- First close on Fund III was in March 2015
- Firm adds new LPs to third vehicle
- Popularity of private credit funds on the rise
CRG LP, the Houston healthcare investor, held a final close on its third private credit fund, hitting the hard cap of $1.25 billion.
The first close was in March 2015, with the fund originally targeting $1 billion. An asset-backed securities financing, which will provide additional capital on top of the equity commitments, is expected to push the total investable capital toward $2 billion.
“We have leverage facilities in place in addition to that $1.25 [billion],” said Managing Director Mike Weinmann. “As we continue to make investments, we’ll be able to tap into the long-term financing market.”
About half the capital has been deployed across 16 investments, Weinmann said. All are commercial-stage healthcare companies, with approved, revenue-generating services or products. CRG’s loans will allow them to to grow their commercial efforts — by hiring sales reps, for example — or help fund R&D projects.
“We always take a senior secured interest in the company,” Weinmann said. “We will take some equity, but it’s usually small relative to the size of our loan.”
“Companies view the cost of capital as attractive relative to equity financing,” Weinmann explained. “If you put yourself in the shoes of an owner or shareholder of one of these companies, they can either raise debt capital from us, or they’re selling a significant portion of the company to new or existing equity investors, and that can get very expensive over time, especially if the company does very well.”
CRG invests across the healthcare industry, lending to pharmaceutical, medical-device, diagnostic, and healthcare services and IT companies. The firm is interested in what it sees as three key trends: cost reduction, personalized medicine and demographic shifts (rising obesity, aging populations).
In 2016 the firm committed more than $750 million from both Fund II and Fund III across 23 companies, “a record year for us.”
Even with uncertainty surrounding the fate of the Affordable Care Act, CRG expects its investment themes to keep driving the market.
“There will be continued focus on drug pricing and healthcare-cost reduction,” Weinmann said. He named portfolio company Imaging Advantage, which employs offsite radiologists to read X-rays, as an example of service providers reducing costs. And diagnostic companies like Biodesix, developer of a test to guide lung-cancer-treatment decisions, will move healthcare away from a mass-market model toward a more tailored approach.
But CRG isn’t necessarily pursuing spectacular winners. “As a lender, we don’t depend on these products to become blockbusters,” Weinmann explained. “We want them to succeed, and we can add value to the companies to do that, but because we’re senior lenders, we have very good downside protection in case these products don’t perform according to plan.”
That’s one attractive aspect of the strategy for investors; another is a yield component, since CRG receives cash interest payments. New LPs in Fund III include University of Toronto Asset Management Corp, a state public pension plan, a corporate pension plan, an Asian insurance company, a U.K. corporate pension and a sovereign wealth fund.
The popularity of private credit has risen over the past five years. In 2016, 119 such funds closed worldwide, raising an aggregate $73.8 billion, Preqin data shows. That was down from $96.2 billion mustered by 152 funds the previous year, but still represented 58 percent more capital than was raised in 2011.
Action Item: Contact Mike Weinmann with questions at email@example.com
Photo of CRG Managing Director Mike Weinmann courtesy of the firm.