on rational calculations that maximize their own benefits. For Smith, emotion in investing didn’t come into the picture and since the theory’s inception, the premise that people use a logical decision making process has been at the center of economics.
Yet, rational choice theory doesn’t always play out, one recent example being the plunge in global share markets when the COVID-19 pandemic first hit. This is why many economists question the assumption that investors are always rational all of the time and has opened the door to behavioral finance that explores the psychological influences and biases that impact our financial decisions.
Behavioural finance and decision making
Prospect Theory is one behavioural finance model that explores how individuals assess their loss and gain, aiming to describe the actual behaviour of people. Developed by the economist Daniel Kahneman and psychologist Amos Tversky 200 years after The Wealth of Nations, the theory was cited in the decision to award Kahneman the 2002 Nobel Memorial Prize in Economics.
In the spectrum of this heady mix of rationalism and emotion, what is the process at MTIP leading up to an investment decision? Where does the team start?
“We need to invest in companies that have a large market potential and also assess whether the opportunity is applicable on a European or global scale,” says Dr. Christoph Kausch, Managing Partner at MTIP. “We’re proud of having a very structured deal flow process from initial investment opportunities to due diligence to agreeing on an evaluation and our ultimate investment.”
He continues: “We’re not just laid-back investors who hope everything goes well. We undertake financial, legal, and tech due diligence, and investigate ESG (Environment, Social, Governance) issues. All four are critically important to us.
In addition to the company’s process, there are some specific things the team look for. Dr. Marc Dietrich, who trained as a medical doctor and worked in hospital emergency rooms and on intensive care wards, is MTIP’s Investment Director. “My number one investment criteria is always to assess whether there is really a problem being solved by the new solution. That’s because digital health is an area where some entrepreneurs think ‘well, let’s apply this concept here’ as a nice to have but in my experience, if something is not absolutely able to change the standard of care it’s very difficult to get good adoption of a technology.”
MTIP’s investment approach is as evidence and fact-based as possible yet Investment Associate Dr. Magdalena Plotczyk acknowledges that, just as in Prospect Theory, emotion may sometimes play a role in decision making. “For me, there are certain parallels in the way you construct a hypothesis around a research topic and an investment opportunity. You try to find enough evidence to either accept or reject the hypothesis and I apply to investing what I know from science.” “But there is some gut feeling when it comes to certain opportunities. In the end, the head comes first, and the emotion builds on top of that”, she adds.
What about experience?
Marc agrees that the experiences he had during his hospital career also influence his decision making, “I know what is likely or unlikely to work or whether a technology is too complicated for the time being. I can also look at potential benefits through the eyes of health care providers, patients, doctors, nurses, hospitals, and insurance companies. I think it’s fascinating that the ecosystem is so diverse. Everyone has different interests to maximize however not all of them can be maximized at the same time, and I would say considering investments this is always something else to think about.”
In such a broad and growing field, with so many different stakeholders, a diversity of experience and opinions is always welcome around the table when final investment decisions are taken, “I’m a strong believer in diversity, and when I recruit additional team members, I lookout for a skill set that we don’t have yet. I was asked in the beginning by a couple of investors ‘why don’t you have the classic private equity investor base’? It’s certainly very important and you need to have this expertise but for me, it’s as important to understand the technologies, to understand the business acumen, to understand the market and I believe that is one of our core strengths – we look at potential investments from all angles. We are also almost 50/50 in terms of gender balance, which again brings a broader perspective. It’s important to me that we live it, not just claim it,” says Kausch.
With a core focus on data and a sprinkling of emotion, the objective of every investment is to revolutionize healthcare in some way through a disruptive digital technology, something that drives Marc every day, “When I was practicing medicine it was obvious to see that digitization and innovation where nowhere and I feel lucky to work at MTIP where I can combine business innovation and medicine. I think the influence I have in this job can be bigger than within a full clinical career because if you scale the right startups, you have a much bigger reach.”
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