Skip to main content
As the health care royalties market has grown and evolved, a newer approach is gaining prominence that blends the annuity-like regular income of traditional royalties with lending structures familiar to private credit investors.


• Structured health care royalties can potentially offer better returns and greater downside protection than traditional royalties in the current economic environment via blended credit products that may include floating rate loans, equity warrants, fees, and royalties.

• Health care is a resilient segment with a robust pipeline of innovative products and a history of strong performance across market cycles.

• Structured royalties could add greater upside to existing fixed income allocations while diversifying exposure to the health care sector.

Royalties are a growing but niche approach to private financing for the health care industry, with completed deal value of roughly $33 billion across more than 130 transactions since 2012.1 These agreements allow intellectual property (IP) holders to monetize that IP via contractual and/or lump-sum payments.

As the health care royalties market has grown and evolved, a newer approach that blends the annuity-like regular income of traditional royalties with lending structures familiar to private credit investors is gaining prominence. This approach, known as structured royalties, still offers non- dilutive growth capital for health care companies seeking liquidity, but with greater return potential for investors in an increasingly competitive space.

In this paper, we examine the value proposition for structured royalties, the market opportunity for structured royalty investors, and the growth opportunity presented by the health care sector.


Investors are facing higher portfolio break-even rates in real terms given the recent surge in inflation: the Consumer Price Index hit 7.9% in February—the highest reading in over 40 years.2 This challenge is particularly acute in the fixed income component of portfolios. Even high-yield public debt is producing negative real returns in the current inflationary environment, with sub-investment grade bonds offering nominal yields of just 3.77% at the end of February.3

Structured royalty investments, which target companies with commercial health care products or services in the biopharmaceutical, medical device, or diagnostic tool spaces, could be part of the solution. They offer regular income from loan interest, augmented by equity warrants and fees, and sometimes royalty payments. This blend of attributes could potentially boost total returns, yet includes several sources of downside risk protection.

First, structured royalty lending is typically senior-secured debt, collateralized against all company assets, including patents. This is higher in the capital structure than equity, and investments usually include substantial underlying asset value to protect against potential capital loss. More technical, negotiated protections may also include:

• Liens on underlying assets by amending license agreements
• Financial covenants to monitor risk
• Tranched funding to link incremental investment to revenue growth or other operational milestones
• Guaranteed minimum payments, which seek to ensure a minimum level of return
• Isolating assets in a bankruptcy-remote special purpose vehicle

In addition, as with other private credit lending, loans are typically extended with floating rates, historically against the London Inter-Bank Offered Rate (LIBOR) until that was supplanted by the Secured Overnight Financing Rate (SOFR) at the end of 2021. This offers lenders and investors protection against rising interest rates, reducing duration risk—the possibility that changes in interest rates over the duration of the loan may hurt its market value.

However, the flip side is that rising rates may place greater strain on the borrower, increasing the risk of default. That said, private credit default rates have historically been relatively low, despite the fact that private lending is usually to smaller companies with an arguably higher risk profile.4

This reflects a combination of factors. First, smaller companies typically use (or are limited to) less leverage than bigger firms. Second, private credit lenders typically implement stronger covenants than public lenders. Third, private financing solutions can be more tailored to the specific situation and needs of the borrower compared with standardized bank loans and public debt issuances.

Any additional risk is also typically compensated for with higher returns. Total returns from senior-secured direct lending were an annualized 8.1% over the five years ended September 30, 2021, while the S&P U.S. High Yield Corporate Bond Index produced total returns of 6.3% over the same period.5

Structured royalty investments in health care specifically have unique additional defensive attributes.

First, these investments are usually made after target companies’ products or services have received U.S. Food and Drug Administration (FDA) approval, when revenue streams are more predictable. This approach dramatically reduces certain risks, most obviously regulatory risk, but also sidesteps potentially significant costs related to research and development (R&D), manufacturing, and sales and marketing, as well as liability and product commercialization risk.

