Healthcare Royalty Partners completes $1.5bn fund

December 2014 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

Global healthcare investment firm Healthcare Royalty Partners announced the successful closing of its third fund in October having raised $1.5bn, reaching the fund’s hard cap. The fund, which will be known as Fund III, came in well ahead of its $850m target and exceeded the $1bn the firm raised for its second fund, which closed in December 2011.

The fund, which will invest in commercial state healthcare royalty contracts from sales of pharmaceutical drugs and medical devices, has attracted a great deal of interest from domestic investors in the US. Backers including the Florida State Board of Administration, Tallahassee, San Francisco City and County Employees’ Retirement System, the Missouri Local Government Employees Retirement System and Jefferson City have all committed funding. However, Healthcare Royalty was able to easily outstrip the fund’s investment target due to significantly increased interest from abroad. The firm raised approximately half of the capital required for its third fund from limited partners outside of the US. This is a sizeable jump from the 35 percent raised from non-US limited partners for Royalty’s Fund II. Indeed, a number of prominent pension funds, sovereign wealth funds and financial institutions from across Europe, the Middle East and Australia have all invested in Fund III. “The response from the global LP community has been robust,” said Clarke Futch, the founding managing director of Healthcare Royalty, in a statement announcing the close. “We substantially exceeded our capital target for Fund III, hit our hard cap, and secured significant commitments from new public and corporate pensions and sovereign wealth funds. We believe the response is a testament to our time tested investment strategy and successful track record of raising and deploying capital in this market over the past decade.”

Another of the firm’s founding managing directors, Todd Davis, also noted that “With Fund III, we continue our mission of identifying and investing in healthcare assets that will generate value for our investors and our partners. We believe our broad and flexible platform will continue to serve as a long-term capital resource for companies, institutions and inventors around the globe.” Healthcare Royalty, which is based in Stamford, Connecticut, has been particularly active in the royalties sector in recent years. The firm has committed around $900m of the $1bn raised from its previous fund, Healthcare Royalty Partners Fund II, through 23 investments in 23 distinct products. The healthcare royalty market has experienced tremendous growth in recent years. Accordingly, each of the firm’s three funds has greatly exceeded the last in terms of the capital committed. Healthcare Royalty’s first fund, which closed in July 2008, raised $500m. The firm has estimated that pharmaceuticals, medical devices and other healthcare treatments currently generate more than $100bn in royalty revenues annually. This represents a significant jump from the $10bn to $15bn that the annual drug royalties market used to generate around 10 years ago.

From its previous funds, Healthcare Royalty has typically backed deals in the $20m to $150m range. However, the size of Fund III will enable the group to invest in more deals than it has done with previous funds. According to Mr Futch, the additional capital committed to the firm’s third fund will likely see Healthcare Royalty back around 25 to 30 deals from Fund III, up from around 20 deals from Fund II. Healthcare Royalty has already begun to make investments from Fund III. In July, it announced a $30m investment in Orenitram, a drug which has been developed by Supernus Pharmaceuticals to treat the orphan disease pulmonary arterial hypertension. It appears that the orphan disease market will be one of the main focuses of Fund III. According to Mr Futch, the sector is popular with investors, particularly in the royalty markets, because of the regulatory protections that are applied to medications of that category.

Richard Summerfield