SEATTLE — When Andrew Farnum used to speak about work with his wife, a program officer focused on global health at the Bill & Melinda Gates Foundation, he would ask himself how he might use his background in finance to have an impact on global health issues.
Farnum started out at Goldman Sachs, then moved to a group at TPG Capital focused on investments in developing countries, then joined the Children’s Investment Fund Foundation, which was started by a billionaire hedge fund manager focused on combating disease and reducing child mortality.
So when the Seattle-based Gates Foundation launched its Program-Related Investments team in 2009, Farnum jumped at the opportunity to combine his love of investing with his interest in global health, moving from senior program officer to deputy director and most recently director of the team.
On Wednesday, PRI changed its name to the Strategic Investment Fund in an effort to make their mission clearer to potential partners.
Farnum said the term PRI comes from the Internal Revenue Service, and while it is understood in the foundation world, it does not always translate when the Gates Foundation speaks with potential co-investors.
“We want to work with the best possible companies, which means we’re partnering with top tier biotech and private equity investors, and when we describe to them what we do, we describe ourselves as the strategic investment arm of the foundation, which they understand,” he said. “A lot of big corporations have strategic investment arms which are making investments to help advance those organization’s strategies, and that’s exactly what we do as well.”
Devex spoke with Farnum at the Gates Foundation headquarters in Seattle, Washington, about how the world’s largest foundation has become one of the world’s largest impact investors, and ways these investments can advance global health outcomes. This interview has been edited for length and clarity.
What was the theory of change behind PRI and how did you structure the team to meet your goals?
We were really experimenting. It was set up as a pilot program. The basic thesis was: We’re trying to solve some of the world’s most difficult problems, problems that the global community has been working on for decades — creating an HIV vaccine, creating a malaria vaccine, creating new tuberculosis drugs — and we are fighting with one hand tied behind our back if we don’t have access to the expertise that is found in the private sector.
Some of the most exciting technology and innovation and some of the best drugs and vaccine development experts are found in biotech and pharmaceutical companies. In some of the other areas that we care about, like agricultural technology and education technology, there are also amazing things going on. We have to have the ability to access that expertise, access that technology, work with these companies directly, and give them an incentive to apply their technologies to our target diseases or our target issues.
“A lot of us came from the private sector, and when we did deals with other companies, we didn’t go around giving each other grants. We used all the tools of capitalism.”— Andrew Farnum, director of the Strategic Investment Fund
Markets don’t always work well for the poor, as we say. Left to their own devices, there is not likely to be a market incentive for a company with a new drug discovery technology to apply it to the diseases of the poor. So we said: How can we form partnerships with those companies to get access to that technology for the diseases and the populations that we care about? We started thinking of a wide variety of ways we could form those partnerships with the private sector.
A lot of us came from the private sector, and when we did deals with other companies, we didn’t go around giving each other grants. We used all the tools of capitalism. We made equity investments, we invested in funds that we thought could have strategies that advanced our goals, we could do royalty-based transactions or guarantees. And if the foundation is going to play in this sector, and access the best companies and form these impactful partnerships, we should have all these tools at our disposal as well.
PRIs have been around for a long time, with a lot of amazing work at a lot of other foundations, but they hadn’t really been used to form partnerships with biotech companies. So we were in some ways making it up in the early days, really experimenting with the question: What are the right tools to use and the ways to structure these deals?
“Within the foundation, we replicated the private equity venture capital model …”—
There were companies that were being funded by other for-profit venture capitalists because of their applications of their technologies to diseases of the developed world, like cancer or diabetes. We had to ensure that we were able to move at the pace of business, being able to move very quickly, as we wanted to get access to the absolute best, most cutting edge technologies.
Within the foundation, we replicated the private equity venture capital model by doing a few things.
We had to hire investment professionals from private equity or venture capital firms, people who were experienced deal makers and investors who also, like me, had a strong desire to have additional impact in their lives.
We also had to build an investment committee of people — again, experienced investment professionals who could quickly review our deals and make sure we structured our investments with the highest possible standards.
And we had to set up an internal process that allowed us to move very quickly. If a hot new company out of Stanford was getting a syndicate together with biotech Bay Area venture capitalists, we had to be able to move within a few weeks to make that investment. We needed a new review process to make sure we could move and make those investments quickly.
What do you look for in your new hires? And how do these employees work with others at the foundation?
We look for top tier investment professionals, just like any other private equity or venture capital firm, who are experienced investors. Investing is a skill that not just anyone has. We look for people who come from biotech venture capital firms, or private equity firms, or investment banks, all top tier investors who are excited about the challenge.
“Our biggest competitive advantage is that with everything we do, we work hand-in-hand with the program team here [at the Gates Foundation].”—
What we like about it is that it is a challenge: Structuring high-quality deals for the foundation where we can be good stewards of the foundation’s capital — we’re not focused on maximizing financial returns, but we want to be good stewards of the foundation’s capital — and negotiating agreements with these companies so that they will work on our deals.
