SV Life Sciences announced June 29 it has closed one of this year's largest venture funds. At $523 million, the firm's fifth fund since inception comes during a time of contraction in the venture world, with other firms scaling back or folding up shop.

A key question these days for venture funds of all stripes is where to raise money. Many traditional contributors to venture funds, such as pension funds and endowments, took a beating during the recession. Coupled with a new pessimism about venture's ability to generate generous returns, LPs have been stingy in their venture allocations. (Also see "Venture Data Continues To Haunt The Biotech Landscape" - Pink Sheet, 15 January, 2010..)

Recent raises of note include Orbimed Advisers' Caduceus IV $550 million fund that closed in March (Also see "OrbiMed Closes $550 Million Fund" - Scrip, 1 March, 2010.) and 5am Ventures $200 million fund, its third, which closed last December (Also see "What Dry Spell? 5AM Closes $200 M Fund" - Pink Sheet, 9 December, 2009.).

SV managing partner James Garvey said his firm tapped 22 new LPs for the new fund, but only after raising the first 70 percent from investors from the firm's fourth fund, which closed in early 2007 with $572 million. The investor base is split roughly in thirds between funds of funds, endowments, and private and public pension funds. Garvey said private pension funds took a larger role than in previous funds.

SV will continue to make about half its investments in biopharmaceutical companies, with the other half spread between devices, diagnostics, health care services and information technology. Keeping its allocation mix roughly on par with previous funds is an interesting decision, seeing how the health care landscape and economy is in severe flux with implementation of U.S. health care reform and the multiple challenges faced by pharmaceutical companies including poor R&D productivity, patent expirations, and rising payor influence.

"We don't think we need to adjust the mix," said Garvey. "The legislation expands participation, but it didn't really control, regulate or limit anything much."

Cost controls, which many observers say are inevitable in later rounds of legislation, will mainly be on the services side, said Garvey. "And we'll avoid the things that are obvious or even might be affected by volume increases and margin compression, perhaps even rationing."

There have been four investments from the new fund so far: UK peptide platform firm Bicycle Therapeutics, co-founded by Dr. Greg Winter, the protein-engineering pioneer whose work led to Cambridge Antibody Technology and Domantis; Broadlane, a group purchasing organization for acute care; anti-inflammatory and metabolic drug developer Catabasis Therapeutics; and The Corner Pharmacy, which co-owns and runs hospital-based retail pharmacies.

One change in the new fund Garvey sees is possibly fewer portfolio companies this time around. In each of its first four funds, SV has invested in 32 to 37 firms. But SV doesn't want to make the mistake other VCs made in the recent cycle, running out of cash to support portfolio companies, so it plans for now to shoot for 30 to 32 investments, boost its reserves, and recycle capital more heavily in the first five years of the fund. SV also thinks it will benefit from what Garvey predicted to be a "washout of a third to half the funds out there," with SV able to pick up investments in companies that other VCs can no longer support.

The last five years have brought what Garvey called a "sea change," with most funding rounds tranched and most acquisitions of privately held companies structured with milestones that force sellers to earn payments post-acquisition. Garvey said SV has made its peace with the structured acquisitions, a trend that "will dominate M&A for the foreseeable future." In 2009, 9 of 12 acquisitions of privately held biotechs included earnouts that averaged more than 100 percent of the upfront price. (Also see "Biotech Backers Are Learning to Live with Exit-by-Earn-out " - Scrip, 1 March, 2010.). "The economy triggered smarter M&A. We've gotten smarter, but so have people who acquire our companies."

- Alex Lash (a.lash@elsevier.com)

Sidestepping the "Washout," SV Life Sciences Closes $523 Million Fund

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