DRI nears $850m for Fund III(2)

DRI Capital, a Toronto-based firm that invests in pharmaceutical royalties, has received just under $850 million in commitments for its third fund in only a matter of months, according to a person with knowledge of the firm.

DRI has a target of $1 billion on Fund III, which it is working to hit by the end of the first quarter, the person said. Fund II closed on $701 million in 2010.

Fund III has had strong interest from limited partners who are attracted by the firm’s strategy and track record, the person said. DRI invests in royalty streams of pharmaceutical drugs that have been in the market for certain periods of time and are essential to keeping people alive. The firm works to build a diversified portfolio of different royalty streams and can use leverage to monetise a portion of the future royalty payments and distribute the cash to LPs.

Fund III is charging a 1.75 percent management fee on committed capital and an 8 percent preferred return, according to documents from the San Diego County Employees’ Retirement Association. SDCERA committed $60 million to the fund in October.

Marketed primarily in the US and Europe, the patented drugs underlying the royalty payments treat important, growing market segments such as rheumatoid arthritis, osteoporosis, various cancers, and chronic/severe allergic conditions. SDCERA

DRI’s third fund also will employ a “European waterfall” type distribution structure, according to the SDCERA documents, meaning the firm must return all committed capital plus the preferred return before it can collect carried interest. The fund will share 100 percent of any deal, break-up or other, similar fees with LPs to offset the management fee, the documents said. Atlantic-Pacific Capital is helping the firm raise its third fund, and also worked on fundraising for Fund II.

Across its first two funds, DRI has 40 royalty payment streams on 27 different patented drugs approved by the US Food and Drug Administration or similar government body, the documents said.

“Marketed primarily in the US and Europe, the patented drugs underlying the royalty payments treat important, growing market segments such as rheumatoid arthritis, osteoporosis, various cancers, and chronic/severe allergic conditions,” according to the documents.

The firm’s royalty investments last as long as the patent protection on the drugs because after the patent expires, pharmaceutical companies can develop generic versions of products that sell for much less.

Canadian private investment firm Inwest Investments took the former Drug Royalty Corporation private in 2002 and turned it into DRI Capital.