File 024003

Images

Text

NEW LEAF VENTURES III, L.P.
– $375 MILLION LIMITED PARTNER INTERESTS –
CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM
APRIL, 2014
Control No. 257
NEW LEAF VENTURES III, L.P.
– $375 MILLION LIMITED PARTNER INTERESTS –
CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM
APRIL, 2014
NEW LEAF VENTURE PARTNERS
Times Square Tower
7 Times Square, Suite 3502
New York, NY 10036
646.871-6400
1200 Park Place
Suite 300
San Mateo, CA 94403
650.234.2700
Statement of Conditions
THIS CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM (THIS “MEMORANDUM”) IS
BEING FURNISHED TO CERTAIN SOPHISTICATED INVESTORS ON A CONFIDENTIAL BASIS BY
OR ON BEHALF OF NEW LEAF VENTURES III, L.P., A DELAWARE LIMITED PARTNERSHIP (“NLV-
III” OR THE “FUND”), SO THAT EACH MAY CONSIDER AN INVESTMENT IN THE FUND.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE TERMS OF
THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THE LIMITED PARTNER
INTERESTS (THE “INTERESTS”) OFFERED HEREBY HAVE NOT BEEN APPROVED, DISAPPROVED,
ENDORSED OR RECOMMENDED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION (THE
“SEC”) OR BY THE SECURITIES REGULATORY AUTHORITY OF ANY U.S. STATE OR NON-U.S.
JURISDICTION, AND NEITHER THE SEC NOR ANY SUCH AUTHORITY HAS REVIEWED THIS
MEMORANDUM NOR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
MEMORANDUM, NOR IS IT INTENDED THAT THE SEC OR ANY SUCH AUTHORITY WILL DO SO.
NO INDEPENDENT PERSON HAS CONFIRMED THE ACCURACY OR TRUTHFULNESS OF THIS
DISCLOSURE OR WHETHER IT IS COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
ILLEGAL.
THE INTERESTS HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES
ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), ANY U.S. STATE SECURITIES LAWS OR
THE LAWS OF ANY NON-U.S. JURISDICTION. IT IS ANTICIPATED THAT THE OFFERING AND
SALE OF THE INTERESTS IN THE U.S. WILL BE EXEMPT FROM REGISTRATION PURSUANT TO
SECTION 4(2) AND REGULATION D AND REGULATION S PROMULGATED UNDER THE
SECURITIES ACT AND OTHER EXEMPTIONS OF SIMILAR IMPORT UNDER THE LAWS OF THE
STATES AND OTHER JURISDICTIONS WHERE THE OFFERING WILL BE MADE. THE FUND WILL
NOT BE REGISTERED AS AN INVESTMENT COMPANY UNDER THE U.S. INVESTMENT COMPANY
ACT OF 1940, AS AMENDED (THE “INVESTMENT COMPANY ACT”).
THE INTERESTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT AND MAY NOT BE
OFFERED OR SOLD IN THE U.S. OR TO U.S. PERSONS (AS DEFINED IN RULE 902(K) OF THE
SECURITIES ACT) UNLESS THE INTERESTS ARE REGISTERED UNDER THE SECURITIES ACT, OR
AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT IS
AVAILABLE. HEDGING TRANSACTIONS INVOLVING THE INTERESTS MAY NOT BE
CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT.
THE FUND AND ITS GENERAL PARTNER ARE NEWLY FORMED ENTITIES. THERE IS NO PUBLIC
MARKET FOR THE INTERESTS, AND NO SUCH MARKET IS EXPECTED TO DEVELOP. EACH
PURCHASER WILL BE REQUIRED TO REPRESENT, AMONG OTHER THINGS, THAT IT IS AN
“ACCREDITED INVESTOR” WITHIN THE MEANING OF REGULATION D OF THE SECURITIES ACT
AND THAT IT IS ACQUIRING THE INTERESTS PURCHASED BY IT FOR INVESTMENT AND NOT
WITH A VIEW FOR RESALE OR DISTRIBUTION. THE INTERESTS ARE SUBJECT TO RESTRICTIONS
ON TRANSFERABILITY AND RESALE AND MAY NOT BE RESOLD OR TRANSFERRED EXCEPT AS
PERMITTED UNDER THE FUND’S AMENDED AND RESTATED LIMITED PARTNERSHIP
AGREEMENT (AS AMENDED FROM TIME TO TIME, THE “PARTNERSHIP AGREEMENT”) AND
UNLESS THE INTERESTS ARE REGISTERED UNDER THE SECURITIES ACT OR EXEMPTED FROM
SUCH REGISTRATION AND REGISTRATION UNDER ANY OTHER APPLICABLE SECURITIES LAW
REQUIREMENTS.
NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATIONS OR GIVE ANY
INFORMATION WITH RESPECT TO THE INTERESTS EXCEPT THE INFORMATION CONTAINED IN
THIS MEMORANDUM, AND ANY REPRESENTATION OR INFORMATION NOT CONTAINED
HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, ITS
GENERAL PARTNER, OR ANY OF THEIR RESPECTIVE PARTNERS, EMPLOYEES, OFFICERS,
i
CONTROL NUMBER 257 - CONFIDENTIAL
DIRECTORS OR AFFILIATES. THE DISTRIBUTION OF THIS MEMORANDUM AND THE OFFER
AND SALE OF THE INTERESTS IN CERTAIN JURISDICTIONS MAY BE RESTRICTED BY LAW. FOR
INFORMATION REQUIRED BY THE SECURITIES LAWS OF CERTAIN U.S. STATES AND CERTAIN
JURISDICTIONS OUTSIDE OF THE U.S., PLEASE SEE THE OFFERING NOTICES BEGINNING IN
SECTION XIV. THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE INTERESTS IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
THIS MEMORANDUM IS NOT, AND UNDER NO CIRCUMSTANCES IS IT TO BE CONSTRUED AS, A
PROSPECTUS OR ADVERTISEMENT, AND THE OFFERING CONTEMPLATED IN THIS
MEMORANDUM IS NOT, AND UNDER NO CIRCUMSTANCES IS IT TO BE CONSTRUED AS, A
PUBLIC OFFERING OF THE INTERESTS.
THIS MEMORANDUM IS FOR THE CONFIDENTIAL USE OF ONLY THOSE PERSONS TO WHOM IT
IS TRANSMITTED IN CONNECTION WITH THIS OFFERING. EACH RECIPIENT ACKNOWLEDGES
AND AGREES THAT THE CONTENTS OF THIS MEMORANDUM AND RELATED
DOCUMENTATION CONSTITUTE PROPRIETARY AND CONFIDENTIAL INFORMATION, THAT
NEW LEAF VENTURE PARTNERS, L.L.C. (“NEW LEAF” OR THE “MANAGEMENT COMPANY”)
AND THE FUND DERIVE INDEPENDENT ECONOMIC VALUE FROM THEIR CONTENTS NOT
BEING GENERALLY KNOWN, AND THAT THE MANAGEMENT COMPANY TAKES REASONABLE
EFFORTS TO MAINTAIN THEIR SECRECY. IN ADDITION, EACH PERSON WHO RECEIVES THIS
MEMORANDUM AGREES THAT ITS CONTENTS ARE A TRADE SECRET, THE DISCLOSURE OF
WHICH IS LIKELY TO CAUSE SUBSTANTIAL AND IRREPARABLE COMPETITIVE HARM TO THE
MANAGEMENT COMPANY AND THE FUND. BY ACCEPTANCE HEREOF, EACH RECIPIENT
AGREES NOT TO TRANSMIT, REPRODUCE OR MAKE AVAILABLE TO ANYONE, IN WHOLE OR IN
PART, THIS MEMORANDUM, ANY SUPPLEMENT HERETO OR ANY INFORMATION CONTAINED
HEREIN OR THEREIN WITHOUT THE PRIOR WRITTEN CONSENT OF NEW LEAF VENTURE
ASSOCIATES III, L.P. (THE “GENERAL PARTNER”), OR TO USE IT FOR ANY PURPOSE OTHER
THAN EVALUATING A POSSIBLE INVESTMENT IN THE FUND. EACH PERSON WHO HAS
RECEIVED A COPY OF THIS MEMORANDUM (WHETHER OR NOT SUCH PERSON PURCHASES
ANY INTERESTS) IS DEEMED TO HAVE AGREED (I) TO RETURN THIS MEMORANDUM AND ANY
SUPPLEMENT HERETO TO THE MANAGEMENT COMPANY UPON REQUEST IF SUCH PERSON
HAS NOT PURCHASED AN INTEREST, (II) NOT TO DISCLOSE ANY INFORMATION CONTAINED
IN THIS MEMORANDUM OR ANY SUPPLEMENT HERETO EXCEPT TO THE EXTENT THAT SUCH
INFORMATION WAS (A) PREVIOUSLY KNOWN BY SUCH PERSON THROUGH A SOURCE (OTHER
THAN THE FUND, ITS PARTNERS OR ANY AFFILIATES OR AGENTS THERETO) NOT BOUND BY
ANY OBLIGATION TO KEEP CONFIDENTIAL SUCH INFORMATION, (B) IN THE PUBLIC DOMAIN
THROUGH NO FAULT OF SUCH PERSON OR (C) LATER LAWFULLY OBTAINED BY SUCH
PERSON FROM SOURCES (OTHER THAN THE FUND, ITS PARTNERS OR ANY AFFILIATES OR
AGENTS THERETO) NOT BOUND BY ANY OBLIGATION TO KEEP SUCH INFORMATION
CONFIDENTIAL AND (III) TO BE RESPONSIBLE FOR ANY DISCLOSURE OF THIS MEMORANDUM,
ANY SUPPLEMENT HERETO, OR THE INFORMATION CONTAINED HEREIN OR THEREIN, BY
SUCH PERSON OR ANY OF ITS EMPLOYEES, AGENTS OR REPRESENTATIVES.
PROSPECTIVE INVESTORS ARE URGED TO REQUEST ANY ADDITIONAL INFORMATION THEY
MAY CONSIDER NECESSARY OR DESIRABLE IN MAKING AN INFORMED INVESTMENT
DECISION. EACH PROSPECTIVE PURCHASER IS INVITED, PRIOR TO THE CONSUMMATION OF
A SALE OF ANY INTERESTS TO SUCH PURCHASER, TO ASK QUESTIONS OF AND RECEIVE
ANSWERS FROM THE MANAGEMENT COMPANY CONCERNING THE FUND AND THIS
OFFERING AND TO OBTAIN ANY ADDITIONAL INFORMATION TO THE EXTENT THE
MANAGEMENT COMPANY POSSESSES THE SAME OR CAN ACQUIRE IT WITHOUT
UNREASONABLE EFFORT OR EXPENSE, IN ORDER TO VERIFY THE ACCURACY OF THE
INFORMATION CONTAINED IN THIS MEMORANDUM OR OTHERWISE.
ii
CONTROL NUMBER 257 - CONFIDENTIAL
PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO RELY ON THE PRIOR RETURNS SET FORTH
HEREIN IN MAKING A DECISION WHETHER OR NOT TO PURCHASE THE INTERESTS OFFERED
HEREBY. AN INVESTMENT IN THE FUND DOES NOT REPRESENT AN INTEREST IN ANY
INDICATED INVESTMENT OR ANY INVESTMENT PORTFOLIO OF ANY RELATED OR OTHER
INVESTMENT FUND, INCLUDING ANY INVESTMENT FUND MANAGED BY THE MANAGEMENT
COMPANY OR ITS AFFILIATES. WHILE THIS MEMORANDUM INCLUDES REFERENCES TO A
NUMBER OF RELATED AND AFFILIATED ENTITIES, INCLUDING CERTAIN AFFILIATED
INVESTMENT POOLS AND VEHICLES, AN INVESTMENT IN THE FUND AS CONTEMPLATED
HEREIN IS SEPARATE AND DISCRETE FROM ALL SUCH OTHER AFFILIATED INVESTMENT
VEHICLES. FURTHER, ALTHOUGH THE PERFORMANCE OF SUCH OTHER AFFILIATED
INVESTMENT VEHICLES MAY BE RELEVANT TO A GENERAL UNDERSTANDING OF THE
GENERAL INVESTMENT EXPERIENCE AND PHILOSOPHY OF THE MANAGEMENT COMPANY
AND ITS AFFILIATES, SUCH PERFORMANCE IS NOT AN INDICATOR OF THE RESULTS TO BE
ACHIEVED BY THE FUND.
THE RETURN INFORMATION CONTAINED HEREIN HAS NOT BEEN AUDITED OR VERIFIED BY
ANY INDEPENDENT PARTY AND SHOULD NOT BE CONSIDERED REPRESENTATIVE OF THE
RETURNS THAT MAY BE RECEIVED BY AN INVESTOR IN THE FUND. CERTAIN FACTORS EXIST
THAT MAY AFFECT COMPARABILITY INCLUDING, AMONG OTHERS, THE DEDUCTION OF FEES
AND EXPENSES AND THE PAYMENT OF CARRIED INTEREST (WHICH MAY BE DIFFERENT FOR
THE FUND) AS WELL AS OTHER FACTORS AS NOTED WITH SUCH INFORMATION. FURTHER,
CERTAIN INFORMATION RESPECTING UNREALIZED RETURNS IS BASED ON PUBLIC MARKET
VALUATIONS THAT, AMONG OTHER THINGS, HAVE BECOME INCREASINGLY VOLATILE AND
AS A RESULT MAY NOT BE INDICATIVE OF THE CURRENT VALUE OR THE ACTUAL VALUE TO
BE REALIZED FROM ANY PARTICULAR PORTFOLIO INVESTMENT.
