Some leading VC firms—such as Abingworth, located in London, Venrock of Palo Alto, California, ProQuest, of Princeton, New Jersey as well as Frazier, with offices in Seattle and Menlo Park, California—are now switching their interest away from privately held startups toward these later-stage public firms. It is not entirely a new strategy: private investments in public equity (PIPEs) have been around for years. In a typical PIPE, the private equity firm identifies an undervalued company, invests a small amount for the short term and waits for the share price to recover before exiting at a profit.
The drawback of the PIPE strategy for venture capitalists has been the difficulty of identifying prime candidates. Biotech shares were not always so wildly underpriced as they are now, and most such companies typically need several more financings before their share prices show a worthwhile gain. Under these circumstances, the risk of failure at some intermediate point, such as a disappointment in the clinic, is high. “So the shares of these companies typically traded sideways, or more often down, as events played out,” says David Pinniger of SV Life Sciences Advisers, London, a leading British VC company. This slump was exacerbated as hedge funds preyed on the company stocks, finding them relatively easy targets for short-selling (that is, betting that the price will drop). For these reasons, Pinniger reckons returns to VC life-science specialists from PIPEs have been very poor so far. “Most are likely to have lost a significant amount of capital over the past five years,” he says.
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