Though Above Target, San Diego Pledges to Drug Fund

The San Diego County Retirement Association, though a tad above its private equity allocation target, recently committed $25 million to Drug Royalty II, joining a parade of other limited partners backing the partnership.

San Diego has pledged to health care-related venture capital vehicles since 1997. But recently its staff began exploring intellectual-property funds and identified Drug Royalty II with help from placement agency Atlantic-Pacific Capital, according to a board document.

Investment Officer Yegin Chen wanted to make the commitment, according to the document, because of the high expected returns from the non-cyclical pharmaceutical industry; inefficiencies in the “opaque but growing” drug royalty market; the increasing number of royalty stream sellers and a reduced number of buyers; and predictable cash flows with a low correlation to the equity markets. San Diego plans to take a seat on the fund’s advisory committee.

The manager of the fund, Canada-based DRI Capital Inc., plans to invest in pharmaceutical royalty streams stemming from products already sold for several years by major pharmaceutical or biotechnology companies. Roughly half its investments will be in the United States and half in Europe.

Although the firm originally sought $500 million for the fund, $600 million has been gathered so far, according to a source with knowledge of the situation. A second source familiar with the circumstances said that the fund may even reach its hard cap of $700 million. The firm launched Drug Royalty II in 2008. Backers include Arizona Public Safety Personnel Retirement System, Los Angeles Fire and Police Pensions, Louisiana State Employees Retirement System, New Mexico Educational Retirement Board, San Bernardino County Employees’ Retirement Association, a fund of funds, two other large public pension funds, major insurance companies and several family offices.

The San Diego County Retirement Association has relationships with more than 30 private equity managers and, at a 5.2 percent actual allocation to private equity, stands slightly above its target allocation of 5 percent as of June 30, 2009, according to a spokesperson.