PROSPECTIVE INVESTORS SHOULD NOT CONSTRUE THE CONTENTS OF THE MEMORANDUM
AS LEGAL, TAX, REGULATORY, FINANCIAL, ACCOUNTING OR OTHER ADVICE. EACH
PROSPECTIVE INVESTOR SHOULD MAKE ITS OWN INVESTIGATION AND CONSULT ITS OWN
ADVISORS AS TO THE LEGAL, TAX, REGULATORY, FINANCIAL, ACCOUNTING AND RELATED
MATTERS CONCERNING THE FUND, THE OFFERING AND AN INVESTMENT IN THE INTERESTS.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK AND IS SUITABLE ONLY FOR
INVESTORS WHO ARE SOPHISTICATED WITH FINANCIAL MATTERS AND FAMILIAR WITH THE
RISKS ASSOCIATED WITH INVESTMENTS SIMILAR TO THE ONES DESCRIBED HEREIN. NONE OF
THE FUND, THE GENERAL PARTNER, THE MANAGEMENT COMPANY OR ANY OF THEIR
AFFILIATES IS MAKING ANY REPRESENTATION OR WARRANTY TO AN INVESTOR REGARDING
THE LEGALITY OF AN INVESTMENT IN THE FUND BY SUCH INVESTOR OR ABOUT THE
INCOME AND OTHER TAX CONSEQUENCES TO IT OF SUCH AN INVESTMENT.
UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED HEREIN RESPECTING
RATES OF RETURN OR OTHER PERFORMANCE DATA, WHETHER REALIZED OR UNREALIZED,
IS QUALIFIED BY THE RELEVANT APPENDICES, FOOTNOTES, AND ENDNOTES HEREIN AND IS
ON A GROSS RETURN BASIS BEFORE GIVING EFFECT TO MANAGEMENT FEES, CARRIED
INTEREST, OTHER EXPENSES AND TAXES, WHICH, IF GIVEN EFFECT TO, WOULD REDUCE SUCH
RETURNS AND, IN THE AGGREGATE, ARE EXPECTED TO BE SUBSTANTIAL. WHERE NET
RETURNS ARE PROVIDED, SUCH RETURNS GIVE EFFECT TO MANAGEMENT FEES, CARRIED
INTEREST AND OTHER EXPENSES. FURTHER, INFORMATION RESPECTING INVESTMENT
PERFORMANCE IS BASED ON CERTAIN INVESTMENT POSITIONS SELECTED AS
REPRESENTATIVE AND ANALOGOUS TO THE TARGETED INVESTMENT CATEGORIES FOR THE
FUND. SUCH INVESTMENT PERFORMANCE INFORMATION IS NOT REPRESENTATIVE OF
INVESTMENT PERFORMANCE BY NEW LEAF AND ITS AFFILIATED INVESTMENT MANAGERS IN
OTHER INVESTMENT ACTIVITIES, WHICH HAVE NOT BEEN INCLUDED HEREIN.
iii
CONTROL NUMBER 257 - CONFIDENTIAL
INVESTORS SHOULD CAREFULLY REVIEW THE INFORMATION CONTAINED IN THIS
MEMORANDUM IN SECTION IX, “CERTAIN INVESTMENT CONSIDERATIONS,” AND SECTION X,
“CERTAIN TAX AND ERISA CONSIDERATIONS.” INVESTMENT IN THE INTERESTS IS SUITABLE
ONLY FOR SOPHISTICATED INVESTORS AND REQUIRES THE FINANCIAL ABILITY AND
WILLINGNESS TO ACCEPT THE RISKS AND LACK OF LIQUIDITY INHERENT IN AN INVESTMENT
IN THE INTERESTS. IN PARTICULAR, ONE OR MORE SUBSIDIARIES OF THE FUND OR OTHER
ENTITIES IN WHICH THE FUND INVESTS DIRECTLY OR INDIRECTLY MAY QUALIFY AS
“PASSIVE FOREIGN INVESTMENT COMPANIES” OR “CONTROLLED FOREIGN CORPORATIONS”
FOR U.S. FEDERAL INCOME TAX PURPOSES, WHICH COULD RESULT IN ADVERSE TAX
CONSEQUENCES TO INVESTORS THAT ARE U.S. PERSONS.
THIS MEMORANDUM CONTAINS A SUMMARY OF THE PARTNERSHIP AGREEMENT AND
CERTAIN OTHER DOCUMENTS REFERRED TO HEREIN. HOWEVER, THE SUMMARIES IN THIS
MEMORANDUM DO NOT PURPORT TO BE COMPLETE AND ARE SUBJECT TO AND QUALIFIED
IN THEIR ENTIRETY BY REFERENCE TO THE ACTUAL TEXT OF THE RELEVANT DOCUMENT,
COPIES OF WHICH WILL BE PROVIDED TO EACH PROSPECTIVE INVESTOR UPON REQUEST.
EACH PROSPECTIVE INVESTOR SHOULD REVIEW THE PARTNERSHIP AGREEMENT, THE
SUBSCRIPTION AGREEMENT AND SUCH OTHER DOCUMENTS FOR COMPLETE INFORMATION
CONCERNING THE RIGHTS, PRIVILEGES AND OBLIGATIONS OF INVESTORS IN THE FUND. IN
THE EVENT THAT THE DESCRIPTIONS OR TERMS OF THE MEMORANDUM ARE INCONSISTENT
WITH OR CONTRARY TO THE DESCRIPTIONS OR TERMS OF THE PARTNERSHIP AGREEMENT,
THE SUBSCRIPTION AGREEMENT OR OTHER DOCUMENTS, THE PARTNERSHIP AGREEMENT,
THE SUBSCRIPTION AGREEMENT OR SUCH OTHER DOCUMENTS SHALL CONTROL. THE
GENERAL PARTNER AND ITS AFFILIATES RESERVE THE RIGHT TO MODIFY THE TERMS OF THE
OFFERING AND THE INTERESTS DESCRIBED IN THIS MEMORANDUM, AND THE INTERESTS
ARE OFFERED SUBJECT TO THE GENERAL PARTNER’S ABILITY TO REJECT ANY COMMITMENT
IN WHOLE OR IN PART.
CERTAIN INFORMATION IN THIS MEMORANDUM HAS BEEN OBTAINED FROM SOURCES
BELIEVED TO BE RELIABLE ALTHOUGH NONE OF THE FUND, GENERAL PARTNER, THE
MANAGEMENT COMPANY OR THEIR RESPECTIVE AFFILIATES GUARANTEE ITS ACCURACY,
COMPLETENESS OR FAIRNESS. OPINIONS AND ESTIMATES MAY BE CHANGED WITHOUT
NOTICE.
THE FUND IS OFFERING INTERESTS TO U.S. PERSONS THAT ARE “QUALIFIED PURCHASERS” AS
DEFINED IN THE INVESTMENT COMPANY ACT AND “ACCREDITED INVESTORS” AS DEFINED
IN THE SECURITIES ACT.
AN INVESTMENT IN THE FUND MAY BE SUBJECT TO INCREASING REGULATIONS AND
GOVERNMENTAL OVERSIGHT, INCLUDING, FOR EXAMPLE, THE BANK SECRECY ACT AND THE
USA PATRIOT ACT OF 2001, INCLUDING THEIR RESPECTIVE IMPLEMENTING REGULATIONS
WHICH, AMONG OTHER THINGS, CONSTITUTE THE ANTI-MONEY LAUNDERING
REGULATIONS. THERE CAN BE NO ASSURANCE THAT SUCH RULES WILL NOT REQUIRE
VARIOUS INVESTOR DISCLOSURES TO, AMONG OTHERS, DOMESTIC AND FOREIGN
GOVERNMENT AUTHORITIES.
YOUR INVESTMENT WILL BE DENOMINATED IN UNITED STATES DOLLARS ($) AND,
THEREFORE, WILL BE SUBJECT TO ANY FLUCTUATION IN THE RATE OF EXCHANGE BETWEEN
U.S. DOLLARS ($) AND THE CURRENCY OF YOUR OWN JURISDICTION. SUCH FLUCTUATIONS
MAY HAVE AN ADVERSE EFFECT ON THE VALUE, PRICE OR INCOME OF YOUR INVESTMENT.
ALL SECURITIES INVESTMENTS RISK THE LOSS OF CAPITAL. NO GUARANTEE OR
REPRESENTATION IS MADE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. AN
INVESTMENT IN THE FUND IS SPECULATIVE AND INVOLVES CERTAIN CONSIDERATIONS AND
iv
CONTROL NUMBER 257 - CONFIDENTIAL
CERTAIN INVESTMENT CONSIDERATIONS. PAST PERFORMANCE IS NOT INDICATIVE OF
FUTURE RESULTS.
THE FUND INTENDS TO CONDUCT ITS INVESTMENT ACTIVITIES THROUGH A NUMBER OF
SUBSIDIARIES AND AFFILIATES THAT MAY BE ESTABLISHED FROM TIME TO TIME IN ONE OR
MORE JURISDICTIONS, EACH OF WHICH MAY HAVE VARYING TAX EFFECTS ON THE FUND
AND PARTNERS. AS SUCH THERE CAN BE NO ASSURANCE AS TO THE CONSEQUENCES OF
SUCH ACTIVITIES. INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE RISK
OF AN INVESTMENT IN THE FUND. SEE ALSO SECTION X, “CERTAIN TAX AND ERISA
CONSIDERATIONS.”
PROSPECTIVE INVESTORS SHOULD REVIEW THE OFFERING NOTICES BEGINNING IN SECTION
XIV FOR INFORMATION RELATING TO THE OFFERING AND SALES OF THE INTERESTS TO
INVESTORS IN VARIOUS STATES OF THE U.S. AS WELL AS CERTAIN NON-U.S. JURISDICTIONS.
IN ACCORDANCE WITH U.S. TREASURY REGULATIONS GOVERNING PRACTICE BEFORE THE
INTERNAL REVENUE SERVICE (CIRCULAR 230), THE FUND HEREBY INFORMS THE INVESTORS
THAT (A) THE INFORMATION BELOW (OR OTHERWISE CONTAINED IN THIS DOCUMENT) IS
NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY THE INVESTORS FOR
THE PURPOSE OF AVOIDING PENALTIES THAT THE U.S. INTERNAL REVENUE SERVICE MAY
ATTEMPT TO IMPOSE ON AN INVESTOR, (B) THE INFORMATION WAS WRITTEN TO SUPPORT
THE PROMOTION OR MARKETING OF THE TRANSACTION OR MATTERS ADDRESSED BY THE
WRITTEN INFORMATION AND (C) INVESTORS SHOULD SEEK TAX ADVICE BASED ON THEIR
PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
Forward-Looking Statements
CERTAIN INFORMATION CONTAINED IN THIS MEMORANDUM CONSTITUTES “FORWARD-
LOOKING STATEMENTS,” WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS “MAY,” “WILL,” “SHOULD,” “EXPECT,” “ANTICIPATE,” “PROJECT,”
“ESTIMATE,” “INTEND,” “CONTINUE,” OR “BELIEVE,” OR THE NEGATIVES THEREOF OR OTHER
VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. DUE TO VARIOUS RISKS AND
UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, THOSE SET FORTH IN SECTION IX
“CERTAIN INVESTMENT CONSIDERATIONS”, ACTUAL EVENTS OR RESULTS OR THE ACTUAL
PERFORMANCE OF THE FUND MAY DIFFER MATERIALLY FROM THOSE REFLECTED OR
CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS. WHILE ASSUMPTIONS
UNDERLYING VARIOUS STATEMENTS AS TO FUTURE PERFORMANCE ARE BELIEVED TO BE
REASONABLE IN NATURE, EXISTING AND PROSPECTIVE INVESTORS SHOULD MAKE THEIR
OWN ASSESSMENTS AS TO SUCH ASSUMPTIONS AND THE ASSOCIATED RISKS, INCLUDING
THE LIKELIHOOD OF THE FUND ACHIEVING CORRESPONDING RESULTS, ALL OF WHICH ARE
SUBJECT TO RISKS AND UNCERTAINTIES MANY OF WHICH ARE BEYOND THE CONTROL OF
THE FUND (SEE SECTION IX “CERTAIN INVESTMENT CONSIDERATIONS”). AS SUCH, NO
ASSURANCE IS GIVEN AS TO THE REALIZATION OF ANY SUCH FUTURE PERFORMANCE. NO
REPRESENTATION OR WARRANTY IS MADE AS TO FUTURE PERFORMANCE OR SUCH
FORWARD-LOOKING STATEMENTS. UNLESS OTHERWISE INDICATED, INFORMATION
CONTAINED HEREIN IS AS OF MARCH 31, 2014. THE DELIVERY OF THIS MEMORANDUM DOES
NOT IMPLY THAT ANY OTHER INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO MARCH 31, 2014.
