DRI expects to launch Fund III later this year

The Toronto-based drug royalty-focused firm closed its second fund on $701m last year and has been investing at a quick pace.

DRI Capital, which focuses on pharmaceutical royalty investments, is expected to launch its third fund later this year after closing its second fund last April on $701 million, according to a person with knowledge of the firm.

The target has not yet been established but could be similar to Fund II, the person said.

Toronto-based DRI has been putting out money at a quick pace, taking advantage of the thriving market for pharmaceutical royalties, the person said. Fund II is already more than 50 percent invested, the person said.
Atlantic-Pacific Capital worked as the placement agent.

In pharmaceutical royalty investments, a firm will pay upfront cash to take over the revenue stream of future royalties on some component of a pharmaceutical product. For example, a firm develops a component of a pain-killing drug and collects royalties on that component every time the drug is sold. The firm will come in and take over the royalty stream in exchange for cash.

Sellers look for this kind of arrangement for various reasons, including if they are trying to raise capital for further research and development, the person said.

“Some sell for tax purposes, if the tax rate is going up and they want to cash out now,” the person said. “Others make large donations to various institutions.”

Limited partners like the strategy because it is “uncorrelated” to other strategies in the private equity portfolio like leveraged buyouts. LPs also like the current yield aspect of the strategy as well, the person said.

“If the debt markets go bad of LBO multiples contract, this is not affected,” the person said.

Pharmaceutical royalty investing is a niche strategy. Other firms that work in the strategy include Capital Royalty, Cowen Healthcare Royalty, a Paul Capital spin-out, OrbiMed Advisors and Paul Capital Healthcare.