Venture Wrap: Not So Strange Bedfellows

This week's spin out by Angiotech Pharmaceuticals Inc. brought together two private equity firms that never worked together previously.

Given the size of the deal--Angiotech could raise up to $300 million through the sale of convertible notes in the new subsidiary Angiotech Pharmaceuticals Interventions Inc.--we weren't surprised to see a big player like Ares Management LLC in the transactions. The Los Angeles-based firm is no stranger to health care with stakes in Aspen Dental Management Inc., GNC Corp. and Hanger Orthopedic Group Inc.

But the name of the co-investor, New Leaf Ventures, caught us a bit by surprise. To be sure, the firm is well capitalized with a freshly closed $450 million fund. But even 10% of the new fund would barely buy one-quarter of the shares in the new subsidiary, which Angiotech will bestow with considerable IP and products including the royalty business associated with Boston Scientific's Taxus stent.

So we asked Ron Hunt, managing director at New Leaf a few questions about the deal. Hunt warned us up-front that he couldn't say much since Angiotech is publicly traded. But we gave it a shot.

What does New Leaf bring to the table in a deal of this size?
If you look at the company’s collection of assets, it’s an assortment of marketed products and a pipeline of products. There is a very interesting mix. Some of their products have venture capital attributes in that they are still in clinical development and require a reasonable amount of investment to get them through clinical testing, past the regulatory stage and onto the market. Ares has a lot of investment experience in health care through their bond portfolio and their private equity fund, with companies like Hanger Orthopedics. What we bring to the table is an exclusive focus on health care technologies. We have a significant portfolio of both biopharmaceutical and medical device companies. So it’s an interesting mix. They have their expertise in the capital markets as well as the debt side of things as a classic private equity firm with a health care focus. We also have an exclusive focus on health care as well as a real focus from our venture portfolio on managing clinical-stage products and identifying new types of opportunities.

Did you team up prior to bidding on the subsidiary? [Goldman Sachs handled the bidding.]
This deal brought us together and it’s been a really great match for us. We came together through the [bidding] process.”

Do you see opportunities for similar transactions in the future.
It’s hard to say. I couldn’t say this is a broader industry trend. We have seen a number of examples, more on the biopharmaceutical side where companies have spun out assets as a way of maximizing value. We’ve done quite a lot of investments where the key asset or assets have been spun out of larger companies. Those are usually built around single assets. I couldn’t say this is a broader trend but we do as a firm have great interest and participated in quite a lot of investments where there is a spin out of assets and forming new companies around those assets. For us it’s an important part of our strategy.

We'll see how the rest of the year plays out, but as we reported last week, One Equity's bid for Johnson & Johnson's Ethicon Inc.'s Wound Care business serves as yet another sign that private equity players are on the move. New Leaf's teaming with Ares is nice model for those venture firms interested in serving as guides for these well-funded newcomers.

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The National Venture Capital Association this week published the results of its survey of venture capitalists. The goal of the survey--and the press release--was to show that the venture capital industry is morphing into a more diverse industry where women and ethnic minorties are playing a larger role.

It may be happening, but it's certainly coming slowly. On the whole, however, the 526 respondents told a very familiar story. Three-quarters of them were male; 88% were white. The numbers are even more tilted when you look at those who identify themselves as "investing venture capitalists." Eighty-six percent of those folks are male.

The one shining beacon, of course, is the life sciences, or biopharmaceuticals, where 32 percent of the respondents were women. Without sifting through our Contacts page in Outlook, that figure seems to fit.

Any thoughts?

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Pequot Capital spinout Longitude Capital this week reported the closing on $325 million on its first fund, Longitude Venture Partners, L.P. Managing Director Juliet Tammenoms Bakker says Longitude's will closely match the playbook used at Pequot which means investments in early-stage medical device companies and later-stage biopharmaceutical companies, including PIPEs. Longitude already has made two pipe investments. We first wrote about the firm a year ago in START-UP.

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Longitude isn't the only firm securing funds. According to VentureWire Lifescience, the credit crunch and wider macro-economic maladies are driving limited partners to invest in venture funds.

From VentureWire, which is reporting on all funds:

Early-stage venture capital funds had a good first half, raking in $5.2 billion across 43 funds, up from $3.4 billion raised by 33 funds at this time last year. This had a lot to do with the specific firms that were in the market - Foundation Capital, for instance, raised $750 million for its sixth early-stage fund, while CMEA Ventures raised $400 million for its seventh early-stage vehicle. But the increase could also be seen as a mini-rebellion against the trend in recent years to move away from early-stage funds in favor of growth opportunities.

Late-stage VC fund-raising declined from a year ago, to $1.2 billion raised by eight funds from $2.3 billion raised by seven funds at this time last year. Kleiner Perkins Caufield & Byers turned in the largest fund in this category, raising $500 million for its Green Growth Fund.

Given last week's gloom-and-doom show by the NVCA about the crisis in venture capital, limited partners either are employing a shrewd contrarian investment strategy by investing when times are tough. Or they're blindly tossing money into an industry that desperately needs less capital, not more.