Essex Looks to Stretch Many Bucks

Daily Dow watchers who were looking for a quick read on the private equity market might have felt a happy little jolt from the news that Essex Woodlands Health Ventures closed on a $900 million fund. After all, limited partners are supposed to be down on private equity and venture capital fund-raising, right? Is this a sign that the storm clouds are clearing?

Well, we're sorry to disappoint. But, as we reported a year ago, Essex Woodlands actually closed on nearly all of this capital in the first half of last year, before the walls really started tumbling down. General Partner Immanuel Thangaraj is correct in remind us that the market wasn't exactly rosy before the September meltdown, but still, times weren't nearly as tough as they've become.

In fact, Thangaraj admits the firm fell a little short of its goal. After institutional investors began lining up behind the eighth fund early into the fund raising, the firm's partners set a $1 billion goal with a $1.25 billion cap. Essex Woodlands wrapped up roughly $800 million in the first half of last year when potential LPs were ready to stuff the fund, but when the economy took a nose dive they retreated, leaving Essex with "only" $900 million. Essex held the fund open until last week to accomodate a few smaller investors who needed time to complete the transaction.

But Thangaraj and his partners clearly aren't complaining. In fact, Thangaraj presents a convincing argument that a $900 million fund in this current market carries considerable more muscle than it would have just a year ago. With public equities down up to 50% or more and private valuations dipping as well, Essex Woodlands has the necessary muscle to negotiate good prices for shares in great companies that simply need capital. If the partners place wise bets the returns from this fund could be the firm's best.

Essex Woodlands will invest the capital to match the times. The firm could put roughly two-thirds of its capital into later-stage, growth-equity style investments in companies with products or commercialization in sight. The remainder would go into earlier-stage venture capital style investments, including start-ups. "It's hard not to reflect the times, but I don't think directionally we've changed."

Thangaraj says Essex first three investments reflect the diversity of the future portfolio: early stage biopharma Catalyst Biosciences Inc.; publicly traded device company ATS Medical Inc. and specialty pharma company Victory Pharma Inc.

The $900 million figure matches the 2002 fund raised by MPM Capital, a vehicle that caused some consternation in the venture industry as many saw it as a sign of too much capital flowing into the sector. That's not a concern today. Every dollar is welcome by VCs and companies alike. In between 2004 and today, Aisling Capital, Clarus Ventures (the spin off from MPM), Domain, Frazier Healthcare Ventures, MPM and Prospect Venture Partners have all gone to raise between $500 million and $700 million in their most recent funds.

MPM Capital previously had the distinction for raising the largest venture capital fund. Asked if Essex Woodlands' partners were tempted to raise just a bit more to top MPM's mark, Thangaraj admitted that Essex Woodlands, in fact, had raised slightly more than $900 million, but only because the capital was available. But the partners preferred to publicize the $900 million, at least partly so as not to look like they were intentionally trying to top MPM's 2002 high water mark.

But Thangaraj says in this market, the value of each dollar of the fund is almost as important as the number of dollars. Valuations are dropping and capital is scarce. "We've not seen this combination in the last 25 years of operation," he says. "We have incredible purchasing power. The billion we though we had in 2007 or 2008 would probably be less effective [at that time] than the $900 million we actually have today."