Drug Royalty Fund Oversubscribed

Firm: DRI Capital Inc.

Fund: Drug Royalty II

Target: $500 million

Amount Raised: $701 million

Placement Agent: Atlantic-Pacific Capital

DRI Capital Inc. is shortly expected to close its second fund far above its $500 million target, implying heavy interest among institutional investors in its strategy of investing in pharmaceutical royalty streams, according to a source familiar with the situation.

The Toronto-based firm has gathered $701 million for Drug Royalty II, including about $300 million raised in the first quarter of 2010, with the help of placement agency Atlantic-Pacific Capital. The fund might have crossed the $1 billion threshold if the firm had taken in the $300 million that it ended up turning away, according to our source. The formal marketing of the vehicle got under way in January 2009.

Backers include public and corporate pension funds, sovereign wealth funds, insurance companies, fund of funds and family offices in the United States, Canada, Asia, Australia and Europe. The San Diego County Retirement Association recently committed $25 million. Other supporters include Arizona Public Safety Personnel Retirement System, Los Angeles Fire and Police Pensions, Louisiana State Employees Retirement System, New Mexico Educational Retirement Board and the San Bernardino County Employees’ Retirement Association.

The firm intends to invest in the pharmaceutical royalty streams of products already in the market for several years and produced by major pharmaceutical or biotechnology companies, research institutes, universities and inventors. About half of the investments are expected to be made in the United States, the rest in Europe. Expect the firm to invest an average of $25 million to $50 million per royalty stream. DRI Capital intends to make roughly 20 investments over a five-year period, acquiring all or a portion of each royalty stream. Using the Drug Royalty II war chest, the firm has already made three investments.

DRI Capital gets involved in a project three to five years after a drug has been on the market, at which time the royalty stream has about eight to 10 years left, according to meeting minutes of the Arizona Public Safety Personnel Retirement System. In sourcing its investments, the firm looks at various attributes of the drug, including the difficulty in manufacturing it, competition and comparables on the market. The minutes note that the passage of recent health care legislation in the United States could be a boon to DRI Capital, as more Americans secure health insurance as a result.

President and CEO Behzad Khosrowshahi joined DRI Capital after a takeover by Inwest Investments Ltd. in April 2002. The firm raised $240 million in 2006 for Drug Royalty I without a placement agent.