None of New Leaf Ventures I, L.P., New Leaf Ventures II, L.P., NLV-III, the Management Company or any of their
affiliates have any affiliation with Credit Suisse nor any its affiliates (collectively, “Credit Suisse”). Credit Suisse
has not compiled, reviewed or participated in the preparation of any of the performance or other information
contained in this Memorandum and assumes no responsibility therefor. Consequently, in no respects should
Credit Suisse be considered to have approved or disapproved of any of the information set forth in this
Memorandum. “Sprout”, “Sprout Group” and the symbols associated therewith are registered trademarks of Credit
v
CONTROL NUMBER 257 - CONFIDENTIAL
Suisse. These trademarks remain the exclusive property of Credit Suisse. The Interests being offered by NLV-III are
not sponsored, endorsed, promoted, offered or sold by Credit Suisse, and Credit Suisse makes no representation
regarding the advisability of investing in NLV-III.
vi
CONTROL NUMBER 257 - CONFIDENTIAL
TABLE OF CONTENTS
I. Executive Summary ......................................................................................................................... 1
II. The Team ....................................................................................................................................... 11
III. Summary of Historical Investment Performance ................................................................. 18
IV. Opportunity In The Healthcare Sector ................................................................................... 24
V. New Leaf Venture Partners Investment Strategy .................................................................. 31
VI. Deal Sourcing & Investment Process ..................................................................................... 43
VII. Ongoing Relationship With Sprout Funds .......................................................................... 45
VIII. Summary of Partnership Terms ........................................................................................... 46
IX. Certain Investment Considerations ........................................................................................ 58
X. Certain Tax and ERISA Considerations ................................................................................... 73
XI. Certain Legal & Regulatory Considerations .......................................................................... 85
XII. Additional Information ............................................................................................................ 88
XIII. Appendices ............................................................................................................................... 89
XIV. Certain Offering Notices ...................................................................................................... 100
vii
CONTROL NUMBER 257 - CONFIDENTIAL
I. EXECUTIVE SUMMARY
FUND OVERVIEW
New Leaf Ventures III, L.P. (“NLV-III” or the “Fund”) is being formed by New Leaf Venture
Partners, L.L.C. (“New Leaf” or the “Management Company”), an established and proven
leader in health care technology investing. NLV-III will be the seventh private equity fund
focused on venture and growth stage investments in healthcare and life sciences companies
raised by the partners of New Leaf. NLV-III is the successor fund to New Leaf Ventures I, L.P.
(“NLV-I”) and New Leaf Ventures II, L.P. (“NLV-II”), which raised capital commitments of
$310 million and $450 million respectively. The New Leaf funds follow four Sprout Capital
funds that included over $1.0 billion of investments in healthcare technology companies. 1 In
total, the New Leaf team has invested over $1.6 billion and have generated one of the industry’s
leading track records by consistently outperforming their peers in the healthcare venture capital
market (based on Cambridge Associates benchmarks 2 ) and exceeding relevant public market
indices by substantial margins. 3,4
The Fund will seek to invest in a diversified portfolio composed of an estimated 24 to 28
healthcare technology companies, most of which will be U.S. based and at the product
development or commercialization phase. Fund investments will typically take the form of
venture capital or growth capital transactions in private companies, or as structured
transactions in small capitalization public companies. The Fund will establish meaningful
ownership positions and in most cases will actively manage the investments with
representation on the boards of directors. The Fund will seek to generate returns that
significantly outperform relevant public market equity indices by creating a portfolio that
optimally balances the risks, timelines, and capital intensity associated with developing and
commercializing innovative healthcare technologies with the financial market realities that are
the backdrop for a venture capital fund focused on this sector.
The Fund is targeting aggregate capital commitments from limited partners of
$375 million.
THE NEW LEAF TEAM
New Leaf is one of the most respected, successful, and established brands in healthcare
technology investing, a reputation built over the last 18 years by a highly experienced and
stable team of partners. NLV-III will be managed by this team of 6 senior partners, 5 of whom
have worked together continuously for a decade or more. These partners bring a strong
combination of significant and relevant industry operating experience and successful venture
capital investment experience to NLV-III.
The Managing Directors of NLV-III are Philippe Chambon MD PhD, Jeani Delagardelle, Ron
Hunt, Vijay Lathi, and Liam Ratcliffe MD PhD. Philippe, Jeani, Ron, and Vijay have worked
together for 15 years over six prior funds at New Leaf and the Sprout Group. Liam joined the
1 Sprout Group is a venture capital affiliate of Credit Suisse
2 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices” including endnote C
in Appendix 4 regarding information provided by Cambridge Associates.
3 S&P500, S&P Healthcare, NASDAQ Composite, and Russell 3000. See endnote F in Appendix 4.
4 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices; Appendix 3”
(regarding the PME+ methodology) including endnotes B, D, E and F in Appendix 4.
1
CONTROL NUMBER 257 - CONFIDENTIAL
New Leaf team five years ago and has made significant contributions to the NLV-II portfolio.
Jim Niedel MD PhD has worked with the team continuously for over twelve years and will
continue to be a senior member of the NLV investment team for NLV-III, but will change his
status to Venture Partner with the closing of NLV-III. In this role, Jim will work full-time with
NLV during the NLV-III investment period in building and managing the NLV-III portfolio,
and he will continue with full oversight and portfolio management responsibilities for NLV-I
and NLV-II. With 80+ years of venture investing experience and decades of operating
experience in the industries in which they invest, this 6 member senior team (the “Fund
Managers”) brings highly relevant and complementary experience to bear on this Fund. This
team of partners is further strengthened by a group of additional investment professionals who
add highly relevant scientific and life sciences investment experience and have made significant
contributions to the NLV-II portfolio.
The New Leaf team is distinctive in that its members have played a leadership role in the
healthcare venture capital industry over the last two decades. During this time, the Fund
Managers have demonstrated the ability to source high quality investments at all stages,
including start-ups, follow-on private investments, company restructurings, and structured
public investments. The Fund Managers source deals through a range of activities that rely on
their deep relationships in academia, industry, and the investment community (private and
public), resulting in differentiated and, in many cases, proprietary deal flow. Once initial
investments are made, the Fund Managers are focused on building value in technology based
healthcare companies by creating strong management teams and then collaborating with them
to develop, manage, and execute capital efficient business plans. Through these efforts, the
Fund Managers have earned a reputation as value-added investors and have created some of
the best performing portfolios of healthcare technology investments in the industry.
LONG TERM TRACK RECORD
Over an 18 year period and across the portfolios of 6 distinct venture funds focused on
healthcare technology investments, the Fund Managers have delivered net performance that
has consistently outperformed venture industry benchmarks and relevant public equity market
indices 5,6 . The Fund Managers’ track record is notable for the following reasons:
�
Performance has been consistently top-quartile since the mid-1990s:
NLV-I, NLV-II and the healthcare technology portfolios in the Sprout Capital funds
have invested over $1.6 billion in healthcare technology companies since 1995. Over
nearly two decades, returns have consistently exceeded Cambridge Associates’ top-
5 Except as otherwise expressly noted, all performance information contained herein, including rates of return, is as of March 31,
2014 and is unaudited. The performance information is based on the cumulative invested capital, cumulative cash dividends and
realized and unrealized sales proceeds in portfolio companies. Where designated as “gross”, the performance information is
presented on a gross basis with regard to expenses and does not reflect deductions for any management fees, the general partner’s
carried interest or other expenses. Where designated as “net”, the performance information is presented on a net basis after giving
effect to management fees, the general partner’s carried interest and other expenses. Please refer to Section III: “Summary of
Historical Investment Performance” and Section XIII: “Appendices” and the endnotes in Appendix 4 for a more detailed description
of the performance of the NLV-I, NLV-II and the Sprout Funds. An investment in the Fund does not represent an interest in any
indicated investment or any investment portfolio of any related or other investment fund, including any investment or fund
managed by the Fund Managers. Disclosure of past performance herein is for informational purposes only and is not indicative of
future results.
6 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices; Appendix 3”
including endnote C (regarding information provided by Cambridge Associates).
2
CONTROL NUMBER 257 - CONFIDENTIAL
quartile benchmarks for U.S. venture capital healthcare and/or U.S. total venture
capital. 7
�
Exceeded relevant public equity indices by substantial margins on all realized funds:
Members of the New Leaf team invested $1.02 billion in the portfolios of healthcare
technology investments in four Sprout Capital funds (Sprout Capital IX, L.P., Sprout
Capital VIII, L.P., Sprout Capital VII, L.P. and Sprout Growth II, L.P.), and these are now
fully realized (or near fully realized in the case of Sprout Capital IX, L.P.). The net
annual IRR’s on the healthcare technology portfolios in these funds outperformed the
S&P 500 (568 – 2,258 bps), S&P Healthcare (302 – 2,064 bps), NASDAQ Composite (451 –
2,125 bps), and the Russell 3000 (502 – 2,215 bps) using the Public Market Equivalent
Plus (PME+) methodology 8 . Although PME+ methodology is most informative when
used to analyze funds whose returns are mature, the PME+ methodology shows that
NLV-I is outperforming these same indices, and shows encouraging results for NLV-II
despite its relative immaturity.
It is this consistently high level of return over an 18 year period, spanning several challenging
investment cycles, that creates a truly unique track record within the venture capital sector.
The chart below illustrates details of the gross and net performance by fund.
Chart 1: Returns by Fund
As of March 31, 2014
($ in millions)
Fund:
Fund Size:
Growth II
HCT
*
$15M Fund
Sprout VII
HCT
*
$95M Fund
Sprout VIII
HCT
*
$147M Fund
Sprout IX
HCT
*
$690M Fund
NLV-I
$310M Fund
NLV-II
$450M Fund
Paid-In Capital $15M $95M $147M $690M $303M $407M
Vintage Year: (1993 - 2007) (1995 - 2011) (1998 - 2012) (2000) (2005) (2008)
First Investment 1995 1995 1998 2000 2005 2008
Gross Fund Returns
N
Total Multiple
N
Realized Multiple
4.4x
4.4x
2.6x
2.6x
1.7x
1.7x
2.0x
2.2x
2.1x
1.7x
1.8x
2.0x
D
Total IRR
D
Realized IRR
44%
44%
19%
19%
10%
10%
15%
17%
19%
23%
30%
33%
Net Fund Returns
N
Net Total Multiple
D
Net Total IRR
*
3.69x
*
28.9%
*
2.17x
*
12.0%
*
1.49x
*
6.0%
*
1.66x
*
9.3%
1.75x
12.0%
1.45x
16.7%
Net Distributed / Paid-In Multiple
F
*
3.69x
*
2.17x
*
1.49x 1.55x * 0.51x 0.50x
Net Distributed $s to LPs $56.3 $207.0 $218.7 $1,071.5 $154.7 $204.2
Interim Fund Liquidity Metrics
G
(Distributed + Public) / Paid-In Multiple -- -- -- 1.62x 0.74x 1.18x
H
(Distributed + Liquid Public) / Paid-In Multiple -- -- -- 1.58x 0.57x 0.75x
IRR Outperformance Versus Public Indices
**
PME+ (Basis Points over S&P 500 Healthcare Sector) +2,064 bps +302 bps +441 bps +776 bps +201 bps -187 bps
**
PME+ (Basis Points over S&P 500) +2,258 bps +568 bps +587 bps +638 bps +496 bps +275 bps
PME+ (Basis Points over Russell 3000)
**
+2,215 bps +554 bps +502 bps +565 bps +446 bps +218 bps
PME+ (Basis Points over Nasdaq Composite)
**
+2,125 bps +554 bps +725 bps +451 bps +181 bps -21 bps
NLV and Sprout fund data as of March 31, 2014. Sprout fund statistics computed based on healthcare portfolio within Sprout.
* See Appendix 2 and endnotes A and E in Appendix 4. Based on synthetic funds with assumptions around recycling and fee structure.
** Based on Public Market Equivalent (PME+) methodology. See Appendix 3 and endnotes A, B, E and G in Appendix 4.
Please Section XIII: “Appendices” for definitions of terms and/or methodology.
7 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices” and endnotes B
(regarding public indices) and C (regarding information provided by Cambridge Associates) in Appendix 4.
8 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices”, Appendix 3
(regarding the PME+ methodology) and to endnotes B, D, E and F in Appendix 4.
3
CONTROL NUMBER 257 - CONFIDENTIAL
For a full overview of investment performance, please refer to Section III: Summary of
Historical Investment Performance.
OPPORTUNITY IN THE HEALTHCARE SECTOR
The Fund Managers believe a number of macro market factors have aligned to create attractive
and lasting conditions for NLV-III’s targeted investment strategy in healthcare technology.
