Venture capital firms in the life sciences sector are increasingly investing in both private and quoted companies – some through hybrid funds that do a bit of both, and some through funds that concentrate completely on quoted investments. The growing prominence of these strategies reflects an overlap between private and listed companies in the sector.

Remy Hauser, life sciences specialist at multi-fund investor Partners Group in Zug, Switzerland, thinks that this overlap is characterised by two things. Firstly, private and quoted life sciences companies do not differ greatly in terms of what stage of development they are at. Ponders Hauser: “Many quoted life sciences companies are still at an early stage of development, which makes them potential targets for venture capitalists.”

Secondly, private and quoted life sciences companies often resemble each other in terms of the intellectual property they focus on. Considers Hauser: “It is rarely the case that only one life sciences company concentrates on one disease; instead, several companies, frequently from both the public and private markets, have different compounds in development for the same disease.”

As a result, VCs see various advantages to investing in both private and public life sciences companies. One is that some companies can be bought more cheaply on the public markets. Hauser cites the example of a listed life science business losing the support of its investors, which can happen for a variety of reasons: if as a result the valuation drops and the company cannot raise any more cash, opportunities might open up for venture capitalists to invest in PIPEs, which typically happen at a discount to the share price.

Stephen Bunting, managing director at life sciences venture capital firm Abingworth, thinks that another advantage is market insight. Bunting says: “Investing in both private and listed companies means that GPs properly understand the trends in the public markets and this facilitates the IPO process.”

UK and US-based Abingworth recently closed its eighth life sciences fund on £300 million (€455 million), the biggest ever European venture fund in the sector. The fund, Abingworth Bioventures V allocates up to 15 percent of its capital to listed life sciences companies, as did the firm's previous fund. Bunting says: “More and more firms have the flexibility to pursue this hybrid strategy, but Abingworth is unique in that it takes a much longer term investment perspective of two to four years.”

One of Abingworth's other funds, Abingworth Bioequities, invests in listed companies only. Launched in July 2005, the fund invests more than $150 million (€116 million) globally in quoted life sciences companies. Says Bunting: “The fund applies a venture capital mindset to investing in quoted companies.”

Another advantage of funds that invest in both spheres is that they appeal to different types of investors. Kate Bingham, managing partner at US and UK-based Schroder Ventures Life Sciences, thinks that hybrid funds attract smaller investors, which can help widen a manager's investor base. Ponders Bingham: “Smaller investors can't get into our regular venture funds because there is a minimum investment of $10 million. Our hybrid fund attracts them because it is more accessible and because it offers them some of the upside of investing in unquoted companies.”

Schroder Ventures Life Sciences' hybrid product is the International Biotechnology Trust (IBT), which is listed on the London Stock Exchange. IBT invests predominantly in listed small cap companies but also in privately owned businesses.

Considering the advantages of hybrid funds, it seems likely that more venture capital firms in the life sciences sector will decide to allocate a percentage of their funds to quoted companies. However, not all venture groups have the requisite skills for the approach.

Partners Group's Hauser warns: “While more firms have the flexibility to pursue this strategy, it takes a sophisticated venture capitalist to invest in both private and quoted companies.”