Second, investments in health care innovation are relatively secure. Commercial drug and medical device IP is typically protected for 20 years from the date of filing, which helps limit competition for several years. Competitors can, of course, innovate sufficiently to get a new patent, but it takes a significant amount of both time and investment to reach the approval stage, particularly in the medical field.


For recipient companies, a significant benefit of structured health care investments is that they are non-dilutive. That is to say, the business owner is not required to give up equity or ownership up front in exchange for capital. Investments via structured royalties may also help better insulate smaller companies from valuation fluctuations and other short-term market trends.

On the lender side, regulations passed in the wake of the Global Financial Crisis have discouraged lending by banks to middle-market companies—typically those with an EBITDA6 of less than $100 million. Most public-market financial institutions prefer large, liquid corporate loans.

Furthermore, barriers to entry for health care royalties are relatively high. Executing deals in this market typically requires a strong, established network to source opportunities. Many traditional Wall Street lenders are not equipped to compete in this market due to the complexity of the necessary diligence processes. A due diligence team must be equipped to understand the proposed investment from not just a financial perspective, but from a scientific and regulatory one too, including:

• Examining historical clinical developments (including failures) in the specific subsector
• Understanding the potential regulatory risk in the subsector
• Assessing the clinical data and the mechanism of action of the product
• Analyzing the severity of the treatment area and the prevalence of the unmet medical need
• Examining the safety profile and adverse event history of the specific product
• Clarifying the reimbursement process for the product or service, which vary within health care but are often triparty (patient, provider, third-party payer)

As such, there is a relatively limited universe of experienced institutional managers of scale competing in this space.


The health care sector is unique in that it has fundamentally defensive characteristics but is also highly innovative.

Overall, health care spending continues to grow globally year-over-year (See Exhibit 1), and it more than doubled in real terms from 2000 to 2019.7

In the United States alone, spending reached $4.1 trillion in 2020, up 9.7% year-over-year.8 This rise was partly driven by public spending due to COVID-19, but the trend has been consistently upward, and is expected to reach $6.2 trillion by 2028.9

Exhibit 1: Health care spending continues consistent growth

Exhibit 2: Health care has proven relatively resilient in down markets

Health care sector growth is closely linked to broader demographic trends, including an aging population, rising global wealth, and ongoing increases in the prevalence of chronic diseases. With health care expenditures disproportionately incurred by the elderly, the aging trend— particularly in wealthier markets—portends secular growth for the health care sector. In the United States, for example, health care spending is roughly seven times higher among those aged 85 or higher than for those aged 19 to 44.10

The confluence of these trends makes the health care sector more resilient to economic downturns. On the public market side, health care stocks have exhibited defensive characteristics, falling less than the broader market during recent market downturns (See Exhibit 2). Over the past 20 years, the S&P 500 Health Care Index—measuring the performance of health care stocks on the S&P 500—has exhibited a moderate beta to the broader market of 0.73.11

These defensive attributes are also evident on the private market side, with health care and life sciences investments exhibiting some of the lowest rates of loan defaults (See Exhibit 3).

Exhibit 3: Default rates low for private credit health care investments


On the other side, the innovative potential in the health care market is substantial.

Spending on R&D in the health care sector is expected to have surpassed that in computing and electronics in 2020, making it the number one industry for R&D spend globally.12 Medical and health care R&D investment in the United States alone reached $245.1 billion in 2020.13

This investment has supported technological innovation in areas such as biotechnology, drug design, technologies expediting development and review timelines, and the decentralization of clinical trials.

This innovation is helping bring forth and commercialize an exciting array of new products and services, including the major sectors to which structured royalties may offer exposure, such as biopharmaceuticals, medical devices, and diagnostics (See Exhibit 4).


Exhibit 4: By the numbers: Growth in sectors to which structured royalties offer exposure


While the outlook appears positive, there are several risk factors that investors should consider before committing to structured royalty investments.