The most important thing to understand about the structure of the team is that everything we do is in support of the foundation's mission and the foundation’s program strategies. Our biggest competitive advantage is that with everything we do, we work hand-in-hand with the program team here. We have access to this incredible bench within the foundation of vaccine development expertise, world class HIV experts, agriculture experts.
In every deal we work on, we make up a deal team of PRI team employees and the relevant program team employees. That brings in investments structured in the negotiation expertise from the PRI team and real deep technical expertise from the program team. We jointly source the deals, diligence them, the PRI team takes the lead on structuring them, while the program team takes the lead on technical diligence.
That’s a huge competitive advantage we have and also sets a north star for us. We’re not out there as a $2 billion fund that can invest in just anything we think is good for the world. Everything we do is a fit for the foundation’s mission and aligned with the foundation’s strategies.
Whenever we make an investment, we sign two sets of documents — a standard investment document just like any other venture capital firm or private equity firm would — and then we don’t just say, “Oh, we really hope that this company will work on our issues.” We get binding contractual commitments from them in exchange for our investment, so that they will make their technologies available.
This is a global access agreement that says: In exchange for our investment, we get a license to your technology for applications in HIV, TB or malaria, or we get a commitment from you that you’ll make the drugs that you develop available in the developing world at an affordable price.
It is a real business deal with these companies, with binding commitments that we structure to be win-win. They get access to capital. They get access to foundation expertise — we have a lot of expertise in growth markets around the world — and we get access to technologies that we otherwise wouldn’t have.
It’s an intellectual challenge to strike these win-win transactions, and we’ve found that a lot of people coming out of investment banking, private equity, and venture capital are excited about that challenge.
Can you expand on how you incentivize companies to work on your priorities, particularly when they have other investors lining up?
“We want to give [companies] an incentive to apply their technologies to diseases in the developing world at the same time [as in the developed world].”—
What we want to get access to are the absolute best companies in the world, with the best management teams, and the most cutting-edge technologies. Those companies are well funded, particularly in this market. They have the choice of who provides them with financing. It’s incumbent on us to demonstrate to their leadership and their boards and their other investors why a partnership with the foundation makes sense for them.
What is really exciting about the PRI program is that it gives the foundation access to these cutting-edge technologies we can quickly apply to HIV, TB, and malaria, where, without our investment, those technologies wouldn’t be applied to our diseases for years, if ever.
We think the diseases we work on are incredibly important, so the goal is that these companies shouldn’t first focus on the developed world and then maybe work on the developing world at a later date. We want to give them an incentive to apply their technologies to diseases in the developing world at the same time and that sort of equity, where the developing world gets access to these technologies at the same time as the developed world, is incredibly important.
We do have to show why we’re an attractive partner to them, and that can mean providing a combination of equity investment and grants. We have a relatively simple way for how we think about whether it makes sense to do that.
This is oversimplified, but: If we’re funding a basic platform technology, like a drug discovery engine that can be used to discover new drugs for cancer and at the same time used to discover new drugs for TB or malaria, then we’re funding something that’s creating financial value for the company and therefore structuring that as an equity investment. When we're sharing the cost and the risk of developing that technology, and that technology is producing financial value, we think it makes sense that the foundation shares in the returns or benefits of that technology.
If we then go to them later — let’s say the platform is successfully developed — and we say, “We’d like you to take that platform and apply [it] specifically to the development of this visceral leishmaniasis drug,” a disease that’s found in poor countries in sub-Saharan Africa and India, that work is not going to create the financial value that the development of platform technology would. In order to incentivize the company to provide that, we need to provide a grant, we need to provide nondilutive capital, and that just makes business sense.
“It’s about finding the best deal, that is the most efficient use of the foundation’s capital and that makes sense for us and for the company.”—
It’s about finding the best deal, that is the most efficient use of the foundation’s capital and that makes sense for us and for the company. If we’re sharing the risk of something broadly applicable, that should be a PRI or equity investment. If we’re funding a very specific program only applicable in the developing world, in order to convince the company to do that, we need to provide grants.
There is sometimes backlash. We hear it both ways. Some people say: “Why would the foundation ever make an equity investment?” Others say: “Why would the foundation ever give a grant to a for-profit company?” But we have a rational framework to figure out what is a fair business deal for these companies.
Most of the time, we use PRIs to structure our partnerships, but we can also use volume guarantee transactions and other things that technically aren’t PRIs. The old name didn’t capture that. We don’t do grants or contracts — those are managed by the foundations — but we have other investment tools we have to form partnerships with the private sector at our disposal. Most of them are PRIs, but not all of them.
Devex, with financial support from our partner MSD for Mothers, is exploring how the private sector is driving innovations in global health. Visit the Focus on: Future of Health Partnerships page for more.