These macro market factors include the following:
�
�
�
Strong and Sustained Growth in Global Healthcare Markets: Healthcare is one of the
strongest and most dynamic markets within the global economy, with powerful
demographic forces expected to drive growth at rates that will outpace GDP in major
economies for at least the next decade. 9 This steady and sustained market growth
creates a positive macro environment for investment in the sector.
Significant Opportunity Created By Healthcare Reform & Restructuring: Through at
least the next decade, the healthcare industry will be going through a period of
significant restructuring as government, private insurance companies, and employers
implement broad reform initiatives that seek to slow the growth of healthcare spending
and limit the threat this burden creates to their long term fiscal viability. In the U.S., the
federal government laid the foundation for these changes with two key pieces of
legislation: the Patient Protection and Affordable Care Act (“ACA”) and the Health
Information Technology for Economic and Clinical Health Act (“HITECH Act”), which are
designed to reduce costs, improve quality, and significantly expand the percentage of
the population with access to healthcare services. Importantly, a component of the
legislation sets aside funding in the form of direct incentives to healthcare providers to
be used to purchase technologies needed to meet the legislation’s requirements. As part
of healthcare reform, government and private payers will need to migrate their
traditional fee-for-service reimbursement models towards more value-centered
approaches that reward outcomes, efficiency, and reduction in waste. Payers are
approaching this goal by slashing costs in areas where viable lower cost solutions are
available, while at the same time investing much more in the adoption of innovative
new products and solutions which can improve outcomes and deliver quantifiable
value, even when considering their additional costs and premium pricing. During this
period of substantial change in the healthcare system, the Fund Managers expect to see
an unusually large number of opportunities to fund companies developing innovative
and impactful new therapeutic products as well as tools and applications that enable the
implementation and realization of healthcare reform’s goals and objectives.
Rapid Acceleration in Innovation: The Fund Managers believe an unprecedented
period of medical innovation is emerging as decades of research into molecular
mechanisms of disease is being translated into a steady stream of safer and more
effective medicines and the biomarkers to guide their use. Importantly, these products
are providing enormous improvements in both life expectancy and quality of life for
patients with many serious, life-threatening diseases. Although they will come with
premium pricing, these products can decrease the overall costs to the healthcare system
by reducing reliance on equally costly, but less effective and more toxic treatments, by
9 CMS, OECD, Eurostat
4
CONTROL NUMBER 257 - CONFIDENTIAL
reducing clinic visits and hospital admissions and by controlling or curing disease so
that the patient can return to a fully productive life. At the same time as this revolution
in the biological sciences is unfolding, exponential increases in the ability to manage,
process, and store information at low cost are coming out of the information technology
(IT) industry. This rapid technological progress in IT is allowing the creation of entirely
new systems and applications that will fundamentally improve how healthcare systems
monitor and manage patients across the full range of care settings. The Fund Managers
believe the massive expansion and integration of capabilities occurring in biology and
information technology is enabling a period of innovation in healthcare that sets a
uniquely positive environment for the investment of NLV-III.
�
�
More Favorable Regulatory Environment For New Drug Approvals: Increasing
numbers of FDA drug approvals and recently passed U.S. regulatory legislation are
reflective of a more favorable regulatory environment. The number of new drug
approvals by FDA in both 2012 (39 NDAs) and 2013 (27 NDAs) trended meaningfully
higher compared to the previous 6 years and versus historic averages 10 . In addition, the
Food and Drug Administration Safety and Innovation Act (FDASIA) was signed into law on
July 9, 2012, providing for additional tools to enable the FDA to promote innovation by
streamlining parts of the approval process and improving communication and
administrative processes between the agency and pharmaceutical and biotech
companies. Chief among these new tools is the “Breakthrough Therapy” designation.
This new designation helps the FDA assist drug developers to expedite the development
and review of new drugs with preliminary clinical evidence that indicates the drug may
offer a substantial improvement over available therapies for patients with serious or lifethreatening
diseases. Overall, these initiatives and others, both in the U.S. and abroad
(e.g., E.U. and Japan), have made the regulatory environment more favorable for
investors in the biopharmaceutical sector, and have reduced some of the uncertainty and
risk in a critical aspect of drug development.
Capital Markets And Industry Dynamics Are Favorable For New Investments & Exits:
Since the most recent peak in fundraising in 2008, it has been estimated that the life
sciences venture capital fundraising has contracted by 68%, from $7.8 billion in 2008 to
$2.5 billion in 2012 11 . The Fund Managers believe that there has been a corresponding
decline in the number of active venture capital firms investing into life sciences
companies (especially earlier stage), resulting in fewer investors competing for new
deals. At the same time, large and mid-sized biopharmaceutical companies have
become increasingly dependent on development stage companies as the source of
innovation and new products to supplement R&D pipelines and stimulate future
growth. Most of these big companies are committing a large and growing portion of
their R&D budgets to external facing search and evaluation efforts that have the goal of
obtaining assets through high value mergers, acquisitions, and partnerships, which
disproportionally benefit smaller, venture-backed, development stage companies. In
the years ahead, we believe that this trend is likely to continue, and possibly accelerate,
driven by expected patent expirations on commercial products and continued low
productivity of pharma R&D. The Fund Managers believe these dynamics offer venture
10 Food and Drug Administration. Center For Drug Evaluation and Research
11 Dow Jones; Fenwick & West Analysis in 2012 Trends in Terms of Life Science Venture Financings
5
CONTROL NUMBER 257 - CONFIDENTIAL
and growth stage investors attractive conditions for both new investments and exits
from existing investments for the foreseeable future.
The Fund Managers view this alignment of critical market factors as unprecedented. Each of
these factors individually has a direct impact on the level of risk and the potential for returns in
the healthcare technology sector. However, the positive trends in all of them occurring at the
same time should create a uniquely positive environment to execute NLV-III’s targeted strategy
within the sector.
INVESTMENT STRATEGY
New Leaf’s investment strategy is differentiated in the venture capital industry in terms of its
sector focus, specific approaches within each sector, and the depth of experience and long-term
track record that supports each element of the strategy. The Fund’s primary focus will be on
investments in the Biopharmaceutical and Information Convergence sectors, with a secondary
focus on Medical Devices and Biological Research Tools & Infrastructure. Investments will
be predominantly in the U.S., but could include a small number of investments in other parts of
the world (e.g., Western Europe or Canada). The focus within each sector will be the following:
Biopharmaceuticals: As in NLV-I and NLV-II, biopharmaceutical investments will be the core
focus for NLV-III and will comprise approximately 50% - 60% of the Fund. The Fund will
typically invest in development stage and commercial stage private companies and in publicly
traded small capitalization companies where the investments will be made mostly through
structured transactions. The portfolio will emphasize companies developing targeted
therapeutics that address molecular mechanisms of disease, where validated biomarkers can be
utilized to positively bias probabilities of success and reduce time and cost of development
compared to historical averages. These companies exemplify some of the key characteristics the
Fund Managers seek across the portfolio - namely large, unmet medical needs, strong science,
well differentiated technologies and high quality pre-clinical and clinical development
programs led by experienced management teams.
The Fund Managers believe that NLV-III will have the opportunity to invest in compelling
biopharmaceutical opportunities and that these will have attractive risk-return profiles for a
number of reasons, including the following:
�
�
For the past decade, biopharmaceutical companies have been shifting their research and
development focus towards products that target mechanisms of disease at the molecular
level. Clinical programs for these types of products are typically smaller, more capital
efficient and have higher probabilities of success. These improvements are achievable
because precise biomarker testing enables a focus on only those patients where the
specific molecular mechanism is known to play an important role in the disease process.
By including only these patients in the clinical programs for these targeted products, the
probability of detecting critical efficacy signals is significantly increased, even with
relatively small numbers of patients;
Targeted development programs are benefiting from an improving regulatory
environment, as the FDA is demonstrating clear interest in working constructively with
companies to bring these types of high-impact therapeutics to market more quickly and
efficiently. This spirit of cooperation was covered thoughtfully in a recent New England
6
CONTROL NUMBER 257 - CONFIDENTIAL
Journal of Medicine editorial (November 2013), where Janet Woodcock, MD, the FDA’s
Director of the Center for Drug Evaluation and Research and other senior FDA staff
members as co-authors, discussed the FDA’s new breakthrough therapy designation
that can be granted to expedite the review and approval of new therapies to treat people
with serious or life threatening illnesses where inadequate treatment options exist. They
state that “The genesis of the new designation can be traced to several emerging trends
in drug discovery and development. Most notable is the rise of molecularly targeted
therapies, often paired with companion diagnostics”. The editorial goes on to say that
“Once a drug is designated as a breakthrough therapy, the FDA commits to working
particularly closely with the drug sponsor to devise the most efficient pathway for
generating additional evidence needed about safety and efficacy”. The breakthrough
therapy designation was created under FDASIA in 2012, and since that time 26
breakthrough therapy designations have been granted on 80 requests; 12
�
�
The pharmaceutical industry’s commercial model is also improving with the shift in
focus to targeted therapeutics, as these therapies can: (a) provide significant
improvements in efficacy and safety over current standards of care; (b) offer important
clinical benefits in terms of increased life expectancy and improved quality of life; (c)
positively impact high morbidity diseases, many of which have primarily expensive, but
inadequate treatments available (e.g., cancer and autoimmune diseases); and (d)
generate compelling economic benefits to payers, even when they carry premium
pricing;
Finally, large and mid-sized biopharmaceutical companies have recognized the
inefficiency of their internal R&D efforts and have deemphasized many of their own
expensive, high risk, “blockbuster” programs. Increasingly, these companies are
“externalizing” a large portion of their R&D activity by acquiring, licensing, or
partnering with smaller biotech companies that are focused on developing the novel
targeted therapeutics mentioned above.
The Fund Managers believe the net result for investors is an improving risk-return equation for
biopharmaceutical investments, which should translate into higher returns in the sector.
Information Convergence: Information convergence investments will be the second core focus
for NLV-III, expected to comprise up to 25% of the Fund. Building on the leadership
established during the NLV-II investment period along with significant experience from past
Sprout funds, the Fund Managers will invest NLV-III in companies seeking to improve
efficiency and reduce overall costs to the healthcare system through the generation, analysis,
and application of information from research to diagnosis and delivery of care. Investments in
this sector will be at the commercial stage at the time of initial investment, or will be expected to
reach the commercial stage during the projected timeline of the investment.
Central to this opportunity is the acute structural deficit in the U.S., with healthcare liabilities
the single largest contributor and the healthcare reform initiatives that were designed in part to
address these critical fiscal issues. Broad scale deployment of new information technology will
12 New England Journal of Medicine, November 14, 2013: Expediting Drug Development – The FDA’s New “Breakthrough
Therapy” Designation
7
CONTROL NUMBER 257 - CONFIDENTIAL
play a critical role in enabling the necessary structural changes to the healthcare system. The
HITECH Act created a $25.9 billion 13 Federal Government funded catalyst for the adoption of
information technology in healthcare in the U.S., and this is stimulating significant investment
in upgrading the information infrastructure at the provider level. This industry-wide
technology upgrade moves the vast majority of providers onto electronic systems, which offers
immediate efficiencies to their businesses and lays the foundation for the adoption of new
targeted information based applications in the future. These investments and legislative actions
by the U.S. government, and the subsequent response by insurers, providers and patients, are
driving a dramatic increase in spending on healthcare information technology (HIT), benefitting
the companies providing technology solutions that reduce cost and waste, drive efficiency, and
improve the quality of patient care.
The opportunity in information convergence also benefits significantly from the technologies
and infrastructure that have been developed and implemented outside of healthcare, such as
cloud computing, wireless communications, web-delivered software-as-a-service, and sensor
technology. Small companies drawing heavily off these existing technologies are able to
optimize their product through rapid iterations driven by user feedback, thereby reducing risk
and capital requirements, and leading to more predictable timelines, similar to what has been
seen in the broader information technology arena. The Fund Managers believe that smaller,
focused companies will play a key role in developing and deploying information based
products that address discrete problems within the U.S. healthcare market, and that a large
number of these will be compelling investment opportunities for NLV-III.
Medical Devices: Given the Fund Managers’ view that the operating and exit environment for
companies in this sector will be more challenging due to increased regulatory and
reimbursement uncertainty, NLV-III will have somewhat less exposure to this sector than
previous funds. The Fund will focus on investments in companies that are developing
innovative and differentiated medical devices, targeting large market opportunities that offer
the potential to meaningfully reduce overall patient treatment costs in high morbidity disease
settings through substantial efficacy and safety benefits versus existing standards of care.
Importantly, the focus will be on opportunities that have established regulatory approval
pathways and clear regulatory precedents, or are already at the commercial stage at the time of
initial investment. The objective will be to identify investment opportunities with later stage
risk profiles that can be expected to thrive in the current environment. Although the number of
deals in this sector is likely to be somewhat lower than in previous funds, with the later stage
focus, it is likely that the size of investments in this sector will be larger.
