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Khazanah-backed Xeraya Capital seeks $400m for fourth life sciences fund

Malaysia-based life sciences-focused investment firm Xeraya Capital is seeking to raise $400 million for its fourth fund, its CEO Fares Zahir told DealStreetAsia. The new fund, dubbed Xeraya Opportunity Fund (XoF), is expected to reach its final close in the next two years, while the first close is targeted at around $100 million by the end of 2020.

“We officially launched the fundraise this week after we received agreements from LPs in late 2019, so the soft marketing has been running since last year,” Zahir said.

Xeraya Capital is owned by Malaysian sovereign wealth fund Khazanah Nasional Bhd with a mandate to focus on the life sciences sector. Khazanah will also invest in the XoF fund, Zahir said.

While the majority of its previous LPs are from developed economies such as North America and Europe, Xeraya Capital is looking to tap investors in Asia and the Middle East for its latest fund.

The new fund will largely be deployed in the life sciences sector. It will also invest smaller amounts in digital or artificial intelligence (AI) enabled health solutions as well as innovations for enhancing food security.

“As we look at the new fund, we think about the areas in which innovation could flourish,” Zahir said, adding that the XoF fund will be focused on venture and growth-stage companies and write cheques of $5-15 million per deal.

The XoF fund will look at opportunities across different regions. Although its existing portfolio companies are mostly headquartered in the US, Xeraya Capital may also look more at Asia, especially countries such as China and Singapore, to deploy its new fund.

So far, Xeraya Capital has $500 million in total assets under management through its three funds, namely Xeraya Managed Fund, Mudharabah Innovation Fund and Co-Managed Fund (MLS Fund II).

Following the launch of XoF fund, the PE firm’s total AUM is expected to hit $700 million in the next three years after taking into account the divestments in the pipeline, Zahir added.

Xeraya Capital’s existing portfolio includes Nasdaq-listed biopharmaceutical company Liquidia Technologies; Imago Biosciences, which develops drugs to fight bone marrow diseases; and digital genome engineering company Inscripta. In Zahir’s view, the life sciences industry is poised to take off, given the declining costs of research and development and advancements such as in the area of gene editing. He said that funds focused on the life sciences sector have been able to generate an internal rate of return of more than 20 per cent.

The higher returns come with higher risks, especially pertaining to regulations. For instance, one of the firm’s portfolio companies, Invendo Medical, a US-based developer of single-use high definition endoscopy tools, had not yet received any regulatory approval or generated revenue when Xeraya Capital first invested in it.

“It is a higher risk because you are investing before [regulatory] approval comes in,” Zahir said.

Established in 2012, Xeraya Capital’s first investment was in US-based Small Bone Innovations (SBI), a specialist in the treatment of diseases of small bones and joints. SBI was sold to the New York-listed Stryker Corporation for $375 million in 2014.

Xeraya Capital also led ConforMIS, an image-to-implant technology platform, to an initial public offering on Nasdaq. In 2017, the investment firm divested Invendo, a developer of endoscopy products, to Denmark-based medical device company AMBU for 225 million euros.

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