March 17, 2013 10:58 pm

Uni spinout funds struggle to take off

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Manchester

Attempts to raise the world’s largest unquoted investment fund dedicated to university spinouts have stalled as investors shy away from early stage businesses.

MTI, a venture capital house that specialises in technology, is struggling to raise its proposed £50m Orion Fund, which would partner with the universities of Manchester, Edinburgh and University College London. The news comes as figures show the vast majority of finance for spinouts remains in the “Golden Triangle” of London, Oxford and Cambridge.

Despite universities in the northwest producing similar levels of research and patents they find it hard to attract investors, according to research by Unquote, the data specialist, with the region attracting only 5 per cent of the early stage funding for life science companies in the UK.

Examining deals between £200,000 and £5m between 2007-12, it found the northwest received £9.83m of the £223m total. London received £60.1m, the southeast, including Oxford, £42.1m and the east, including Cambridge, £41.7m.

Paul Morton, partner at Aquarius Equity, a Manchester life sciences investor, said it commissioned the research after being surprised at the lack of competition when striking deals in the region.

“Venture capitalists are lazy. They are in London and don’t want to come out of London. We see lots of great assets,” but he said people were starting to wake up to world-leading science in Manchester, the northwest and Scotland.

Aquarius has backed spinouts including Nanoco, maker of quantum dots, and Auralis, a drugmaker bought by Viopharma. Clive Dix, a veteran biotech entrepreneur who has worked with Aquarius on previous spinouts, said investors were missing out – and Britain was passing up a golden opportunity.

Spotting gaps

Aquarius Equity Partners began life in 2005 as a general private equity investor for wealthy individuals. It is now focused on niche life sciences after spotting a gap in the market, writes Andrew Bounds.

Its most successful venture is Nanoco, the maker of quantum dots – tiny pieces of fluorescent material that are used in lighting, display screens and solar panels – which repaid eight times its £450,000 investment on listing.

Other successes include Tissue Regenix, a listed company whose science helps bodies accept transplanted parts, and Auralis, a drugmaker, sold to Viopharma for more than five times the investment.

Paul Morton, a partner at Aquarius, attributes the strong performance of recent investments to the fact that the group insists on finding outside managers before investing and lays down demanding performance thresholds before investing more cash.

The group pulled the plug on one business after a £250,000 investment because “the technology was not going to be accepted by the market”, he says.

Aquarius exits pre-revenue, allowing those with deeper pockets to come in and share the upside. It chooses platform assets, or niche pharmaceuticals treating rare diseases. These have “orphan” designation that allows clinical trials to be more limited and carry
10-year patent protection, thus guaranteeing income.

Aquarius’s latest fund, which aims to raise £60m, has been set up as a portfolio company. Investors have the option to buy into each deal as it happens.

MPs agree, warning last week that too many promising science-based companies were failing in the “valley of death” between first fundraising and subsequent bigger rounds to finance clinical trials.

“There is room for two or three more of Aquarius’ size, in the north,” he said.

Cambridge-based, Mr Dix chairs Comformetrix, a Manchester university spin out in which Aquarius has invested. Brainchild of two researchers, it allows faster drug discovery. It can map a molecule’s shape in hours rather than months allowing compounds to be tested that might treat diseases.

It has signed a collaboration agreement with AstraZeneca, the pharmaceutical company, but Mr Dix, who ran research and development for GlaxoSmithKline, said it required patient capital. “It is very disruptive technology and people are conservative,” he said.

Mark Rahn, of MTI, said raising money for the Orion Fund had proven difficult. “The funding environment is awful. But we think we can close Orion with £45m.”

This follows MTI’s experience with its 2008 UMIP Premier Fund, a £32m pot it raised with University of Manchester. It closes to new investment this month and has invested about half its money in spinouts from Manchester, Oxford and Southampton. Investors include the Greater Manchester Pension Fund, the European Investment Fund, the National Endowment for Science, Technology and the Arts and the Co-operative Insurance Society.

Manchester has struck a £5m deal with the listed IP Group, which has agreements to commercialise the research of several universities, to invest in proof of principle research.

Mr Rahn says the state should play more of a role in early stage investment because of benefits commercialising technology has for the UK. “If you are going to take these to an initial public offering you are going to need tens of millions.” He reckons spinouts generate twice as much benefit per pound than foreign direct investment.

There are some public funds, for example, Spark Impact, part of the £170m Northwest Fund financed by the European Union, which concentrates on biotechnology. But its remit is to spread money widely to create jobs, rather than focus on one of two potential worldbeaters. Richard Young, partner at Enterprise Ventures in Preston, manages several biotech investments.

But reeling off a list of 10 recent spinouts, he can name only a couple that delivered as promised. He cites Renovo, which consumed more than £40m before its main scar reduction product failed final clinical trials. It is now a cash shell on Aim.

You need a rare combination of money and academics capable of making technologically commercial useful, said Mr Young.

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