Biological Research Tools & Infrastructure: The rapid growth of this sector is being fuelled by
many of the same biomedical advances that are impacting health care more broadly, such as
personalized medicine and DNA sequencing. Smaller companies have always been a prolific
source of innovative new research tools, leading to high M&A interest among the large
commercial players in this sector. Moreover, because new reagents and research tools are not
subject to the risks of clinical trials, regulatory approvals or payer reimbursement it is possible
to build high-gross margins businesses that reach break-even on manageable timelines and
budgets. The Fund will approach this sector opportunistically and will seek to invest in a small
13 U.S. Department of Health and Human Services. Actuarial estimate as of January 2012.
8
CONTROL NUMBER 257 - CONFIDENTIAL
number of commercial stage companies with novel and clearly differentiated products targeting
defined and established high growth market segments.
DEAL FLOW AND INVESTMENT PROCESS
The Fund Managers have a proactive approach to deal sourcing, which targets both private and
public opportunities. The established and proven sourcing activities rely on diverse networks
of deal sources that have been built and cultivated over two decades and focus on identifying
compelling healthcare technology investment opportunities, at attractive time points for
investment. These efforts balance the inherent attractiveness of an innovative technology with
the selection of the appropriate investment stage, offering an optimal risk-adjusted return
potential and multiple paths to realization and liquidity.
The Fund Managers have refined and successfully executed this investment process over many
years, and it is an integral part of the firm’s culture. New Leaf’s investment philosophy and
process emphasize a team approach to maximizing investment returns, focusing the most
appropriate resources within the firm to deal sourcing, rigorous investment analysis, deep
involvement with portfolio companies and active management of financings and exits.
DISTINCTIVE FEATURES OF NEW LEAF
Over the last two decades, New Leaf has established itself as one of the premier brands in
healthcare technology investing as a result of a powerful combination of:
�
�
�
�
�
one of the most established and stable teams in the venture capital industry with deep
and complementary operating and investing experience;
a long term track record across portfolios of healthcare technology investments in six
distinct venture funds and over $1.6 billion in total invested capital that has
demonstrated consistent outperformance versus venture industry peers and relevant
public market indices (S&P 500, S&P Healthcare, NASDAQ Composite, and Russell
3000) 14 ;
an evolving investment strategy, focused on a diversified portfolio of investments across
sectors, stages (start-ups to growth equity), and therapeutic areas that has proven to
generate returns through both up and down phases of macro investment cycles;
a hands-on approach to working with management teams as board members to
optimize corporate strategy, develop and refine clinical, regulatory, and operating plans,
recruit world-class talent, and drive business development activities that lead to valuemaximizing
follow-on financings, partnerships, and M&A transactions; and
a reputation for intellectual rigor, hard work, value added contributions, and
constructive collaboration that makes New Leaf a sought after lead investor by
outstanding entrepreneurs and a preferred co-investor amongst a broad range of top
quality investors.
14 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices” including endnotes
B, C, F and G in Appendix 4.
9
CONTROL NUMBER 257 - CONFIDENTIAL
NLV-III Investment Opportunity
The objective of NLV-III is to invest in a portfolio of healthcare technology companies that offer
attractive risk-adjusted returns. The companies that comprise the portfolio will be selected and
managed by a team of highly experienced senior partners who have developed and proven
their investment process over many years and multiple funds. The investment strategy for
NLV-III is similar to the strategies pursued in prior funds, in that it will have a core focus on
biopharmaceutical investments with a balance of investments across other healthcare
technology sectors. Given the strength and stability of the team, the consistency and the depth
of the track record, and the positive market forces and investment conditions that are expected
to be in place during the life of the Fund, the Fund Managers believe NLV-III offers investors an
opportunity for attractive returns.
10
CONTROL NUMBER 257 - CONFIDENTIAL
II. THE TEAM
NLV-III will be managed by the New Leaf team, which currently manages NLV-I, NLV-II, and
provides sub-advisory services managing the remaining healthcare technology investments in
the Sprout Funds. The team of six senior partners, five of whom have worked together
continuously for over a decade, stands out in the industry for its depth of accomplishments,
track record of consistent investment success, and its organizational stability. Each of the senior
partners has a strong combination of significant and relevant industry operating experience and
venture capital investment experience from one or more of the Fund’s targeted sectors. The
New Leaf team is further strengthened by a group of experienced investment professionals who
add highly relevant scientific backgrounds and investment experience.
The following timeline shows the history and progression of the New Leaf team:
History and Progression of New Leaf Team
SENIOR TEAM
Philippe Chambon, MD, Ph.D., (55), Managing Director, helped found New Leaf in 2005.
Philippe joined Sprout in 1995 and since that time has been an active investor in all three sectors
of interest for NLV-III. His investments have spanned all stages including six start ups and
several later stage growth equity investments and one buy-out. Philippe is currently focused on
New Leaf’s Information Convergence sector and late stage biopharmaceutical investments.
Philippe is currently on the boards of directors of Treato, Truveris, Karos Pharmaceuticals,
Principia BioPharma and VaxInnate. He was previously on the boards of NxStage Medical
(NASDAQ: NXTM), Auxilium (NASDAQ: AUXL), ePocrates (NASDAQ: EPOC, acquired by
athenahealth), Nuvelo (NASDAQ: NUVO), Sapient Health Network (acquired by WebMD),
Spotfire (acquired by Tibco Software), and Combichem (acquired by DuPont). He also led our
investment in, and was a board observer at, Audax Health (acquired by UnitedHealth/Optum).
Immediately prior to joining Sprout, Philippe was a Manager in the healthcare practice of the
Boston Consulting Group. In that capacity, he managed strategy and business re-engineering
assignments with clients in the pharmaceutical, biotech and insurance industry. Previously,
Philippe was an executive with Sandoz Pharmaceutical for seven years, where he built and led
an organization responsible for late stage clinical project management, portfolio management,
and pre-marketing and pharmacoeconomics activities. He conducted graduate research in
11
CONTROL NUMBER 257 - CONFIDENTIAL
molecular immunology at The Pasteur Institute and earned an M.D. and Ph.D. from the
University of Paris, and an M.B.A. from Columbia University.
Jeani Delagardelle, (57), Managing Director, helped found New Leaf in 2005. She joined Sprout
in 2000. At New Leaf, Jeani leads the Medical Device investment effort. Jeani is currently on the
boards of directors of Access Closure, Altura, Cardiokinetix, Direct Flow Medical, Intrinsic
Therapeutics, ReShape Medical, and Spiracur. She was previously on the boards of directors of
Interlace (NLV-I company acquired by Hologic), Epicor (acquired by St. Jude), Visiogen
(acquired by Abbott), PercuSurge (acquired by Medtronic), and NxStage Medical (NASDAQ:
NXTM). Prior to joining the healthcare investment team at Sprout, Jeani was a General Partner
at Weiss, Peck & Greer Venture Partners (“WPGVP”) where she focused on healthcare
investments. Before joining the venture industry, Jeani spent 16 years in senior marketing and
general management positions in both the medical device and pharmaceutical industries. She
was Vice President of Global Marketing for Target Therapeutics, held several senior
management positions within the Medi-tech division of Boston Scientific, and served as the
Director of Business operations for Roche Pharmaceuticals. Jeani earned an A.B. in Clinical
Psychology from Occidental College and an M.B.A. from the University of California at Irvine.
Ron Hunt, (49), Managing Director, joined Sprout in 1998 and helped found New Leaf in 2005.
He has played significant role in the firm’s investment activities in later stage
biopharmaceuticals and has also contributed to the activities in each of the other sectors. Ron is
currently on the boards of Durata Therapeutics (NASDAQ: DRTX), IlluminOss Medical,
Relypsa (NASDAQ: RLYP), and SpineWave. Ron was previously on the boards of Cerexa
(NLV-I company acquired by Forest Laboratories), Stromedix, Inc. (NLV-I company acquired
by Biogen Idec), Aspreva Pharmaceuticals (NASDAQ: ASPV, acquired by Galenica, Inc.), Phase
Forward (NASDAQ: PFWD, acquired by Oracle), and Pathology Partners (acquired by Caris
Group). Before joining Sprout, he spent a combined 12 years in the pharmaceutical industry in
operating roles and as a management consultant with The Healthcare Group (a division of the
Interpublic Group of Companies) and Coopers & Lybrand Consulting. He gained eight years of
operating experience in various commercial roles working for SmithKline Beecham and Johnson
& Johnson. Ron earned a B.S. from Cornell University and an M.B.A. from The Wharton School
of the University of Pennsylvania.
Vijay Lathi, (41), Managing Director, helped found New Leaf in 2005 and joined Sprout in 1998.
Vijay’s activities are focused primarily on information convergence, although historically he has
been involved in investments across all sectors. He is currently on the boards of directors of
AwarePoint, Oxford Immunotech (NASDAQ: OXFP), iRhythm Technologies, Kit Check,
TigerText and XDx, while maintaining board observer status with Labcyte. Vijay was
previously on the boards of Advanced Cell Diagnostics, Ilypsa (acquired by Amgen) and
Relypsa (NASDAQ: RLYP). Prior to joining Sprout, Vijay spent one year as an analyst in the
healthcare venture capital group at Robertson Stephens where he reviewed investments
spanning medical devices, therapeutics and healthcare information technology. Prior to
Robertson Stephens, Vijay spent approximately one and a half years as an analyst at
Cornerstone Research, a business consulting firm focused on financial and econometric
analysis. He earned an M.S. in Chemical Engineering from Stanford University and a B.S. in
Chemical Engineering from MIT, with a focus on applications of engineering to the life sciences.
12
CONTROL NUMBER 257 - CONFIDENTIAL
James Niedel, MD, Ph.D., (70), Venture Partner, joined Sprout in May 2002 and helped found
New Leaf in 2005. Jim will change his status to Venture Partner in NLV-III with the closing of
the new fund. In this role, Jim will work full-time as a senior member of the NLV investment
team working on new investments, and he will continue with full oversight and portfolio
management responsibilities for NLV-I and NLV-II. Jim is currently on the boards of directors
of Chimerix (NASDAQ: CMRX, former Chairman) and Tioga. He was previously on the boards
of Intarcia Therapuetics (now currently a Board observer), Sirna Therapeutics (NASDAQ:
RNAI, acquired by Merck in 2006 for $1.1 billion), where he served as Chairman; Oriel
Therapeutics (acquired by Novartis in 2010), where he served as Executive Chairman, and Pearl
Therapeutics (acquired by AstraZeneca in 2012). Prior to joining Sprout, Jim was Chief Science
and Technology Officer for GlaxoSmithKline (“GSK”). From 1995 to 2001, he led Global
Research and Development, Information Technology and Product Strategy and was a member
of the board of directors of Glaxo Wellcome plc. From 1988 to 1995 Jim was Vice President,
Research and Senior Vice-President R & D for the U.S. subsidiary of Glaxo. During his nearly
13 years with the Company, he oversaw the discovery, development and/or registration of over
20 products marketed by GSK, including those for: HIV, hepatitis B, asthma/COPD, migraine,
BPH, irritable bowel syndrome, smoking cessation, depression, chemotherapy-induced nausea
and vomiting, breast cancer, herpes and malaria. Prior to GSK, Jim was Professor of Medicine,
Chief of the Division of Clinical Pharmacology and Principal Investigator on studies of
mechanisms of cancer and inflammation at Duke Medical School, where he had completed an
Internal Medicine residency and a Hematology-Medical Oncology fellowship. Jim received his
M.D. and Ph.D. (Biochemistry) degrees from the University of Miami, was selected a Searle
Scholar and is a Fellow of the Royal College of Physicians (London).
Liam Ratcliffe, MD, Ph.D., (50), Managing Director, joined New Leaf in September 2008 and
concentrates on biopharmaceutical investing. He is currently on the boards of directors of
Array BioPharma (NASDAQ: ARRY), Neuronetics, Karus Therapeutics, Afferent, Calchan and
Convergence, the latter three investments resulting from spin-outs from Roche (Afferent) and
GSK (Calchan & Convergence), respectively. Prior to joining New Leaf, Liam previously served
as Senior Vice President and Development Head for Pfizer Neuroscience, as well as Worldwide
Head of Clinical Research and Development. Additional positions during his 12 years at Pfizer
included Vice President of Exploratory Development for the Mid West region, and Head of
Experimental Medicine at Pfizer’s Sandwich, UK Laboratories. As Head of Neurosciences, Liam
was responsible for the development of several successful late-stage projects and marketed
products, including Lyrica, Chantix and Geodon. In previous roles, he gained extensive
experience in early drug development and translational research across multiple therapeutic
areas, including inflammation, pain, cardiovascular disease, infectious diseases and genitorurinary
medicine. Liam began his career in the pharmaceutical industry in a medical marketing
role at Roche in South Africa. He received his M.D. degree and Ph.D. degree in immunology
from the University of Cape Town and his M.B.A. degree from the University of Michigan.
Liam completed his internal medicine training and fellowship in Immunology at Groote Schuur
Hospital and associated teaching hospitals in Cape Town, South Africa.
