Merlin Nexus Nears Second Close On Third Fund

Firm: Merlin Nexus

Fund: Merlin Nexus III

Target: $125 million

Merlin Nexus, a New York-based shop that invests in both private and public life sciences companies, expects to hold a second close on its third crossover fund in the next few weeks, Buyouts has learned.

Merlin Nexus held its first close on the fund, which has a $125 million target, at $40 million in mid-May, and the firm anticipates a final close will be held in the first half of 2009. David Gould, a principal with the firm, declined to put a figure on the next close for Merlin Nexus III, saying the details were still being ironed out. “It’s certainly challenging out there right now but we’re still finding a receptive audience for our strategy,” Gould said. “Our strong track record with the first two funds helps and we’re a bit unique in that we’re able to take advantage of opportunities on the public side.”

Another differentiating factor, Gould said, is that Merlin Nexus has a shorter investment horizon than most private equity firms. “The term is five years, and we look to hold investments for two to three years,” he said. Most funds have 10-year life spans.

The firm’s first effort, Merlin Nexus I, closed with $46 million in commitments in October 2001. The follow-up, Merlin Nexus II, garnered $40 million in pledges and held its final close in April 2006. Gould said that not only is Merlin Nexus II fully invested, it’s already had realizations on 75 percent of LP commitments. According to the Cambridge Associates Healthcare Benchmarks, Merlin Nexus I (2001) is ranked first in its vintage year with a net IRR of 17 percent as of June 30. Merlin Nexus II (2005) currently ranks fourth with a 13 percent net IRR, according to Cambridge Associates.

The three areas that Merlin Nexus targets are late-stage private companies, PIPE (private investments in public equity) deals, and select long-term open market investments. For each investment, the firm looks for the potential for liquidity within two-to-three years of the initial deal as well as a 2-to-3X return on invested capital. The shop’s strategy also calls for frequent communication with the management teams of its portfolio companies.

The first full investment from Merlin Nexus III was a PIPE deal involving Micromet Inc., a Munich, Germany and Bethesda, Md.-based biopharmaceutical company developing antibodies for the treatment of cancer and inflammation. Merlin Nexus co-invested in the $40 million private placement, which was disclosed in early October, with Index Ventures, a European venture capital firm; Abingworth LLP, a life sciences-focused venture capital firm with offices in London, Boston and Menlo Park, Calif.; DAFNA Capital Management LLC, Los Angeles-based biotechnology investor; and others. Its portion of the deal was $3 million, according to Thomson Reuters data.

Micromet shares have roughly doubled since the start of 2008. The stock was recently changing hands at around $4 per share.

The PIPE deal called for the sale of units at $4.25 each. Single units consisted of one common share and a warrant to purchase an additional 0.30 of a share. The warrants expire in five years and are exercisable at $4.63 a share. Micromet isn’t profitable as yet, and is largely counting on the success of the drugs that are still in early clinical development. The company presented new data from two studies on Dec. 7 and Dec. 8 at the annual meeting of the American Society of Hematology in San Francisco.