Prospect Venture Partners Gives Up the Ghost on Fourth Fund: Report – UPDATED

Attention venerable venture funds: Limited partners don’t give a hoot about how long you’ve been in business. The only number they care about these days is your internal rate of return.

The latest firm to learn that lesson is Prospect Venture Partners, a biopharmaceutical and medical device investor founded in 1997. Prospect has released its limited partners from their commitments to its fourth fund after failing to reach its target of $250 million, Venture Wire reported Thursday. Even though Prospect had raised $150 million for Prospect Venture Partners IV, the firm decided that it “didn’t have sufficient capital and reserves to execute its strategy,” Venture Wire reported.

Update: I spoke to three of the partners from Prospect today. They wanted to make it clear that their decision to not proceed with fund IV had nothing to do with their LPs being critical of their past performance. In fact, their most recent fund has performed better than comparable funds from other health care VCs, they said. And while  some of the firm’s LPs urged Prospect to move forward with fund IV, the partners just didn’t feel it was the right thing to do.

“After extensive consideration, we concluded that it was in the best interests of our LPs to release them from their capital commitments to PVP IV,” the partners said via email. “Specifically, we believed Fund IV, as capitalized, would not have sufficient capital to invest in a manner consistent with the Fund’s investment thesis in enough deals to provide an appropriate degree of portfolio diversification and reserves. The PVP Partners will focus on the active management of Funds II and III where substantial unrealized value exists with 30 active companies and with substantial capital reserves.”

The move isn’t surprising given the poor performance of Prospect’s most recent fund. Prospect Venture Partners III, a $500 million fund raised in 2005, has an IRR of -9.3%, according to the California Public Employees’ Retirement System (CalPERS), an investor in the fund.

CalPERS committed $50 million to fund III. Prospect drew down $36.2 million of that amount, but returned just $2.1 million in cash, and the cash out and remaining value of the fund III portfolio was worth $26.2 million as of March 31, CalPERS reports.

Update: Prospect says that CalPERS’ performance data aren’t up to date. The partners said via email: “As of Q2 2011, Fund III’s Net IRR is –2.1%, comparing favorably to the median benchmark of –3.92 percent. PVP III has 20 active companies. (Note: The benchmark data are from Cambridge Associates for health care venture capital funds from vintage year 2004, as of Q1 2011, which is the most current available benchmark data.)”

Prospect didn’t exactly hit the ball out of the park with its second fund. Prospect Venture Partners II, a $505 million fund raised in 2001, has produced an IRR of 4.1%, CalPERS reports. CalPERS committed $100 million to fund II, of which Prospect drew down $90.5 million. Prospect returned $78.2 million in cash, and the cash out and remaining value of the fund II portfolio was $107.7 million as of March 31, according to CalPERS.

Update: As with fund III, CalPERS’ data for fund II aren’t up to date, Prospect’s partners say. “Prospect Venture Partners II remains a 1st quartile performing fund based on all metrics relative to health care venture funds for its 2001 vintage year including Net IRR, ROIC and DPI,” the partners said via email. “As of Q2 2011, Fund II’s Net IRR is 5.62% versus 3.93% for the upper quartile benchmark. PVP II still has 10 active companies remaining in the portfolio including five private companies and five public companies. (Note: The benchmark data are from Cambridge Associates for health care venture capital funds from vintage year 2001, as of Q1 2011, which is the most current available benchmark data.)”

Prospect raised $100 million for its inaugural fund in 1997, according to Thomson Reuters (publisher of peHUB). PeHUB was unable to find performance data for that fund.

Prospect Managing Director Alexander Barkas told Venture Wire that he and his partners haven’t yet decided if they will try to raise another fund at a later date. For now, the partners are focusing on their 30 active portfolio companies, Barkas said.

In addition to Barkas, the Palo Alto, Calif.-based firm’s partners are Russell Hirsch, Dorothy J. Margolskee, David Schnell and Ilan Zipkin, according Prospect’s website.

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1 Comment

  • [...] to raise money, and several diversified funds with healthcare have cut their allocations.  Prospect  Ventures is throwing in the towel on their fund because they didn’t have enough capital to deploy against their strategy.  The [...]

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