13
CONTROL NUMBER 257 - CONFIDENTIAL
OTHER INVESTMENT PROFESSIONALS
Kathy LaPorte, (52), Venture Partner, is an angel investor in the Digital Health space focusing
on evaluating and mentoring start-ups developing digital technology solutions for healthcare
consumers, providers, payers and the pharmaceutical/medical device industries. Kathy is
affiliated with Health Tech Capital and is a Venture Partner with New Leaf, collaborating on
sourcing of opportunities with an emphasis on the Information Convergence sector. Kathy was
one of the founders of New Leaf upon its spin out from the Sprout Group in 2005. Kathy joined
the Sprout Group in 1993 and became a General Partner in 1994. Between 1987 and 1993, she
was a Principal at Asset Management Company, a venture capital firm focused on early stage
investments. Kathy received an M.B.A. from Stanford University Graduate School of Business
(Arjay Miller Scholar), and a B.S., summa cum laude, Phi Beta Kappa from Yale University.
Mark Charest, Ph.D., (36), Portfolio Manager, joined New Leaf in 2012. Previously, Mark was
an Associate and Kauffman Fellow at Panorama Capital (2010-2012) focused on life sciences
investments. Mark previously worked as a Consultant at ZS Associates (2009) and as an
Associate at Great Point Partners (2007-2009), a healthcare-focused public and private equity
investment firm. Prior to that, Mark held an operating role as a Medicinal Chemistry Lab
Manager at Novartis Institutes for BioMedical Research (2004-2007). Mark received his Ph.D. in
Chemistry and Chemical Biology from Harvard University as a National Science Foundation
Graduate Research Fellow.
Mike Dybbs, Ph.D., (39), Principal, joined New Leaf in 2009 and was promoted to Principal in
2012. Mike is currently on the boards of directors of Advanced Cellular Diagnostics and
Versartis. Prior to joining New Leaf, Mike was a Principal at the Boston Consulting Group
(BCG) where he was a core member of their Health Care practice. Mike graduated magna cum
laude from Harvard University with an AB in biochemical sciences and received his Ph.D. in
molecular biology and genetics from UC Berkeley, where he was awarded a Howard Hughes
Medical Institute fellowship. His research had been published in peer-reviewed journals,
including Neuron, Science and Nature.
Eric Kim, (28), Associate, joined New Leaf in December 2013. From 2011 through 2013, Eric was
a Private Equity Associate at Francisco Partners, where he focused on diligence and company
oversight efforts on the firm’s healthcare information technology portfolio. Prior to joining
Francisco Partners, Eric worked for three years at McKinsey & Company as a Senior Business
Analyst in their Corporate Finance Practice. Eric received his dual B.A. in Mathematical
Methods in the Social Sciences and Economics from Northwestern University.
Isaac Manke, Ph.D., (37), Portfolio Manager, joined New Leaf in 2009 as an Associate and was
promoted to Public Investment Director in 2012. Prior to joining New Leaf, Isaac was an
Associate in the Global Biotechnology Equity Research group at Sanford C. Bernstein.
Previously, Isaac worked as an Associate in the Biotechnology Equity Research group at
Deutsche Bank and was a Senior Analyst at Health Advances, a biopharmaceutical and medical
device strategy consulting firm. Isaac received a B.A. in Biology and a B.A. in Chemistry at
Minnesota State University (Moorhead), and a Ph.D. in Biophysical Chemistry and Molecular
Structure at the Massachusetts Institute of Technology (MIT). Isaac’s discoveries led to several
publications in top journals, including Science and Cell, and were selected by Science as one of
14
CONTROL NUMBER 257 - CONFIDENTIAL
the “2003: Signaling Breakthroughs of the Year”. These discoveries also resulted in four issued
patents.
FINANCE AND OPERATIONS
Craig L. Slutzkin, (39), is Chief Financial Officer and manages the back office, compliance and
administrative functions for New Leaf. Craig joined Sprout as Vice President and the head of
its back office operations in August 2002 and transitioned to New Leaf at the time of the spinout.
Prior to joining Sprout, he spent over seven years in the audit and assurance practices of
Arthur Andersen and Ernst & Young in New York, attaining the position of Senior
Manager. While at Andersen and Ernst & Young, clientele included various multi-strategy
private equity and venture capital fund firms as well as top tier investment banks. Craig
received his M.B.A. in finance from Columbia Business School and received a B.A. in
Accounting and Information Systems from Queens College. He is a certified public accountant
and a member of the American Institute of Certified Public Accountants.
INDUSTRY ADVISORS
The Fund Managers work closely with industry professionals who are experts in New Leaf’s
fields of interest and are willing to work closely with the Fund Managers on an as needed basis
to provide their perspectives on topics and issues that are relevant to due diligence on new
investments, on-going issues that arise in the management of existing portfolio companies, and
longer term fund strategy. New Leaf’s advisors are all prominent in their fields, and hold
senior positions within leading corporations and academic institutions. These experts provide
New Leaf and its portfolio companies with their own invaluable insights, but equally
importantly open up their networks of contacts in ways that vastly expand and strengthen New
Leaf’s own network.
Therapeutics Advisors
New Leaf works with a broad range of industry advisors to support its investment activities in
therapeutics. The Fund Managers work on an as needed basis with a large group of advisors
that includes contacts from industry and academia that each of the investment professionals
within the firm has cultivated through their own professional and academic experiences. The
Fund Managers solicit input from advisors on an as needed basis to get valuable input on
specific scientific, clinical, and commercial issues and topics relevant to diligence on new
investment opportunities, and to the management of existing portfolio companies. This
network gives New Leaf timely and valuable access to some of the world’s leading academic
scientists and experienced practitioners/executives from industry, and brings their subject
matter expertise to bear across the myriad of topics that are critical to New Leaf’s decision
making in the therapeutics sectors. Because of the breadth of topics where this type of outside
input is required, and due to the fact that the science and technology is evolving rapidly in most
of these fields, New Leaf has not created a formal advisory board for therapeutics
Information Convergence Advisory Board
The Fund Managers have assembled an additional advisory board to support activities in
Information Convergence. This group of advisors has a breadth of experience in the
development and deployment of new information technologies that are reshaping healthcare.
15
CONTROL NUMBER 257 - CONFIDENTIAL
Their collective experience is from industry, including leading large and entrepreneurial
corporations, as well as from the provider side, including senior administration of one of the
world’s most prominent and forward-thinking teaching hospitals. These professionals include
the following:
John Halamka, M.D., is a physician and technology leader who focuses on electronic health
records as well as secure sharing of healthcare data for care coordination, population health,
and quality improvement. He is currently Chief Information Officer of Beth Israel Deaconess
Medical Center and also a practicing Emergency Physician and Professor at Harvard Medical
School. He is current Chairman of the New England Healthcare Exchange Network (NEHEN),
co-chair of the national HIT Standards Committee, and co-Chair of the Massachusetts HIT
Advisory Committee.
Lee Newcomer, M.D., Senior Vice President, UnitedHealthcare with strategic responsibility for
Oncology, Genetics and Women’s Health. Dr. Newcomer returned to UnitedHealthcare in
2006 to focus on combining clinical, financial and administrative incentives for improved and
affordable cancer care. From 1991 to 2000, Dr. Newcomer was the chief medical officer at
UnitedHealthcare. He is a board certified medical oncologist and former chairman of Park
Nicollet Health Services and was previously a medical director for CIGNA Health Care of
Kansas City. Dr. Newcomer was a founding executive of Vivius, a consumer directed venture
that allowed consumers to create their own personalized health plans.
Stephen Oesterle, M.D., Senior Vice President for Medicine and Technology, Medtronic Inc. Dr.
Oesterle is focused on the formation of technological strategies and continued development of
relationships with the world’s medical communities. He previously served as an Associate
Professor of Medicine at the Harvard University Medical School and as Director of Invasive
Cardiology Services at Massachusetts General Hospital.
Marcia Radosevich, Founder and CEO of HPR, a HCIT company that was sold to McKesson.
Her prior experience was with Managed Health Care Services, The Travelers Insurance
Companies, and Health Data Institute (a healthcare consulting firm).
Anand Shroff, Chief Technology and Product Officer and Co-Founder, Health Fidelity, Inc.
Prior to joining Health Fidelity, Mr. Shroff was VP of HIE and EHR Products at Optum (a
division of UnitedHealthcare). He came to Optum by way of acquisition of Axolotl Corporation,
a leader in the health information exchange (HIE) space. Anand was also a founding member of
the Oracle Healthcare team, and was responsible for Oracle’s healthcare product portfolio that
included healthcare analytics, clinical data management, and terminology mediation solutions.
David Watson, Vice President of Healthcare Product Strategy, Oracle. Previously he was the
Chief Operating Officer of MedeAnalytics, and prior to that was Senior Vice President and
Chief Technology Officer of Kaiser Permanente. Prior to Kaiser, Mr. Watson served in a variety
of executive IT roles at Baxter Healthcare, Allergan, Northrup Grumman, and Mattel. He is a
senior HCIT executive with 25 years of experience delivering client facing solutions in the broad
areas of application development, infrastructure engineering, business consulting, strategy,
architecture and operations.
16
CONTROL NUMBER 257 - CONFIDENTIAL
David Whittlinger, Executive Director, New York eHealth Collaborative. Prior to working with
NYeC, served as the Director of Healthcare Device Standards and Interoperability for the Intel
Corporation in its Digital Health Group. Mr. Whitlinger was responsible for Intel’s healthcare
device interoperability strategies and standards development. He has also led a large, crossindustry
consortium, the Continua Health Alliance, focused on the establishment of an
ecosystem of interoperable, personal telehealth systems. Prior to establishing the Healthcare
Device Standards Group, he worked on a wide variety of wireless standards within Intel.
17
CONTROL NUMBER 257 - CONFIDENTIAL
III. SUMMARY OF HISTORICAL INVESTMENT PERFORMANCE
The Fund Managers’ long term track record in healthcare technology investing clearly
establishes the team as one of the most successful in the venture capital industry over the last
two decades. Over an 18 year period and across the portfolios of six distinct venture funds
focused on healthcare technology investments, the Fund Managers have delivered net
performance that has consistently outperformed venture industry benchmarks and relevant
public equity market indices 15,16 . The Fund Managers’ track record is notable for the following
reasons:
� Performance has been consistently top-quartile since the mid-1990s:
NLV-I, NLV-II and the healthcare technology portfolios in the Sprout Capital funds
have invested over $1.6 billion in healthcare technology companies since 1995. Over this
time, The Fund Managers’ returns have consistently exceeded Cambridge Associates’
top-quartile benchmarks for U.S. venture capital healthcare and/or U.S. total venture
capital. 16
�
Exceeded relevant public equity indices by substantial margins on all realized funds:
The Fund Managers invested $1.02 billion in the portfolios of healthcare technology
investments in four Sprout Capital funds (Sprout Capital IX, L.P., Sprout Capital VIII,
L.P., Sprout Capital VII, L.P. and Sprout Growth II, L.P.), and these are now fully
realized (or near fully realized in the case of Sprout Capital IX). The net annual IRR’s on
these four funds outperformed the S&P 500 (568 – 2,259 bps), S&P Healthcare (302 –
2,066 bps), NASDAQ Composite (451 – 2,125 bps), and the Russell 3000 (502 – 2,215 bps)
using the Public Market Equivalent Plus (PME+) methodology 17 . Although PME+
methodology is most informative when used to analyze funds whose returns are
mature, the PME+ methodology shows that NLV-I is outperforming these same indices,
and shows encouraging results for NLV-II despite its relative immaturity.
It is this consistently high level of return over an 18 year period, spanning several challenging
investment cycles, that creates a truly unique track record within the venture capital sector.
INVESTMENT PERFORMANCE WITHIN INDIVIDUAL FUNDS
The New Leaf team has invested over $1.67 billion in 126 healthcare technology companies
within 6 distinct funds since 1995. These funds included NLV-I and NLV-II and the healthcare
technology investments in four Sprout Capital funds (Sprout Capital IX, L.P., Sprout Capital
VIII, L.P., Sprout Capital VII, L.P., and Sprout Growth II, L.P., together the “Sprout Funds”). In
aggregate, the team has exited or partially exited investments in 92 companies, generating gross
realizations of over $2.6 billion and a gross realized cash-on-cash return and internal rate of
return (IRR) of 2.1x and 17%, respectively. Corresponding net returns on the portfolios in each
of these funds are provided in Appendix 2.
15 Please see Section XIII: “Appendices” and the endnotes in Appendix 4. Disclosure of past performance herein is for
informational purposes only and is not indicative of future results.
16 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices” and endnote C
(regarding information provided by Cambridge Associates) in Appendix 4.
17 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices; Appendix 3”
(regarding the PME+ methodology) and endnotes B, D E and F in Appendix 4.
