Three Arch Set To Close $450M Fund

It’s said that the third try is the charm. For Three Arch Partners, the fourth time around is not so bad, either.

This week the Portola Valley, Calif.-based health care investor expects to close its fourth fund with $450 million. The close comes after three months of pitching an investment strategy that’s been refined since the firm’s founding in 1993.

“What we’re doing now with this fund is really no different than what we’ve done in the past,” says Mark Wan, a partner with the firm. “The strategy is about solving real clinical problems and finding a solution that brings real clinical value. We’re looking at investments from the clinician’s and the practitioner’s standpoint, rather than from a pure technology perspective.”

Primarily focused on early-stage companies, Three Arch Partners IV LP will also do some development-stage and later-stage deals in the biopharmaceutical, health care information technology and services, and medical device industries. The fund may commit as little as $100,000 to a portfolio company, or as much $10 million.

Wan will manage the fund alongside five Three Arch partners – Thomas Fogarty, Wilfred Jaeger, Bill Harrington, Mike Kaplan and Richard Lin.

It’s a strategy that has pleased the firm’s limited partners. The Pennsylvania State Employees’ Retirement System allocated $45 million to the fourth fund. Other LPs include CIBC Capital, Columbia University, Ford Foundation, Mayo Foundation, Orange County Retirement System, Rockefeller Brothers Fund, SBC Communications and the University of Chicago.

Three Arch’s new vehicle comes as private equity fund-raising dropped 50% during the third quarter of 2003, according to Thomson Venture Economics (publisher of PE Week) and the National Venture Capital Association.

But, of the $1.39 billion worth of funds raised last quarter, follow-on funds accounted for three out of four, according to Venture Economics.

Moreover, Three Arch’s fund is one of the largest venture capital funds to close recently. New Enterprise Associates is reportedly near a $1 billion first close on its targeted eleventh fund. Besides NEA’s, the next largest fund to close recently is a $300 million vehicle belonging to ComVentures, which closed during the third quarter. Other third quarter fund closeouts included Crosslink Capital, with $215 million for its fourth fund and OrbiMed Advisors with $200 million for its Caduceus Private Investment II fund.

“Overall, the competition for the best funds will be fierce as these funds are likely to downsize their future funds, forcing some LPs to decrease their allocations to these funds and some being left out altogether,” says Jesse Reyes, director of Venture Economics’ U.S. branch.

Three Arch last raised a $300 million fund in 2000. The firm now has $1.5 billion under management.

Past investments by Three Arch that have since gone public include Biopsys Medical Inc., Perclose Inc., General Surgical Innovations Inc. and Odyssey HealthCare Inc.