Accelmed seeks $400m for new medical devices fund

Uri Geiger

Accelmed's fourth fund will work according to its established model of grafting new technologies onto stagnating companies, but will also invest in growth companies.

The Accelmed group of investment funds, managed by co-founding managing partner Dr. Uri Geiger, is in the process of raising a second private equity fund with $300-400 million, according to a presentation obtained by "Globes." This fund, Accelmed's largest to date, is in addition to the raising by the group of an Israel venture capital fund for investment in technologies at the early stages.

The new fund will be Accelmed's fourth. It currently has two private equity and venture capital funds.

The first fund, raised in 2011, was a $100 million venture capital fund for investment in medical devices in Israel. The fund scored a success with several of its companies, including Eximo Medical and EndoSpan, which were sold. In time, however, the group realized that building marketing channels for an Israeli company with a single product was not the best method for this market. It raised a $150 million private equity fund in 2016 on a different model, which will also be applied to the new fund - adding new technologies to existing platforms.

Implementation of this model began when Geiger moved to the US five years ago. At that time, the fund began to acquire US companies that had built a marketing network for existing products, but which found growing and operating difficult. The fund added new and promising technologies, some of them Israeli, to these stagnating marketing platforms. This strategy led to several quick exits. EndoGastric Solutions, the first company in which Accelmed invested under the new model, is already considering a possible IPO.

Playing on the field of growing companies

According to the presentation obtained by "Globes," the Accelmed group's internal rate of return (IRR) for its two venture capital funds is 39%, most of which has been realized. The IRR of the private equity fund is 45%. The first two funds were founded as a partnership of Geiger with Mori Arkin, who is no longer an active managing partner. Geiger is currently the group's sole managing partner.

The group is currently operating in these two channels: venture capital and private equity. A month ago, it announced that it was beginning to raise a $100 million venture capital fund, to be managed by Dr. Irit Yaniv, which would invest in Israeli companies developing new products. After realizing that devising marketing set-ups for single-product Israeli companies is well-nigh impossible, however, the fund will invest only in companies that it believes have a chance of achieving an exit before a substantial marketing network is necessary. The products involved are innovative in their fields, and for which the regulatory track that must be traversed is usually prolonged and expensive. Companies that have been through this process have therefore already proven feasibility to some extent, making them suitable for acquisition.

The new fund now being revealed will continue to operate on the model of an acquisition, or partnership in an acquisition, of existing companies in the US and enhancing them with additional technologies and involvement in management. Accelmed's plan is to take a substantial share of the ownership in these companies. The fund will also make minority investments in growing companies that it believes are on the right path and do not have to be changed. This is a new element in the fund's model, made possible by its $400 million size. Up until a few years ago, Accelmed was small and unknown in the US, and therefore experienced more difficulty in getting a foothold in investment in growing companies. Today, it can also compete in this sphere.

Accelmed's presentation shows that it believes that since the market for small and medium-sized medical devices companies is covered by large investors in the sector, with little competition, and many companies are underperforming, it has an opportunity to acquire these businesses at low prices.

Accelmed seeks companies with revenue of around $10 million and a high growth rate that need another financing round in order to expand their marketing, and believes that the companies in this category in which it will invest can be brought to an exit in 2-4 years.

Two-year average to an exit

"In all of the companies in which we have invested to date, even when we had large significant investors as partners in the company, I was the one who eventually sold it," Geiger told "Globes." "Our connection with the potential buyers was created as soon as the company entered the portfolio. So far, our longest time between acquiring and selling was three years and ten months. The average is two years."

"Globes": It appears that the model of acquiring companies and adding innovative technologies to an existing marketing set-up works. Why did you add investment in companies that are already growing?

Geiger: "My IRR is high now, but this approach is likely to increase the multiples by taking advantage of our platform and reputation in the US. We're a leading fund in investment in companies with values of less than $500 million."

Geiger says that although it aims at quick exits, the fund is fairly conservative. "Our investments are not leveraged, and we don't enter at high prices, even if it means waiting a year for a deal, when the existing owners realize that the valuation that they are striving for may be too high, or when the market situation changes in favor of lower prices. When I invest, I tell myself that the only thing I control is the price at which I buy.

"We tell the entrepreneurs, 'The valuation in the investment is less than you hoped for, but this isn't your exit; it's a financing event.' We leave them a large enough stake in the company so that the upgrading processes that we carry out will also contribute to them when the real sale takes place. We can replace the management. Sometimes that's part of the problem."

Where Israeli companies have difficulty

The partners in the private equity fund now being founded are Geiger; general partner Lior Shav, a former corporate manager at Meitav Capital Markets and VP business development at two Israeli medical device startups; partner Dr. Rafael Torgovicky, a former executive at international companies, including Eli Lilly; and general partner Evan Norton, who led Abbot Ventures, the venture arm of Abbot Laboratories, and was a principal in ONSET Ventures, which invested in medical device companies. Norton is currently an adjunct professor at Kellogg School of Management (Medical Products Commercialization and Funding) and serves on the Innovation and New Ventures Advisory Board and N.XT Fund Investment committee at Northwestern University.

Norton told "Globes" that in his opinion, technology is well-supported in Israel, "but you have trouble commercializing the technology in markets that are remote from you." He explains that the large medical device companies have undergone a consolidation process, and are now acquiring mainly mature commercial companies.

"This is the source of Accelmed's model, which is a very distinctive model. I'm delighted to enter the position as both as an investor and to contribute to companies' operations. I understand what large companies want, and Uri understands what small companies need, so between us we can put the jigsaw puzzle together."

Published by Globes, Israel business news - en.globes.co.il - on November 17, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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