18
CONTROL NUMBER 257 - CONFIDENTIAL
New Leaf Funds
NLV-I has capital commitments of $310 million, and the Fund Managers began investing in
mid-2005. The fund completed its new investment period in early 2008 with a portfolio of 22
companies. NLV-I has fully realized 13 investments, and there are nine active investments in
companies and contingent value rights (CVRs) from three of the realized investments remaining
in the fund. NLV-I is a relatively young fund, with the majority of the cost basis still at work,
and to date has generated a gross realized IRR of 23%, and a gross total IRR of 19%. NLV-I has
a net total multiple of 1.76x and a net IRR of 12.1%. NLV-I has a distributed to paid-in-capital
ratio of 0.51x, and the Fund Managers believe the fund has significant future returns potential
from the remaining active investments in the portfolio as well as from potential payments from
CVRs on three realized investments. NLV-I is in the top quartile of funds tracked by
Cambridge Associates for U.S. healthcare venture capital in the 2005 vintage year.
NLV-II has capital commitments of $450 million, and the Fund Managers began investing in
2008. The fund will complete its new investment period by mid-2014. NLV-II currently has a
portfolio consisting of 35 companies. NLV-II has realized or partially realized 13 investments,
and there are 22 other active investments and a small public portfolio remaining in the fund.
NLV-II is still an immature fund in terms of level of realizations, and to date has generated a
gross realized IRR of 34%, and a gross total IRR of 30%. NLV-II has a net total multiple of 1.44x
and a net IRR of 16.4%. NLV-II has a distributed to paid-in-capital ratio of 0.50x, and the Fund
Managers believe the fund has significant future returns potential from the remaining active
investments in the portfolio. The Fund Managers believe that NLV-II has unusually positive
liquidity characteristics for a life sciences focused venture capital fund of its age, with just over
65% of the fund’s current carrying value in the form of public securities (as of March 31, 2014).
NLV-II’s current performance places the fund in the top quartile of funds tracked by Cambridge
Associates for U.S. venture capital in the 2008 vintage year.
Additionally, over the investment period of NLV-I, the net annual IRR is outperforming
relevant public market indices when compared on a public market equivalent basis (PME+).
NLV-II’s net annual IRR shows encouraging results thus far for a relatively immature fund 18 .
The range of outperformance for each of these portfolios versus the S&P 500, S&P Healthcare,
NASDAQ Composite, and the Russell 3000 through March 31, 2014 is the following:
Net IRR Outperformance vs. Public Indices (PME+ Methodology)
S&P
500
S&P
Healthcare
NASDAQ
Composite
Russell
3000
New Leaf Ventures I, L.P. +496 bps +201 bps +181 bps +446 bps
New Leaf Ventures II, L.P. +275 bps -187 bps -21 bps +218 bps
18 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices; Appendix 3” and the
endnotes thereto (regarding the PME+ methodology).
19
CONTROL NUMBER 257 - CONFIDENTIAL
Sprout Capital Healthcare Technology Portfolios:
Since 1995, members of the New Leaf team made all of the healthcare technology investments in
the Sprout Funds while they were part of the investing team at the Sprout Group. The Sprout
Funds were venture capital funds that were diversified across several sectors including
information technology, communications, services, and healthcare technology. The healthcare
technology investments in the four Sprout Funds included $1.019 billion in total cost, which
was invested in new and follow-on investments in 69 companies from 1995 to 2013. The
healthcare technology investments in the first three of these funds are now fully realized, and
those in Sprout IX are nearly fully realized. To date, across these four funds, the New Leaf team
has generated $1.997 billion of realizations in the aggregate (63 realized investments), and there
is $68 million in unrealized value in six unrealized investments.
The net annual IRR performance on the healthcare technology portfolios in each of the Sprout
Funds would place them in the top quartile of all healthcare venture capital funds tracked by
Cambridge Associates in each of the vintage years for which they have established a
benchmark 19 . Additionally, over an 18 year period the net annual IRR on these portfolios
outperformed relevant public market indices when compared on a public market equivalent
basis (PME+) 20 . The range of outperformance for each of these portfolios versus the S&P 500,
S&P Healthcare, NASDAQ Composite, and the Russell 3000 through March 31, 2014 is the
following:
Net IRR Outperformance vs. Public Indices (PME+ Methodology)
S&P
500
S&P
Healthcare
NASDAQ
Composite
Russell
3000
Sprout Capital IX, L.P. * +638 bps +776 bps +451 bps +565 bps
Sprout Capital VIII, L.P. * +587 bps +441 bps +725 bps +502 bps
Sprout Capital VII, L.P. * +568 bps +302 bps +554 bps +554 bps
Sprout Growth II, L.P. * +2,258 bps +2,064 bps +2,125 bps +2,215 bps
*Healthcare Technology Portfolios
19 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices” and the endnote C in
Appendix 4 regarding information provided by Cambridge Associates.
20 Please refer to Section III: “Summary of Historical Investment Performance” and Section XIII: “Appendices; Appendix 3” and the
endnotes thereto (regarding the PME+ methodology).
20
CONTROL NUMBER 257 - CONFIDENTIAL
Current gross and net portfolio returns for the New Leaf funds and for the healthcare
technology portfolios in the Sprout Funds are detailed in the following chart:
Chart 1: Returns by Fund
As of March 31, 2014
($ in millions)
Fund:
Fund Size:
Growth II
HCT
*
$15M Fund
Sprout VII
HCT
*
$95M Fund
Sprout VIII
HCT
*
$147M Fund
Sprout IX
HCT
*
$690M Fund
NLV-I
$310M Fund
NLV-II
$450M Fund
Paid-In Capital $15M $95M $147M $690M $303M $407M
Vintage Year: (1993 - 2007) (1995 - 2011) (1998 - 2012) (2000) (2005) (2008)
First Investment 1995 1995 1998 2000 2005 2008
Gross Fund Returns
N
Total Multiple
N
Realized Multiple
4.4x
4.4x
2.6x
2.6x
1.7x
1.7x
2.0x
2.2x
2.1x
1.7x
1.8x
2.0x
D
Total IRR
D
Realized IRR
44%
44%
19%
19%
10%
10%
15%
17%
19%
23%
30%
33%
Net Fund Returns
N
Net Total Multiple
D
Net Total IRR
*
3.69x
*
28.9%
*
2.17x
*
12.0%
*
1.49x
*
6.0%
*
1.66x
*
9.3%
1.75x
12.0%
1.45x
16.7%
Net Distributed / Paid-In Multiple
F
*
3.69x
*
2.17x
*
1.49x 1.55x * 0.51x 0.50x
Net Distributed $s to LPs $56.3 $207.0 $218.7 $1,071.5 $154.7 $204.2
Interim Fund Liquidity Metrics
G
(Distributed + Public) / Paid-In Multiple -- -- -- 1.62x 0.74x 1.18x
H
(Distributed + Liquid Public) / Paid-In Multiple -- -- -- 1.58x 0.57x 0.75x
IRR Outperformance Versus Public Indices
**
PME+ (Basis Points over S&P 500 Healthcare Sector) +2,064 bps +302 bps +441 bps +776 bps +201 bps -187 bps
**
PME+ (Basis Points over S&P 500) +2,258 bps +568 bps +587 bps +638 bps +496 bps +275 bps
PME+ (Basis Points over Russell 3000)
**
+2,215 bps +554 bps +502 bps +565 bps +446 bps +218 bps
PME+ (Basis Points over Nasdaq Composite)
**
+2,125 bps +554 bps +725 bps +451 bps +181 bps -21 bps
NLV and Sprout fund data as of March 31, 2014. Sprout fund statistics computed based on healthcare portfolio within Sprout.
* See Appendix 2 and endnotes A and E in Appendix 4. Based on synthetic funds with assumptions around recycling and fee structure.
** Based on Public Market Equivalent (PME+) methodology. See Appendix 3 and endnotes A, B, E and G in Appendix 4.
Please Section XIII: “Appendices” for definitions of terms and/or methodology.
21
CONTROL NUMBER 257 - CONFIDENTIAL
INVESTMENT PERFORMANCE BY SECTOR
BIOPHARMACEUTICAL RETURNS SUMMARY:
The New Leaf team’s biopharmaceutical investment performance has been strong in all funds.
In aggregate, the New Leaf team has invested $945 million in 64 biopharmaceutical
investments, and the historic realized biopharmaceutical results are 2.29x gross realized cashon-cash
return (“Multiple”) and a 21.4% gross realized IRR. These realized returns have been
driven by successful early and later stage investments. Table 1 summarizes the gross realized
and unrealized returns from biopharmaceutical investments in each New Leaf fund and the
Sprout Funds.
Table 1: Gross Biopharmaceutical Performance by Fund Group
$ amounts in millions, as of March 31, 2014
Gross Value Gross Multiple Gross IRR
Deals Total Cost Total Realized Unrealized Realized Overall Realized Overall
New Leaf Ventures II, L.P. (2008) 20 $209.0 $508.5 $218.0 $290.4 2.59x 2.43x 67.5% 58.3%
New Leaf Ventures I, L.P. (2005) 14 $205.6 $501.6 $167.3 $334.4 1.68x 2.44x 22.8% 23.5%
All Sprout Funds (1993, 1995, 1998, 2000) 30 $533.5 $1,217.0 $1,163.9 $53.1 2.37x 2.28x 20.6% 20.0%
Total 64 $948.2 $2,227.1 $1,549.2 $677.9 2.29x 2.35x 21.4% 21.6%
Please see the endnotes in Appendix 4 for definitions of terms and/or methodology. Note that these gross returns are for portions of each fund,
broken out by investment sector subfocus. Management fees, the general partner’s carried interest and other expenses are applied on a fund level
and not based on individual investments or a portion of the investment portfolio. For net returns on each fund which would include these items,
please see Appendix 2.
INFORMATION CONVERGENCE RETURNS SUMMARY:
While New Leaf restarted new investment activity in information convergence opportunities in
NLV-II, the Fund Managers already had an established track record in this sector from 9
investments in the Sprout Funds. In total, the Fund Managers have made 17 investments in
this sector, for a combined total of $142 million of invested capital. The team has realized or
partially realized nine investments for combined gross realizations of $262 million and a 2.62x
gross realized Multiple and 18.8% gross realized IRR. Table 2 summarizes the gross realized
and unrealized returns from information convergence investments in each New Leaf fund and
the Sprout Funds:
Table 2: Gross Information Convergence Performance by Fund Group
$ amounts in millions, as of March 31, 2014
Gross Value Gross Multiple Gross IRR
Deals Total Cost Total Realized Unrealized Realized Overall Realized Overall
New Leaf Ventures II, L.P. (2008) 8 $46.0 $59.0 $12.5 $46.5 3.44x 1.28x 95.5% 16.0%
New Leaf Ventures I, L.P. (2005) 0 $0.0 $0.0 $0.0 $0.0 N/A N/A N/A N/A
All Sprout Funds (1993, 1995, 1998, 2000) 9 $96.2 $249.2 $249.2 $0.0 2.59x 2.59x 18.6% 18.6%
Total 17 $142.1 $308.2 $261.7 $46.5 2.62x 2.17x 18.8% 18.5%
Please see the endnotes in Appendix 4 for definitions of terms and/or methodology. Note that these gross returns are for portions of each fund,
broken out by investment sector subfocus. Management fees, the general partner’s carried interest and other expenses are applied on a fund level
and not based on individual investments or a portion of the investment portfolio. For net returns on each fund which would include these items,
please see Appendix 2.
22
CONTROL NUMBER 257 - CONFIDENTIAL
MEDICAL DEVICES RETURNS SUMMARY:
The Fund Managers have been an active investor in the medical device sector across the New
Leaf and Sprout Funds. Combined, the Fund Managers have invested $371 million in 29
medical device companies, and have gross realizations of $394 million and a 1.82x gross realized
Multiple and 9.4% gross realized IRR. Table 3 summarizes the gross realized and unrealized
returns from medical device investments in each New Leaf fund and the Sprout Funds:
Table 3: Gross Medical Device Performance by Fund Group
$ amounts in millions, as of March 31, 2014
Gross Value Gross Multiple Gross IRR
Deals Total Cost Total Realized Unrealized Realized Overall Realized Overall
New Leaf Ventures II, L.P. (2008) 5 $72.0 $52.5 $1.8 $50.6 0.11x 0.73x N/A -9.2%
New Leaf Ventures I, L.P. (2005) 6 $73.3 $146.4 $67.3 $79.2 5.64x 2.00x 58.8% 15.5%
All Sprout Funds (1993, 1995, 1998, 2000) 18 $225.2 $328.9 $325.1 $3.7 1.73x 1.46x 8.3% 6.1%
Total 29 $370.5 $527.8 $394.2 $133.5 1.82x 1.42x 9.4% 6.6%
Please see the endnotes in Appendix 4 for definitions of terms and/or methodology. Note that these gross returns are for portions of each fund,
broken out by investment sector subfocus. Management fees, the general partner’s carried interest and other expenses are applied on a fund level
and not based on individual investments or a portion of the investment portfolio. For net returns on each fund which would include these items,
please see Appendix 2.
