Chicago hedge fund firm Citadel is known for buying and selling stocks, bonds and derivatives across public markets. But lately it's been pumping millions of dollars into private biotech companies.
The firm's Surveyor Capital fund has invested about $150 million in 17 such companies, mainly in the biopharmaceutical field, since February 2018.
That venture investing is a small portion of billionaire Ken Griffin's $30 billion Citadel business, but it's part of a striking and expanding departure from his 30-year focus on public markets. Placing capital with young biotech companies can be risky, but Surveyor has captured big gains in initial public offerings. Those types of returns have increasingly attracted investors to the biotech sector over the past decade, and that wave of interest is likely to keep climbing with the new hunt for coronavirus treatments.
"We're really at a significant growth phase in biotech in terms of new treatments hitting the market," says Sean Nolan, the former CEO of Chicago-based AveXis, a gene therapy company that combats a rare genetic disease in children. "The need created by the COVID virus is going to spur opportunities in biotech to develop treatments and vaccines."
While Surveyor isn't in coronavirus-specific startups, Seattle research firm Pitchbook has detailed the breadth and depth of Citadel's investing in the area, echoing press statements from fledgling biotech companies that have received the money. Citadel spokeswoman Megan Ingersoll declines to comment.
Surveyor, with 175 investment professionals, is one of a handful of Citadel funds investing worldwide, pursuing equity strategies to deliver returns for Griffin, clients and firm employees. So far this year, Citadel's flagship Wellington fund has achieved a 10% gain through April, according to a person familiar with the results, despite the market rout.
Surveyor bought AveXis shares at $20 apiece in a February 2016 initial public offering and shared in its windfall less than two years later when industry giant Novartis bought AveXis for $8.7 billion, or $218 a share, in April 2018. "Surveyor, at least in the AveXis instance, had a long view and was a very good investor along the way," Nolan says.
Now a different Surveyor team is getting into biotech companies pre-IPO, even earlier in the attempt to move a research idea through clinical trials to federal regulatory approvals to production. There are bigger gains to be had from investing at lower valuations before companies go public, but there are also more chances to stumble. "The venture capitalists are there earlier because they're willing to take more risk," Nolan says.
Surveyor always invests as part of a group that doesn't disclose how much each investor contributes, but based on the group amounts and dynamics, Surveyor is likely in for about $5 million to $15 million per company.
So far this year, Surveyor joined with other investors to place $170 million with Cambridge, Mass., gene and cell therapy accelerator ElevateBio; $105 million with Boston-based hearing loss therapy company Akouos; $100 million with South San Francisco-based Pliant Therapeutics, which is developing treatments to fight fibrotic diseases; and $88 million with San Francisco-based Spruce Biosciences, targeting treatments to battle endocrine disorders.
At that rate, Surveyor is on track to exceed the eight investments it made last year and the five in 2018. The dollar amounts of Surveyor's group investments have also mainly climbed, perhaps reflecting the arena's rising allure.
The IPO typically gives a 30% boost to investments, says Keith Crandell, whose Chicago-based investment firm, Arch Venture Partners, has carved out a niche in biotech venture investing. "Generally, you see the values pop, so there's talk about arbitraging that private-public step-up," says Crandell, an Arch managing director.
More investment funds are crossing over from public to private markets to grab that upside, he says. The closer companies get to approval for starting trials on humans, the more capital they require and the bigger sums they attract. "If you have a success in the clinic, it's worth a lot of money," he says, but "none of these are certain things."
Still, it takes only a couple of big wins to make a pack of investments successful. Surveyor's $85 million group investment in New York-based cancer treatment company Zentalis Pharmaceuticals in December delivered big returns last month when the company went public. Its shares, priced at $18 in the IPO, jumped as much as 50% on their first day of trading before closing at $23.20 and have since climbed to $31.93.
Surveyor's pre-IPO investment in Beltsville, Md.-based NextCure in November 2018 also panned out. In the May 2019 first-time stock sale, shares priced at $15 apiece and have more than doubled a year later, closing at $35.89 on May 7.
Crandell observes that a significant portion of Surveyor's investments are in gene and cell therapy and in cancer-fighting treatments. Those therapies have "performed well," particularly in oncology, "because the science has proved out," he says.
Surveyor may be increasing its odds by backing startups that have already landed "top-tier" venture capitalists in earlier stages of fundraising, he says, noting prominent firms like Third Rock Ventures and Canaan Partners. Surveyor's group co-investors aren't slouches, either, including Fidelity Management & Research and Franklin Templeton Investments.
Nonetheless, some of Surveyor's picks have declined. It invested in Sutro Biopharma in July 2018 before the company's September 2018 IPO, which priced at $15 a share. The shares have since sunk by more than a third to $9.62 on May 7.
All in all, Surveyor is still doing what Citadel does best, hedging its bets, but with more investor interest in biotech, the biggest gains may be harder to come by.
This story first appeared in our sister publication, Crain's Chicago Business.
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$30 billion hedge fund's next bet is on biopharmaceuticals - ModernHealthcare.com
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