For example, most candidates for structured royalty investments are smaller companies that are not yet profitable enough to access traditional debt markets. Credit risk may be higher than for larger, better-established companies. Even though structured royalty investments hold debt that is senior in the capital structure to equities, the danger of bankruptcy and default remains.

Certain structured health care funds may also assume greater execution risk and lend to companies in the pre-approval phase. Only around 60% of phase-three trials are successful,14 but the lending terms should reflect this risk via, for example, higher interest rates, a larger equity warrant component, and/or higher fees. Cash returns from these more speculative investments will obviously be limited in the short term, but the potential upside should be commensurately greater. The inclusion of warrants can ensure that, should the company successfully go public, investors also benefit—though this is not typically viewed as a key driver of returns, more a potential upside surprise.

Finally, the level of specialist knowledge and depth of competitive analysis required to execute these transactions can be a risk. The health care market has very little margin for error, which could potentially punish even small omissions or mistakes during the due diligence process.


Structured health care royalties could serve a complementary role in a fixed income allocation. They help provide attractive cash yields at floating rates with some potential upside, which is especially appealing in the current context of high inflation, in which many public fixed income instruments provide negative real yields. These attractive returns are balanced with structural mechanisms that help limit risk, potentially including a variety of negotiated contractual protections and typically senior positions in the capital structure.

In conjunction with their exposure to a resilient and innovative market, both traditional and structured health care royalties can offer meaningful diversification benefits for a well-balanced portfolio with return drivers distinct from both other sectors and investment strategies, reflected in low market beta and differentiated performance during downturns.15

Was this article helpful?


(1) Source: Royalty Pharma.
(2) Source: Bloomberg, as of March 11, 2022.
(3) Source: ICE BofA US High Yield Index Option-Adjusted Spread.
(4) Source: Managed Funds Association, “The Role of Private Credit in U.S. Capital
Markets”, March 31, 2022.
(5) Source: Cliffwater CDLI-S Index, S&P U.S. High Yield Corporate Bond Index.
(6) EBITDA = Earnings before interest, taxes, depreciation, and amortization.
(7) Source: World Health Organization, “Global expenditure on health: Public
spending on the rise? 2021”.
(8) Source: Centers for Medicare and Medicaid Services, “National Health
Expenditure Projections 2019-2028”.
(9) Source: Centers for Medicare and Medicaid Services, “National Health
Expenditure Projections 2019-2028”.
(10) Source: The Brookings Institution,“A dozen facts about the economics of the US health-care system”. In the United States, per capita health care spending for individuals aged 19-44 averaged roughly $5,000/year in 2018, versus $18,000 for the 65-84 age bracket and $35,000 for the 85+ age bracket
(11) Source: Bloomberg, as of March 1, 2022. For period April 2002 to February 2022. Based on monthly returns. For illustrative purposes only. Past performance is not indicative of future results. Future results are not guaranteed.
(12) Source: PwC,“The Global Innovation 1000 study”, 2018.
(13) Source: Research America, “U.S. Investments in Medical and Health Research and Development, 2016-2020”, January 2022.
(14) Source: Wong, Chi Heem, Siah, Kien Wei, and Lo, Andrew W,“Estimation of clinical trial success rates and related parameters”, Biostatistics, Volume 20, Issue 2, April 2019.
(15) Source: Bloomberg, as of March 1, 2022. For period April 2002 to February 2022. Based on monthly returns. For illustrative purposes only. Past performance is not indicative of future results. Future results are not guaranteed.


The material herein has been provided to you for informational purposes only by Institutional Capital Network, Inc. (“iCapital Network”) or one of its affiliates (iCapital Network together with its affiliates, “iCapital”). This material is the property of iCapital and may not be shared without the written permission of iCapital. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of iCapital.

