OrbiMed Shows How To Raise a Second Fund –

Once you get past all the jargon and exotic technologies, the venture capital business is pretty straightforward. The easiest way to raise a second fund is by showing investors that you can make money with your first. That’s what OrbiMed Advisors did and it ended up turning away potential LPs.

OrbiMed’s new fund, called Caduceus Private Investments II LP, closed on $300 million in September. It could have raised more than $400 million, says Carl Gordon, a general partner. OrbiMed’s second fund was well received by potential LPs because “the performance of our first fund was very strong relative to a lot of other funds LPs have been involved with,” he says. He declined to reveal the IRR for the 3-year-old first fund, but he says, “It’s a good positive number.”

The new fund will seek investments in drug development, drug discovery and medical device companies, with an emphasis on late-stage deals. About three out of four of the fund’s investments will be in drug development, with the remainder in medical device companies, says Jonathan Silverstein, an OrbiMed director.

In particular, the New York City-based firm will look to invest in drug development and product-focused companies that have proprietary technology that can be patent protected. For example, one of OrbiMed’s better-known portfolio companies from its previous $275 million fund is Given Imaging Ltd., an Israel-based maker of a video camera that is swallowed by a patient so that doctors can look for intestinal abnormalities. OrbiMed was the company’s sole investor in a $30 million early-stage round in 2000. It was the only venture capital investment the company sought. Given Imaging then launched a $60 million IPO in 2001 (Nasdaq: GIVN).

OrbiMed expects to invest its latest fund over the next three to four years, with investments ranging from $5 million to $20 million. It prefers to take the lead on deals that it invests in.

OrbiMed’s closing of the fund comes as more and more firms are starting to raise new funds. After all, as venture capital deal flow slowly inches upward, the capital from funds that were raised during the Internet heyday is winding down. Besides, OrbiMed, ComVentures, an early stage communicationsfocused VC based in Palo Alto, Calif., also raised a $300 million fund this fall.

OrbiMed’s new fund is significant since it comes as LPs are stepping up their due diligence – even if they are repeat customers. A general partner at OrbiMed says LPs made it clear that they want to see VCs these days raise smaller funds that will return capital more quickly. The LPs also like that fees are lower in the smaller funds.

Gordon says that caution rules the day. “In general, what I’ve seen is that when you meet a new LP now they’re more skeptical than they were three years ago,” he says. “They’ve seen a lot of people come by who haven’t been able to deliver. LPs in general are expressing more skepticism about the carrying value of unrealized investments. There is a little less enthusiasm because they’ve been knocked around for the past couple of years.”

OrbiMed was able to get results relatively quickly partly because of its late-stage focus and partly because it did some private investment in public equities (PIPE) deals. It plans to continue the PIPE strategy with its second fund. “With our PIPE strategy, one of the things we like is valuations,” Gordon says. “We still see a lot of opportunity in out-of-favor biotechs that people don’t care about.”

As for private companies, valuations have increased in the past six months, but “they’re still very attractive,” he says. “It’s a buyer’s market.” OrbiMed’s primary interest is in late-stage, private biotech companies. “Generally, we’re looking for stuff as late as possible,” Gordon says. “Companies with revenue and some products on the market. We’re also looking for companies with clinical programs in human testing.”

The fund will invest 80% to 90% of its money in North America, with the rest going to Europe. “We’ll go anywhere in the United States,” Gordon says.

The new fund has not made a new investment yet, but it will likely do so by the end of the year. The predecessor fund is fully invested.

New limited partners include California Public Employees Retirement System, J.P. Morgan Chase & Co., Citigroup and Japanese investment bank JAFCO Group, which also manages Japanese venture capital fund JAFCO Ventures. OrbiMed says about half of the LPs in its latest fund are new. One returning LP is Fort Washington Capital Partners.

On the issue of public LPs, OrbiMed did not avoid them despite concerns about the disclosure of internal rates of return. “We felt it was high-quality money,” Gordon says. “We would rather that our information be confidential, but it wasn’t a deal breaker. It wasn’t something that we were that concerned about.”

Besides being a private equity firm OrbiMed also describes itself as a “health care investment firm.” Its largest vehicle is a mutual fund. It made its first private equity deal in 1993 and raised its first private equity fund in 2000. Because OrbiMed invests in both the private and public markets, “we have a kind of unique structure in the industry,” Gordon says. “We think it gives us excellent insights into the industry.”


Alastair Goldfisher contributed to this story.