After 35 years of investing in software and communications companies, Sprout Group is making a permanent shift to invest only in health care companies. As part of the shift, it plans to trim its last fund by 25 percent. The changes are expected to go into effect Jan. 1.
Pending approval from Sprout’s limited partners, the Credit Suisse First Boston private equity affiliate will spin out its health care group to form a new firm, Sprout Healthcare Ventures (SHV), says a Sprout general partner.
SHV will begin fund-raising in mid-2004 with plans to raise between $250 million and $400 million. CSFB will be a limited and a general partner in the new fund.
The switch to health care comes at a time when investment in life sciences is gaining fervor. At least one longtime health care investor says the Sprout news is good for the sector. “I don’t yet see the space getting too crowded for early stage investors,” says Fred Dotzler, co-founder and managing director of De Novo Ventures in Menlo Park, Calif. “The larger funds usually invest in later-stage companies. We view this as a plus for financial support of the device companies we fund. The biotech companies consume lots of cash, so having lots of sources is also favorable.”
As for talk of a biotech bubble, Dotzler says: “During the [Internet] bubble, the amount of capital for technology companies increased by a factor of 15 to 20. I believe the supply of capital for the life sciences sector could double and it would still be a good place to invest.”
Partners at Sprout Group say the firm’s change in direction is due to a declining IT market. “We don’t see the rate of IT investment picking up anytime soon,” says Philippe Chambon, a general partner with Sprout Group. “We began a review of where we stood this summer and there were too many differences between the health care and the IT portfolios.” More than 60% of Sprout IX’s portfolio sits in health care deals, while Sprout VIII, a $750 million fund raised in 1998, was only 20% invested in health care.
Chambon will manage the new health care firm alongside Jeani Delagardelle and Kathy Laporte. The team will invest in health care IT, late-stage biopharmaceutical companies, early-stage medical device companies and in lab devices and services across all stages.
Sprout Group’s IT group will stay on to manage its portfolio. Keith Geeslin, head of Sprout’s IT practice, is to retire. Partners Stephen Diamond, Robert Finzi and Alex Rosen also will not participate in the new health care-focused fund.
Sprout Group’s portfolio includes 85 companies worth about $1 billion. Limited partners in Sprout Group include AIG, Brinson Partners, the Common Fund, Equitable Life and Toronto Dominion Bank, as well as pension funds from the states of Michigan, Colorado and Washington.
As part of its shift to health care, Sprout will reduce the capital managed by its vintage year 2000 fund – $1.44 billion Sprout IX – by 25% to $1.08 billion. That fund, currently 80% invested, will continue to support its portfolio of IT and health care companies. New investments out of Sprout IX will be for health care investments.
The firm also plans to cut the management fee on Sprout VIII from 2% to 1%. That fund is fully invested.