BMGF Ventures LLP

One of the better aspects of capitalism is its ability to create wealth and one it worst aspects is concentrating that wealth in a minority elite.  But with a little nudging from the US government in the form of favorable tax treatment for the wealthy and their philanthropic foundations that wealth can be put to purposes that benefit the majority society, an almost uniquely American invention.  Harvard drop-out Bill Gates begat Microsoft which begat Gates the billionaire who begat the Bill and Melinda Gates Foundation (BMGF) which doles out about $3.5 billion per year to support global health and other worthy causes (Gates Form 990 guide), which is a bit more than the required annual disbursement of 5% of assets.  The BMGF’s generosity is not news, but, given the amount of money in play, the foundation’s investment trends are of interest to the many potential recipients.

Foundations may invest their assets in two ways.  One way is to generate income (more money to give away and to cover operational expenses) and the other is to maybe generate money but moreover to help a social benefit organization to become self-sustaining, that is, generate enough revenue so that it doesn’t need foundation hand-outs.  The overwhelming majority of most foundations’ investing is the first type, and in this area the BMGF back-pedaled recently.  Investment managers for foundations buy stocks, bonds, real estate, commodities, and just about anything else based on the returns they may brings, the bigger the better from the view of the managers whose healthy fees are in part based on their return on investment.  In 2007, a LA Times review of the Gates Foundation’s holdings found 40% was invested in companies whose business “countered” the Foundation’s aims (were not socially or environmentally “responsible”), and the BMGF said it would review its portfolio (LA Times article).  While one can argue that the companies in the current portfolio are not all good corporate citizens (Seeking Alpha article), in 2009, the BMGF went a step further to avoid an appearance of a conflict of interest between its investments and its grants to promote global health and sold all its holdings in pharma and biotech companies (WSJ article).

The second category of investment is a relatively new but potentially the more meaningful one:  a “program-related investment” (PRI) in which a foundation invests in a for-profit, low-profit, or not-for-profit company to help that company survive and succeed in delivering a socially-beneficial product or service.  These investments may be in the form of a loan, at a fixed rate of return, or equity purchase, a speculative rate of return, and are recognized by the IRS as qualified disbursements (for details see the Foundation Center).  More than a year ago (1/14/2010), I wrote a post about the BMGF’s announcement in September 2009 that it was planning to use $400 million of its endowment for PRIs, and I expressed a hope that some of that investment would be made into early-stage biotech/medtech companies with products in development that could make a difference in global health.  My concerns:  “it is not clear if the Gates will operate as the professionals [venture capital investors] do:  conducting thorough due diligence to understand the opportunity and risk, investing the proper amount needed to get to the next value inflection point, and being closely involved in the management of the investee.”  Early last month, it was announced with some fanfare that the BMGF completed its first global health-related PRI by making a $10 million dollar equity purchase in Liquidia Technologies of Research Triangle Park, NC, “to support the development and commercialization of safer and more effective vaccines and therapeutics” (Liquidia press release).  Unfortunately, I don’t see much in this deal to indicate that the BMGF will be using its PRIs in meaningful way.

On the plus side, the Gates is investing in experienced management.  Neal Fowler, the CEO, is a veteran of the biotech/pharma industry, including seven years heading the Centocor division of Johnson and Johnson.  And the investment is substantial, adding 20% to the company’s previously-raised $50 million cash (NC Biotech note).  However, the decision to invest does not seem to be part of deliberative process, rather it resulted from a chance encounter between the Gates’s top infectious disease guy, Doug Holtzman, and Liquidia’s CMO, Frank Malinoski, whom I know a bit from my days at Wyeth and think highly of (Xconomy article).  Further it was not part of a fund-raising round, meaning Gates had less leverage (Liquidia closed a Series C in January 2010).  Also, I doubt if anyone at the Gates has expertise in Liquidia’s technology, which is based on nanomaterial fabrication method that purports to control functionality (nice pictures of itsy bitsy things are at Liquidia technology).

More importantly though, it is not clear to me that the Gates investment team got much leverage in assuring that the company is diligent about applying their technology to a vaccine important to global health.  According to the Xconomy article, the Foundation specified what it “wants” the company to work on, but is not required to, and it has the right to “disengage” if it doesn’t like where the company is headed which to me means the BMGF may sell back its shares at a much-reduced price but not get its money back.  Apparently, any commitment to global health the Gates got from the Liquidia is not in writing; Holtzman is quoted in the article as saying, “We explained our charitable intent, as a slightly different kind of investor in the company.  We don’t want to interfere with their ability to make money, but we do have an expectation they’ll make this technology available for (global health) product development.”  Finally, the Gates will have no voting board positions as it should as a major investor; it will participate as an “observer” (Xconomy article and Daily Tarheel article).

It looks to me as if global health is not a major part of the company’s mission/vision.  While Liquidia has a recent collaborative agreement with the largely-Gates-funded Malaria Vaccine Initiative, the press release doesn’t note how much money is involved, who’s doing what, and what outcome is expected (Liquidia press release).  And the academic founder, UNC pharmacology professor Joseph DeSimone, seems lukewarm about global health; “he wishes to see something produced by his NC company help people across the world” according to the Daily Tarheel.  If I were involved, I would have negotiated an assurance that the investment was put to work developing global health applications with a diligence commitment and a march-in right as a stick.  I wasn’t but am available if the BMGF wants help in figuring our their PRI strategy for global health.

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