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The High Bid That Wasn’t

Last summer, Boston Scientific agreed to sell a portfolio of 53 venture capital investments to Saints Capital for approximately $100 million. It was the largest-ever direct secondary sale of healthcare interests, but peHUB has learned that the process was almost derailed by a separate suitor that didn’t have the money to back up its offer.

That bidder was Omega Funds, a healthcare-focused direct secondaries shop with offices in Boston and Switzerland. Kind of ironically, Omega Funds is actually a fundless sponsor, which means that it doesn’t have an existing pool of capital from which to draw. The firm is currently embroiled in a legal tête-à-tête with some of its former employees and advisors – it’s sued them for alleged breaches of noncompete agreements – which is where details of the busted Boston Scientific bid first emerged.

In a response to Omega’s original complaint, defendants Nessan Bermingham and Arthur Rosenthal both submitted affidavits claiming that Omega boss Ottello Stampacchia had claimed that Omega had “oversubscribed” financing commitments to purchase the Boston Scientific direct portfolio (an indirect portfolio of LP interests was sold separately to Paul Capital). They both also say that those representations proved to be false.

peHUB has confirmed with third parties that Omega, which had first approached Boston Scientific a year earlier about selling some assets, had the winning bid but was ultimately unable to cut a check.

There are two things, however, I’m unsure about: First, I do not know the size of Omega’s bid, except that it was higher than what Saints ultimately paid. Second, I do not know if Omega had legit commitments that fell through, or did not have said commitments in the first place. In support of the former, Omega has bought 30 portfolios in the past five years (usually does so quietly, no website or other PR). Plus, the economy turned very sour as this fairly-complicated auction progressed.

In support of the “commitments fell though” argument, defendant Bermingham (a former VC with Atlas Venture) writes that Omega won a subsequent auction that it also was unable to finance. He doesn’t identify the deal, but we’ve identified it as a sale of 3i stakes that ultimately went to Apposite Capital (note: Omega did buy some 3i assets in a separate deal). A source more sympathetic to Omega says that this situation was different from Boston Scientific, in that Omega reduced its bid after funding some problems during due diligence (as did Apposite, however, another fundless sponsor that received financing from VCFA Group).

What really amazes me in all this is how tenuous the commitments to a fundless sponsor apparently can be and/or the lack of seller due diligence. I’m told that fundless sponsors are basically the norm in direct secondaries, with just a small handful of dedicated exceptions (Saints, W Capital, Vision Capital, etc.). The Boston Scientific debacle was perhaps the largest direct secondary to fail due to a lack of financing, but apparently it is not unusual on smaller deals. “Most of the fundless sponsors mean well, but they often leave big messes to clean up,” said a funded sponsor.

As for the noncompete lawsuit, a judge late last month denied Omega’s bid for a preliminary injunction. The issue now will likely go to a non-jury trial in Boston on October 19. The main issue is be whether or not the defendants are using proprietary methods learned at Omega, or whether Omega’s special sauce isn’t actually so special.

I expect to write more about the noncompete angle of this case early next week, as part of a broader piece about how other PE firms are using noncompetes (particularly firms that have done layoffs). If you’ve got any relevant info to share on this, please get in touch with me (confidentiality assured).

Finally, both Bermingham’s attorney and Omega’s Stampacchia declined comment.