In a private equity market place where capital and financial engineering skills have long become commodities, sector specialisation is arguably the most effective way for a general partner to differentiate himself from the competition. The less interests your rivals have in a niche market that you’ve already moved into the better. And just imagine your prospects if you can be the only game in town.
Paul Capital Partners may be in just that position. The US private equity house more commonly associated with its activity in the secondaries market, is currently fundraising for its second medical royalty acquisition fund. Paul is the only private equity manager targeting this market, providing liquidity to owners of healthcare licensing interests such as life science companies, universities, research institutions and inventors.
Of interest are investment opportunities in therapeutics, devices, platform technologies and bioinformatics. The majority of the fund’s investment will be related to approved products, although a significant amount of capital is set aside to purchase royalties of products that are still in phase III testing.
The firm is looking to raise $750m for the fund, having raised $300m for Fund I in 1998. To date, Paul Capital Partners and its affiliated entities have invested in or structured more than $190m worth of royalty transactions. Through co-investment arrangements with its limited partners, the Paul Capital Royalty Acquisition Funds have access to more than $1bn in additional funds to complete larger transactions.
Sellers can monetise a royalty interest to enable companies to fund research, development and marketing activities and to generate liquidity in an environment where the public and private capital markets offer at best limited options. Royalty vendors have also used the proceeds to help finance in business transactions and acquisitions.
Deals completed by the first fund include a commitment of up to $30m over the next two years in SkyePharma. The UK-listed drug delivery technology business will use the investment to fund the clinical development of two of the company’s trial products. In return, SkyePharma will sell a portion of the future royalty and revenue streams from these, and seven other, products from SkyePharma’s drug pipeline to Paul Capital.
A number of US private equity firms have expressed an interest in the royalties business, but no-one has yet followed Paul Capital’s example and raised a dedicated fund. Entering the market requires a high level of industry expertise to execute deals, and the number of qualified investment professionals is limited.
Other buyers of royalty-related cash flows include Drug Royalty, a listed Canadian company whose strategy is based on pursuing and negotiating profitable royalty agreements for late-stage and market-ready pharmaceutical products.
Also active in the sector is Royalty Pharma. The US-Swiss firm seeks to eliminate the large overhead costs associated with pharmaceutical product development for shareholders, while benefiting from revenues generated by pharmaceutical products. Owning royalty interests in nine marketed products as well as three product candidates in phase III clinical trials, Royalty Pharma receives a portion of revenue from the sale of pharmaceutical and biotechnology products to third parties. For the year ended December 31 2001, aggregate worldwide revenues for the company’s portfolio of products exceeded $3.3bn.
Royalty Pharma set out to invest in royalty assets in 1996. The firm raised $60m from private investors and continues to re-invest the proceeds from royalties. “Royalty Pharma’s strategy is not dissimilar to that pursued by Paul Capital although we are using a different capital structure,” said Alex Kwit, vice president at Royalty Pharma.
Also operating in the pharmaceutical royalties sector is US investment bank Bear Sterns, which securitises proceeds from pharmaceutical sales.
Paul Capital is to hold a first close on its latest fund, which according to a source has already received significant commitments. The firm hopes to hold a final close in early 2003. UBS Warburg is acting as placement agent.