Power Corp. of Canada’s alternative-investment arm is expanding its scope with a new team that hopes to raise a nine-figure fund focused on generating returns from pharmaceutical innovations.
The billionaire Montreal Desmarais family’s Sagard Holdings is set to announce a new investing wing on Monday. Sagard Healthcare Royalty Partners will invest in intellectual property (IP) in the pharmaceutical industry. Heading the team will be partner David MacNaughtan, a pharmaceutical veteran whose career has taken him from chemical engineer to, most recently, the senior principal in charge of pharmaceutical IP investment at the Canada Pension Plan Investment Board.
The expansion of Sagard Holdings’s portfolio is the latest in a series of moves to diversify the assets under Power Corp.’s management. Last October, the Power Corp.-backed Portag3 Ventures announced it had raised $198-million for its second financial-technology venture fund, while Sagard Holdings launched a US$450-million credit fund with backing from several outside institutions.
“Pharmaceutical royalties offer strong, uncorrelated returns, which is attractive from a portfolio construction standpoint,” said Paul Desmarais III, who is Sagard Holdings’s chair and chief executive officer, in an e-mail. “We believe this to be especially true in today’s volatile markets.” Mr. Desmarais is the son of Power Corp. chairman and co-CEO Paul Desmarais Jr.
Mr. MacNaughtan said the team plans to raise a fund in the “several-hundred-million” range, but that Sagard’s balance sheet will allow them to make investments even before that and they are already on the hunt for deals.
Many drug patents are created by teaching hospitals, universities and biotech firms, who in turn license patents and commercialization rights to large pharmaceutical companies. If such drugs are widely used, these licences can generate valuable, long-term royalty streams for their owners. “Intellectual property is a space that we believe will become increasingly interesting as intangible asset value gains in importance,” Mr. Desmarais said.
Much like Mr. MacNaughtan did with CPPIB, Sagard Healthcare Royalty Partners plans to buy patent royalty entitlements and let existing owners borrow against future cash flows. He said a diverse portfolio is comprised of six to 10 drug-patent entitlements – the fund’s eventual target – and by targeting different disease-treatment groups, can blend uncorrelated income streams that themselves are uncorrelated to traditional capital markets.
Mr. MacNaughtan has been investing in royalty transactions for a decade and a half, including more than seven years at CPPIB, developing enough experience that, he says, he became interested in raising his own fund. But the built-in network and platform offered by Sagard Holdings, as well as its increasingly diversified investment strategies, enticed him to join that team.
“It’s an area where you can get outsized returns if you have the experience and wherewithal to put these deals together,” Mr. MacNaughtan says.
For much of the previous decade, Mr. MacNaughtan invested in pharmaceutical IP at DRI Capital. Two former DRI Capital colleagues, Ali Alagheband and Raja Manchanda, will join him at Sagard Healthcare Royalty Partners and be based in Toronto.