First-Timer Thomas, McNerney Hits It Big –

Leveraging its partners’ long track records in health care investing, Thomas, McNerney & Partners LLC has closed on a first-time fund of $216 million.

“We were planning on going on the road right before Sept. 11, 2001, which wasn’t great, so we held off and then raised the fund in about a year,” says James Thomas, co-founder and managing partner. “It was pretty hard to raise the fund, but we got a good reception based on our track record.”

The firm’s three managing partners collectively have been investing for more than 35 years. They have backed 24 companies that have gone public and 17 that have been acquired. “Between the three of us, we have invested more than $5 billion, so the LPs were favorable toward us,” Thomas says. “But raising any first-time fund is hard.”

The partners’ pedigrees certainly helped with fund-raising. Thomas spent 13 years at E.M. Warburg, Pincus & Co. LLC’s health care technology private equity practice.

Pete McNerney and Karen Boezi, the two other co-founders, came to the firm after overseeing the health care practice for Coral Ventures. Prior to joining Coral in 1994, Boezi worked with Thomas in Warburg’s health care technology practice.

“When I was ready to leave Warburg, it turned out that Karen and Pete were winding down at Coral and we thought it made sense to merge our efforts,” Thomas says.

The other members of the team are Venture Partner Alex Zisson, a former managing director and leader of health care equity research at Hambrecht & Quist, and Chief Financial Officer Susan Haedt.

The firm’s goal was to raise $250 million, but “what we have is enough, and we are happy with what we got,” he says.

The firm, which initially called its fund Lumina Ventures, was founded in 2001 and has offices in New York City, Minneapolis and San Bruno, Calif.

The fund doesn’t have any geographic limitations, but it will probably wind up closing more deals around its three offices. “Between the three of us, we have invested in 26 states during our careers, but we have the advantage of being local in three big markets,” Thomas says.

The fund is looking for deals that require $5 million to $20 million in one or more rounds, but it will also do deals as small as $100,000. It prefers to be the lead investor.

The new fund will invest in all stages of the pharmaceuticals, medical devices and biotechnology. “We’re stage agnostic,” Thomas says. “Our first deal was a growth financing. We’ll do small acquisitions and we’ll invest in startups. Right now, we perceive the greatest value to be in the later-stage public and private drug development companies. The public markets have been so tough. A number of companies have made progress, but the value is not being recognized. That will reverse.”

Thomas, McNerney made its first investment into Apptech Laboratories, a Minneapolis-based bio-testing company, in December 2002.

While Thomas wouldn’t disclose all of the new fund’s LPs, he says that most were institutional investors and many were public pension funds. Among the investors are the City of New York, the State of Minnesota, the State of New Mexico and the University of Michigan Endowment Fund. Thomas says two medical device companies are among the LPs, but he declined to name them.

The fund will source most deals from individual contacts, but it expects to occasionally get deals from the two medical device companies that are LPs. Neither company has special rights.

“Because we have been in the business, most deals come from our own contacts, but we’re plenty happy when our LPs send deals our way,” Thomas says. “We have term sheets out for a couple more deals. We’ll close our next deal when we find a great investment. That will most likely be next quarter.”