Archive | August, 2013

The Megafund Model: A solution to curing the largest indications facing mankind?

29 Aug

By Vishal Chinchwadkar, Research Analyst, LSN

Can a novel financing tool be the answer to cure some of mankind’s greatest medical challenges? Andrew W. Lo, a hedge fund manager and a finance professor at MIT, recently proposed a revolutionary idea to promote research for cancer. Mr. Lo has suggested the creation of a $30 billion “megafund” targeted at the singular goal of maximizing cancer therapy development. The concept aims to create a diversified portfolio in a single broad indication to mitigate risk by diversifying the fund’s portfolio. At the most basic level, it allows a single large investment entity to tolerate early stage risk by diversifying its allocations along the entire pipeline. This is critical in an indication that affects millions, but remains a major therapeutic challenge (largely due to funding gaps).

Private partnership structures, such as those used by venture capital funds, can’t justify the creation of a diversified portfolio because of the timeline associated with the full development cycle of a therapeutic. Thus they often focus on a specific development stage and hope to pass their investment off to another entity further down the line. The megafund structure is different in that it has enough capital to tolerate the broad diversification of capital across the entire therapeutic development landscape.

Even more interestingly, the megafund structure is organized in such a way that It could draw on capital (at least in part) via the public capital markets via securitization. Securitization is a common financing tool in which capital is obtained from a diverse group of investors by means of equity and debt in order to have claims in the biomedical research. It may seem naïve that so much capital could be raised in a generally poor economic climate, but given the low-interest rate environment, the timing may be ideal for issuing long-term debt.

The megafund concept signifies a paradigm shift in how capital could be allocated to major diseases in the future through a broad-based investor audience, but allocated by experts. Having a skilled management team in control of a portfolio, is a major factor. The public market capitalization of such a fund allows universal participation (like crowdfunding), but keeps experts in control of the vetting of technologies. Within a single portfolio, the open sharing of data, knowledge, and resources across hundreds of research projects can be of great benefit to scientists, investors, and society as a whole. Megafunds might just be the biggest shift in how companies are funded in the life sciences arena moving forward.


Hot Life Science Investor Mandate 1: PE Provides Buyouts, Majority Recaps, Family Successions

29 Aug

A private equity group based in the Eastern US, which manages SBIC (small business investment company) funds, has around $200 million in total assets under management. They are currently deploying capital from their second fund, which closed in 2012. The group is interested in sourcing new firms in the life sciences space, typically making equity investments ranging from $1-10 million.

The most important criteria for potential investments for the PE group is the company’s structure. The group provides company owners capital to facilitate majority recapitalizations, majority management buyouts, as well as family successions. Accordingly, they would be especially interested in a firm where a manager is seeking to buyout the company’s owner, a business whose owner is looking to retire, or company owner who is looking for a strategic financial partner. The firm is thus most interested in management teams who are looking to retain or acquire a significant equity stake in their company.

The PE is seeking firms that have at least $1-10 million in EBITDA, and $10-100 million in revenue. The firm is most interested in the suppliers and engineering space. However, they are very opportunistic in terms of sector, and would consider companies operating within any subsector of the healthcare suppliers and engineering space.

Hot Life Science Investor Mandate 2: Eastern US-Based PE Interested in Deploying Funds to CROs, CMOs

29 Aug

A private equity group based in the Eastern US is currently deploying funds from the firm’s fifth fund, which closed at over $500 million. The firm is currently looking for new firms in the life sciences space, and will allocate to around 10 new firms in 2013. The firm provides growth capital to firms, and also executes buyout transactions. Typically, they invest in middle-market companies that have an enterprise value ranging from $10-100, but their preference is firms with values in the $20-80 million range.

The firm is most interested in biotech companies in the R&D services space, and is most interested in contract manufacturing organizations (CMOs), as well as contract research organizations (CROs). The PE is also seeking firms in the suppliers and engineering space and is looking for firms that are producing reagents.

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