This material is provided for informational purposes only and is not intended as, and may not be relied on in any manner as, legal, tax or investment advice, a recommendation, or as an offer or solicitation to buy or sell any security, financial product or instrument, or otherwise to participate in any particular trading strategy. This material does not intend to address the financial objectives, situation, or specific needs of any individual investor. You should consult your personal accounting, tax and legal advisors to understand the implications of any investment specific to your personal financial situation.

ALTERNATIVE INVESTMENTS ARE CONSIDERED COMPLEX PRODUCTS AND MAY NOT BE SUITABLE FOR ALL INVESTORS. Prospective investors should be aware that an investment in an alternative investment is speculative and involves a high degree of risk. Alternative Investments often engage in leveraging and other speculative investment practices that may increase the risk of investment loss; can be highly illiquid; may not be required to provide periodic pricing or valuation information to investors; may involve complex tax structures and delays in distributing important tax information; are not subject to the same regulatory requirements as mutual funds; and often charge high fees. There is no guarantee that an alternative investment will implement its investment strategy and/or achieve its objectives, generate profits, or avoid loss. An investment should only be considered by sophisticated investors who can afford to lose all or a substantial amount of their investment.

iCapital Markets LLC operates a platform that makes available financial products to financial professionals. In operating this platform, iCapital Markets LLC generally earns revenue based on the volume of transactions that take place in these products and would benefit by an increase in sales for these products.

The information contained herein is an opinion only, as of the date indicated, and should not be relied upon as the only important information available. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance. The information contained herein is subject to change, incomplete, and may include information and/or data obtained from third party sources that iCapital believes, but does not guarantee, to be accurate. iCapital considers this third-party data reliable, but does not represent that it is accurate, complete and/or up to date, and it should not be relied on as such. iCapital makes no representation as to the accuracy or completeness of this material and accepts no liability for losses arising from the use of the material presented. No representation or warranty is made by iCapital as to the reasonableness or completeness of such forward-looking statements or to any other financial information contained herein.

Securities products and services are offered by iCapital Markets, an SEC-registered broker-dealer, member FINRA and SIPC, and an affiliate of iCapital, Inc. and Institutional Capital Network, Inc. These registrations and memberships in no way imply that the SEC, FINRA, or SIPC have endorsed any of the entities, products, or services discussed herein. Annuities and insurance services are provided by iCapital Annuities and Insurance Services LLC, an affiliate of iCapital, Inc. “iCapital” and “iCapital Network” are registered trademarks of Institutional Capital Network, Inc. Additional information is available upon request.

©2024 Institutional Capital Network, Inc. All Rights Reserved. | 2024.01

Back to Private Credit
Kunal Shah

Kunal Shah

Kunal is Managing Director and Head of Private Asset Research & Model Portfolios, focused on the identification, selection, and due diligence of private market funds. Previously, Kunal was a Principal in the private markets group at Meketa Investment Group, a leading global investment consultant serving pensions funds, endowments and foundations, and family offices. He received a BS in Business Administration with a concentration in Finance from Drexel University. See Full Bio.

Shan Hasnat

Shan Hasnat

Shan is a Senior Vice President on the Research & Education Team, focused on private markets. Prior to joining iCapital in 2020, he was a Vice President and Senior Investment Analyst with Voya Investment Management, where he co-managed the alternatives portfolio for Voya’s insurance business. Previously, Shan spent eight years at Bank of America Merrill Lynch. He received an MA in International Economics from Brandies University and is a CAIA charterholder.

Joe Zheng

Joe Zheng

Joe is a Vice President on the Investment Products and Research team at iCapital focusing on private fund research and due diligence. Joe joined iCapital from Portfolio Advisors, where he focused on private equity investment research and due diligence. He had previously worked for Siguler Guff, focusing on private equity investment in China. Joe began his career in the United States Marine Corps. He received an MBA from Kellogg School of Management and a BA in Economics-Mathematics from Columbia University.