(Feb 28): Life science innovations have led to significant breakthroughs in healthcare and other sectors over the past decade. This has caught the attention of investors seeking alternative sources of returns in a low-yield and highly volatile market environment. 

Xeraya Capital, a wholly-owned PE and venture capital entity of Khazanah Nasional, Malaysia’s sovereign wealth fund, is currently looking to raise US$400 million ($559 million) for its fourth life sciences fund. The Xeraya Opportunities Fund (XoF) is expected to reach its final close in the next two years, says Xeraya CEO Fares Zahir. 

“This fund is built on a model of capturing global investments in key critical areas such as oncology, cardiovascular therapies and infectious diseases. We also see opportunities in artificial intelligence-related healthcare solutions. In fact, we have invested in this area in the past. So, the fund will be looking at this as well. We are also looking at things related to food security. 

“For this particular fund, our intention is to seek [investments from] institutional investors, family offices and high-net-worth individuals. It is more focused on areas where we believe there will be returns and the impact on human life will be high.” 

Xeraya aims to extend its reach beyond Europe and the US to opportunities in Asia-Pacific and the Middle East. The money raised will be invested in venture and growth-stage companies in the healthcare sector. Going by its track record, the firm is looking to achieve an internal rate of return of at least 20% for the fund, says Fares. The minimum initial investment amount is US$5 million. 

Xeraya is the only active PE and venture capital firm in the country that focuses on life science investments. It currently has US$500 million under management. 

The firm manages several funds, including the Malaysian Life Sciences (MLS) Capital Fund II and the Mudharabah Innovation Fund (MIF). 

MLS Capital Fund II is co-managed by Xeraya and Spruce Capital Partners. It was launched in 2015 to invest in biogreentech companies at all stages of development. 

According to the firm’s website, biogreentech spans plant and animal agriculture; food, feed and nutrition; and bio-renewable chemicals and materials. It also includes companies and technologies developed in big data analytics, robotics, production, harvesting and use of natural resources, and synthetic biology. 

MIF is a closed PE fund, managed on behalf of the Ministry of Finance. According to Xeraya’s website, the fund matches private sector investments in life sciences, “offering a superior risk return profile to co-investors”. 

Xeraya’s journey 

Xeraya has come a long way since it started investing in life sciences. It adopted its life sciences strategy in 2008, before enabling technologies such as AI and machine learning had made any headway in creating value in areas like healthcare biotechnology, pharmaceuticals, medical technology and bio-renewables. 

As the brainchild of Khazanah, Xeraya was initially established to provide capital support through PE and venture capital funds to catalyse life science breakthroughs. It came at a time when life sciences were at an inflection point. Advancements in healthcare digitalisation, democratisation of data, convergence of biopharmaceuticals and molecular therapeutics have provided a strong impetus for the growth of the industry. 

As a sovereign wealth fund, Khazanah envisioned life sciences (with an initial penchant for biotechnology) as a new growth area for the country. Fares, who was already working there as a financial analyst, was asked to head Xeraya, given his experience managing funds for European asset management firms Schroders and UBS

At the time, there was a lot of fear that the turmoil in the global financial system could roil the broader economy. “We needed to look at whether it was necessary to be in that area itself. But we felt that it would be an area in which we could identify new opportunities,” Fares tells Personal Wealth. 

As the sector required expert attention, Khazanah decided to carve out a separate entity, one that focused solely on life sciences and that could attract deals that were generally smaller and more specialised than the sovereign wealth fund was accustomed to. 

“The process of investing is the same. There is a long string of processes and due diligence that needs to be done, whether it is a big or small investment. That was why Khazanah decided to go this way [create Xeraya as a separate entity],” says Fares. 

“Also by then, Khazanah had already made investments in Springhill Bioventures and MLS Capital Fund. These funds were then consolidated with Xeraya to supervise the investments that had already been made.” 

The MLS Capital Fund, the predecessor of the MLS Capital Fund II, is dedicated to early-stage investments in agriculture, industrial and healthcare biotechnology. The fund, which was founded in late 2006, has US$162 million in committed capital and is fully allocated. Similarly, Khazanah invested in a venture capital fund managed by Spring Hill Bioventures in 2003 to boost the local biotechnology industry. 

Drawing inspiration from the strong structure of trees and the promise of growth, Khazanah resolved to name the entity incorporated in 2012 as Xeraya, after Seraya — a towering species of giant trees scattered throughout Sabah that has been acknowledged as the tallest tropical species in the world — and a play on the letter “X”, which signifies the DNA of life science.

Xeraya — which has an extensive list of international portfolio companies in the fields of medical technology, pharmaceutical biotech and bio-renewables — often invests as the lead or co-lead investor with other leading venture capital groups. 

“Typically, our investments range from US$5 million to US$15 million. Our investment horizon is three to five years. We have made subsequent investments for most of the companies. So, before we exit, the amount of money that we put in could eventually be double what we initially put in,” says Fares. 

But the investment horizon is not necessarily set in stone. It could be shorter, depending on the company and its prospects, he says. 

“We invested in a German medical technology company called Invendo Medical GmbH. When we first invested in the company, it was pre-revenue. When we exited, it was also pre-revenue. There were follow-on investments from start to finish and the average valuation was about EUR50 million when we invested. But when it was bought by Ambu A/S [a Danish company], it was EUR225 million,” says Fares. 

“So, the ability to make a return is there. But if it is marked by revenue, it was zero to begin with. From an investment perspective, it is possible to make money within a shorter time horizon, even though the company or technology itself will take much longer to become sustainable.” 

As life sciences cover a broad spectrum of industries, Xeraya hones in on companies that drive innovation across the value chain and enable that innovation to improve lives. “The reality is that healthcare as a whole will have inherent growth. The proliferation of the ageing population and the rise of disposable income has an impact on the quality of life. We have found that there is always going to be inherent, long-term growth in this segment,” he says. 

“With life sciences being the focus, we are looking at a lot more than healthcare. Each of the other market segments that we have invested in is valued in the billions.” 

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