Psilos Seeks $450 Million Health Care Fund, Defying Crunch

April 7 (Bloomberg) — Psilos Group, a New York venture-
capital firm focused on health-care technology and services,
plans to raise a $450 million fund, its largest ever, an
investor in Psilos’s most recent fund said.

The firm told some investors of its plans to gauge their
interest in a new fund, said Tom Reilly, managing member at
Fernwood Investment Management LLC in Quincy, Massachusetts. He
and his clients have invested with Psilos before.

Psilos’s investments include companies that drive
information technology into health care, an area promoted by
President Barack Obama, Chief Executive Officer Al Waxman said.
Its fundraising may also benefit from a wave of health-care
mergers, as companies seek combinations to contain costs amid
increasing pressure for lower medical expenses, said D. Brooks
Zug, senior managing director at HarbourVest Partners.

“The one area in private equity that has done really well
recently is health care,” said Zug, whose Boston-based firm
invests in venture funds on behalf of institutions. “It’s the
one area with a merger market that’s active. And you’ve got
Obama’s health plan. Those are two reasons to think it might be
a place to put some of your money.”

The fund would be the fourth for Psilos, which has raised
$557 million since 1999 and invested in about 40 companies. Its
investments include ActiveHealth Management, which Aetna Inc.
bought for $400 million in 2005, and Definity Health Inc., sold
to UnitedHealth Group Inc. for $300 million in 2004.

Fundraising Slump

“The space they are in is working,” said Reilly,
estimating that the new fund would close later this year. “As
soon as they get their third fund to critical mass, there will
be momentum for fund four.”

Waxman declined to confirm or deny Psilos will start a fund
this year.

Psilos’s move comes as venture-capital fundraising is
cramped by the recession. The amount raised by U.S. funds fell
71 percent in the fourth quarter, to $3.37 billion, according to
the National Venture Capital Association in Arlington, Virginia.

The climate for health-care investing has been especially
tough. Venture capitalists invested only $195 million in health-
care service companies in 2008, a 27 percent drop, according to
the NVCA.

A $450 million fund would be among the five biggest raised
so far this year, NVCA spokeswoman Emily Mendell said. Last
year, at least 18 firms raised funds of $500 million or more.

Psilos’s past investors have included Health Evolution
Partners, a San Francisco fund run by David Brailer, who was
President George W. Bush’s national coordinator for health-care
information technology. His fund is backed by $700 million from
the California Public Employees’ Retirement System.

Brailer declined to comment on Psilos’s plans.

‘Not for Faint of Heart’

Psilos itself warned in a Jan. 28 report that “health-care
investing will not be for the faint of heart in 2009.” The
recession and federal budget deficit will pose risks this year,
before the need to fix Medicare’s budget problems and contain
health-care costs create opportunities over time for companies
whose technologies promise savings, Psilos said. Failure will
lead to a government-run health system, Waxman said.

“We still have a chance to build a health-care system that
is private and built on best practices supported by evidence,”
Waxman said. “If we don’t do it in the next 10 years, we’re
going to have a single-payer system. We are looking at the teeth
of the devil.”

Venture firms have been burned during years of betting on
the power of information technology to transform health care,
said Jim Watson, a partner at San Francisco-based CMEA Capital.
He didn’t specifically address Psilos’s fund.

“As an investor, I wonder when to start taking it
seriously because so much has been lost in that area,” Watson

Electronic Records

About 17 percent of doctors have adopted electronic medical
records, and 4 percent have fully-functional electronic systems
that help doctors make decisions about patient care, according
to study by Harvard University’s David Blumenthal and other
academics last year.

Obama named Blumenthal national coordinator of health-care
information technology last month. The stimulus bill passed in
February allocated almost $20 billion to help doctors adopt

Recent deals have put more bounce into health-care
investing, Zug said. Medtronic Inc., the world’s second-largest
medical-device maker, has made six acquisitions since December.
HarbourVest hasn’t invested in past Psilos funds, Zug said. The
returns on some of Medtronic’s recent deals were enough to let
HarbourVest clients recover half of their investment in funds
that had invested in multiple companies, he said.

The stimulus bill has also boosted interest in health-
information technology, said Edmund Billings, chief medical
officer of Carlsbad, California-based Medsphere Systems Corp.,
which makes open-source medical-record software for hospitals.

“The intensity of interest from investors since the
stimulus has gone way up, and the intensity of interest from
hospitals and doctors has gone way up,” said Billings, whose
company is looking for capital. “The stimulus is working from
our point of view.”

Tim Mullaney is a business writer for Bloomberg News. Before joining Bloomberg, Tim was with BusinessWeek magazine where he authored a series of influential cover stories on healthcare themes, including the Digital Hospital, a piece co-written with Arlene Weintraub and Bush’s Healthcare Radical, a profile of Bush administration healthcare IT coordinator David Brailer. Reprinted with permission.

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