DRI to seek $1bn for third fund

The Toronto-based firm, which focuses on pharmaceutical royalties, has been busy since closing its second fund on $701m in 2010.

DRI Capital, a Toronto-based firm that invests in pharmaceutical royalties, is set to launch its third fund with a $1 billion target, according to a person with knowledge of the firm.

DRI closed its second fund on $701 million in 2010, along with a $225 million sidecar vehicle for co-investments — so the $1 billion target is not a huge leap from its prior fund, the person said. Atlantic-Pacific Capital will work as the global placement agent on the fundraising; the firm also helped DRI raise its second fund.

The fundraising could launch by next month. DRI has just started conversations with prospective LPs. The firm could not be reached for comment.

Led by president and chief executive officer Behzad Khosrowshahi, DRI makes investments in royalty streams of pharmaceutical drugs that have been in the market for certain periods of time and are essential to keeping people alive. Because of the necessity of these products, the revenue streams are “robust and predictable”, the person said.

“DRI acquires royalties on drugs that are necessary for people to live. A patient cannot stop taking these drugs,” the person said. Also, DRI invests in royalty streams only for the duration of the patent protection on the products since after the patent expires, pharmaceutical companies can develop generic versions of products that sell for much less.

This asset class is uncorrelated to the broader public and private equity markets and tends to offer strong current returns and a lower risk profile similar to mezzanine with upside potential comparable to buyouts or late stage venture capital.

LA Fire and Police pension memo

The strategy works like this: an inventor develops a component of a pain-killing drug. The inventor then licenses the component to a pharmaceutical company and collects royalty payments based on sales of the drug.

The inventor decides instead of collecting (for example) $10 million a year for 15 years, he will sell the royalty stream for $75 million to DRI in a lump sum payment and use the money to make a large donation to his favorite charity.

Once DRI collects a diversified portfolio of different royalty streams, it can apply some leverage to monetise a portion of the future royalty payments and distribute the cash to LPs.

The universe of sellers is broad – while an inventor may be looking to cash in on an invention for various reasons, a large corporation might want to sell off cash flow-producing inventories of royalty interests to help finance an acquisition. Universities and research labs also develop drugs and hold royalties. Often, academic institutions sell off royalties as part of capital-raising campaigns.

LPs like several things about the strategy, including the current yield aspect of the investments and its lack of correlation to the public and private equity markets, according to a 2009 investment staff memo from the Los Angeles Fire and Police Pensions.

“This asset class is uncorrelated to the broader public and private equity markets and tends to offer strong current returns and a lower risk profile similar to mezzanine with upside potential comparable to buyouts or late stage venture capital,” the memo said.

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

A few other firms operate similar strategies in the space, including Paul Capital, Cowen Healthcare and New Health Capital Partners.