TOOLS, DIAGNOSTICS, & INFRASTRUCTURE RETURNS SUMMARY:
The Fund Managers have made investments in the tools, diagnostics, and infrastructure sector
across the New Leaf and Sprout Group funds. The strategy has included predominantly
later/commercial stage tools and infrastructure investments and a mix of early/development
stage and later/commercial stage diagnostics companies over time. Combined, the Fund
Managers have invested in 17 companies, for a total $221 million in cost. The Fund Managers
have generated gross realizations of $261 million, for a 1.50x gross realized Multiple and 14.2%
gross realized IRR. Table 4 summarizes the gross realized and unrealized returns from tools,
diagnostics, and infrastructure investments in each New Leaf fund and the Sprout Funds:
Table 4: Gross Tools, Diagnostics, & Infrastructure Performance by Fund Group
$ amounts in millions, as of March 31, 2014
Gross Value Gross Multiple Gross IRR
Deals Total Cost Total Realized Unrealized Realized Overall Realized Overall
New Leaf Ventures II, L.P. (2008) 3 $31.0 $36.1 $0.0 $36.1 0.00x 1.16x N/A 4.8%
New Leaf Ventures I, L.P. (2005) 2 $25.7 $1.7 $1.7 $0.0 0.06x 0.06x N/A N/A
All Sprout Funds (1993, 1995, 1998, 2000) 12 $164.0 $273.1 $258.8 $14.3 1.88x 1.67x 16.4% 13.9%
Total 17 $220.7 $310.9 $260.5 $50.4 1.50x 1.41x 14.2% 11.9%
Please see the endnotes in Appendix 4 for definitions of terms and/or methodology. Note that these gross returns are for portions of each fund,
broken out by investment sector subfocus. Management fees, the general partner’s carried interest and other expenses are applied on a fund level
and not based on individual investments or a portion of the investment portfolio. For net returns on each fund which would include these items,
please see Appendix 2.
For further detail on prior performance, please refer to the Appendices and endnotes hereto.
23
CONTROL NUMBER 257 - CONFIDENTIAL
IV. OPPORTUNITY IN THE HEALTHCARE SECTOR
The Fund Managers believe a number of macro market factors have aligned to create attractive
and lasting conditions for NLV-III’s targeted investment strategy in healthcare technology.
Each of these market factors individually would have a direct positive impact on the level of
risk and the potential for returns from investments in the healthcare technology sector. The fact
that there are positive trends in all of them occurring simultaneously is unprecedented, and the
Fund Managers expect that this will create a uniquely positive environment for NLV-III’s
investments in the healthcare technology sector. These macro market factors include the
following:
STRONG GROWTH IN GLOBAL HEALTHCARE MARKETS
Healthcare is one of the largest and most dynamic segments of the global economy, and its
growth is projected to continue the well-established historical trend of outpacing GDP growth
in major economies for at least the next decade. 21 In the U.S., since 1970, health care spending
per capita has grown at an average annual rate of 8.2% or 2.4 percentage points faster than
nominal GDP. The persistence of this trend suggests systematic differences between health care
and other economic sectors where growth rates are typically more in line with the overall
economy. A smaller difference is projected over the 2011 to 2020 period, where the average
annual growth in per capita health spending (5.3%) is projected to be about 140 basis points
higher than the growth in GDP (3.9%) 22 . This powerful and sustained growth differentiates
healthcare from many other large industrial and technology sectors, and it creates a positive
backdrop for investment in certain areas within the sector.
The drivers of healthcare market growth vary between mature and emerging economies, but in
both cases the shifts are resulting in significant increases in per capita health care consumption
and predictable increases in spending to meet the rising demand. In developed economies,
growth is being driven primarily by an aging population coupled with a continued willingness
of payers to cover the costs for new therapeutics and interventions that meaningfully extend or
improve the quality of patients’ lives. In the U.S., which is representative of the demographic
shifts in other major economies, the number of people over 65 is expected to double over the
next three decades, reaching 70 million by 2030 or roughly 20% of the total U.S. population. 23
This aging demographic has a higher prevalence of disease and the cost of delivering care to
treat the diseases of this older demographic is rising steadily. For example, in 2009, the per
capita health care cost for a person 65 – 74 years old was approximately $14,000, but it was more
than double that ($33,000) for those over 85. Before the end of this decade, the projected per
capita annual cost to care for these same two groups is expected to rise to $22,000 (+57%) for 65
– 74 year olds and $55,000 (+67%) for those 85+ 24 .
Emerging markets such as Brazil, Russia, India and China (BRICs) are also contributing to the
growth in health care spending globally, as these emerging markets mature and begin moving
towards the standards of their counterparts in developed economies. The size of the middle
21 CMS, OECD, Eurostat
22 Historical data from Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group
23 U.S. Census Bureau
24 Alvarez & Marsal healthcare, getting much closer to the cost precipice
24
CONTROL NUMBER 257 - CONFIDENTIAL
and upper classes in these countries is growing rapidly, and the spending power of these
groups is becoming important to the global economy in many sectors. As the populations of
these countries become more affluent, a greater proportion of their GDP is being spent on health
care, and this is leading to rapid growth in many different healthcare product sectors in these
countries. For example, China’s prescription drug market, which is projected to be the world’s
second largest by 2020, is projected to grow to more than $110 billion by 2015 – up from $50
billion in 2010. 25 The medical device market in China is showing a similar growth pattern, with
the current $17 billion medtech market (world’s fourth largest) projected to more than double
within the next five years. 26 This growth in emerging economies is expected to continue for the
foreseeable future, and as it does, it will open vast new markets for established healthcare
products companies in more developed countries, and will become increasingly important as a
percentage of sales of global brands. At the same time, it will create opportunities for smaller,
U.S. based companies to partner with large multinationals and domestic companies in the
BRICs that have established distribution channels in these markets.
SIGNIFICANT OPPORTUNITY CREATED BY HEALTHCARE REFORM &
RESTRUCTURING
As a result of the strong growth in healthcare expenditures, for at least the next decade, and
likely much longer, the healthcare industry in the U.S. will be going through a period of
significant reform and restructuring as the increasing healthcare costs place unsustainable fiscal
burdens on government programs. After years of dire predictions and endless debate amongst
elected officials, pundits, corporate leaders, and patient advocacy groups, there is recognition
that long term healthcare liabilities are a critical issue and require broad reform to control their
growth before they lead to irreparable fiscal harm. While much of the attention in these
initiatives is focused on identifying opportunities to cut costs, the silver lining in them for
investors is that their objectives also seek to improve the quality of healthcare and to
substantially broaden the population that has access to healthcare services covered by third
party payment.
In the U.S., the Federal Government has laid the foundations for restructuring the healthcare
system through two key pieces of legislation. First, the HITECH Act provides large government
subsidies for the adoption of IT tools by healthcare providers. The Federal Government has
recognized that a fundamental underpinning of healthcare reform is a massive upgrade of the
information technology infrastructure at all levels of the industry, and through this legislation
has earmarked $26 billion dollars in direct subsidies to catalyze investment in this area.
The second key piece of legislation is the ACA, which is being implemented as a first step in the
overhaul of the U.S. healthcare system. The ACA was signed into law in the U.S. in 2010 and
begins its implementation phase in 2014. It is a complex piece of legislation that is designed to
reform and overhaul many aspects of the U.S. healthcare system. The goals of the ACA are to
increase the affordability and rate of health insurance coverage for all Americans, and to control
the runaway growth in costs of health care faced by government, employers, and individuals.
The ACA mandates a number of broad reaching mechanisms to achieve these goals, and
25 Reuters
26 InVivo (Elseveir), June 2013
25
CONTROL NUMBER 257 - CONFIDENTIAL
introduces a range of new incentives/penalties that force market participants to address major
cost, efficiency, and quality issues within the healthcare system.
The ACA and other healthcare reform initiatives are challenged by dual and somewhat
conflicting objectives. They are focused on reducing costs and slowing growth rates in
spending, but at the same time expand the size of the population that has access to healthcare
covered by third party payment mechanisms. In order to cover the increased costs of the
expanded coverage, reform initiatives attempt to radically improve the efficiency of healthcare
delivery as a way of freeing up resources that can be redirected to providing care to populations
that had previously not been covered. Some of the lowest hanging fruit that is being targeted in
early reform initiatives is eliminating waste from the healthcare system. There are enormous
resources that can be freed up by eliminating expenditures that are unnecessary or duplicative.
In the U.S. healthcare system alone, there is an estimated $765 billion that is wasted annually.
More than half of that total ($415 billion) is the result of fraud, unnecessary services, and
inefficiently or mistakenly delivered care. Another 25%+ of the total ($190 billion) is the result
of excess administrative costs (e.g., inefficiencies associated with paperwork and
documentation) 27 . Finding ways to reduce waste in the system offers the opportunity to create
significant value, but requires the adoption of entirely new tools and technologies by payers,
providers, and patients. Developing these tools, applications, and systems is an area of
significant opportunity for innovative technology focused companies.
A major part of eliminating waste in healthcare will be accomplished by driving efficiency and
deriving maximum benefit from the enormous levels of current expenditures. Achieving this
goal will have to include a fundamental change in focus to the principles of value-based
medicine across all levels of the healthcare system. This is a radical change in objectives that is
already happening, and it is leading to entirely new reimbursement models built around paying
for technologies and treatments that provide care efficiently and at a cost proportional to the
health benefit they deliver. Value-based medicine focuses on outcomes from healthcare
services, which more closely aligns the interests of the payers with the healthcare providers and
product companies whose services and products are the major cost elements in the delivery of
healthcare. Although simple conceptually, this is a fundamental change in how healthcare is
paid for from the historical reimbursement models that have focused on fixed payments for
delivery of discrete procedures, with no corresponding emphasis on quality of the care
delivered or on the resulting patient outcomes.
Refocusing treatment objectives within the healthcare system towards high quality outcomes
over numbers of procedures will require many healthcare companies to reengineer aspects of
their business models, but it will also provide them with new opportunity. In a system that
rewards outcomes, companies and organizations that run with the highest quality and most
efficiently will have significant opportunity to expand their own returns by taking on risk in the
treatment of patients. Opening the market to this dynamic, where there is opportunity to earn a
return on cost-effective, high quality patient management and outcomes, will stimulate the
development and adoption of an entirely new set of enabling technologies and business models,
which represent opportunity for innovative, technology-based, development and growth stage
companies.
27 National Academy of Sciences, “Best Care at Lower Cost: The Path to Continuously Learning Health Care in America”
26
CONTROL NUMBER 257 - CONFIDENTIAL
There is no question that the shift to value-based reimbursement models will have a major
impact on the economics of healthcare. Payers will be looking for ways to significantly reduce
costs in all areas where a range of viable lower cost solutions are available, and will force
providers to use those wherever possible through increasingly restrictive reimbursement
policies. As an example, one area where this type of change has been implemented successfully
for years is in the increased use of generic drugs, where payers no longer offer unrestricted
reimbursement for the use of high cost, premium priced branded biopharmaceutical products
that deliver only minor benefits in terms of convenience, or slight improvements in efficacy to
small percentages of patients. This type of value-based review is now going on in all areas
within healthcare, and is resulting in changes that are having a major impact on what services
and products are selected, and who bears what percentage of the cost of that selection.
At the same time that payers and other ‘at-risk’ organizations are looking for any and all
opportunities to move to lower cost alternatives, they are also continuing to invest in the
adoption of innovative new therapeutics which can both improve outcomes and deliver
quantifiable value, even when considering their additional costs and premium pricing. The
products that receive this type of support from payers are ones that are focused on addressing
truly unmet medical needs and deliver significant efficacy or safety benefits to patients, when
compared to existing standards of care. They are also usually based on new technologies that
enable novel approaches to the treatment of diseases and disorders. There are vast areas in
medicine where large unmet medical needs exist and where scientific and technological
progress is enabling entirely new approaches to addressing these. Where these intersect are
areas of great opportunity for experienced investors.
RAPID ACCELERATION IN INNOVATION IN TARGETED SECTORS
Biopharmaceuticals:
Decades of government and industry investment in the study of the biological and genetic basis
of disease is translating into a steady stream of new products with improved efficacy and
decreased toxicity, and these are transforming how many high-morbidity diseases can be
treated. Through this growing body of work, a much deeper understanding of the biochemical
pathways underlying complex diseases is emerging, which is leading to identification of many
new molecular targets for drug therapy. This targeted approach to pharmaceutical R&D is a
fundamental change from the historical process that relied on large-scale, random screening of
drug candidates for activity. A whole new generation of products targeting diseases at the
molecular level is emerging and these offer much higher levels of efficacy and improved safety
to specific groups of patients whose disease is well characterized by biomarkers that are tightly
linked to the mechanisms of the underlying disease. This more targeted approach to discovery
and development offers important benefits to all constituents, which ultimately improves the
investment environment in biopharmaceuticals.
Oncology (i.e., cancer) is one therapeutic area where some of the most significant progress has
been made recently. Targeted therapies in certain indications in oncology now provide for
more effective treatments with fewer side effects than one-size-fits-all chemotherapy drugs. For
example, new therapies have recently been developed that target specific subsets of malignancy
through molecular targets including EGFR, HER2, and BRAF that have led to dramatic
improvement in the treatment of certain cancers (e.g., lung, pancreatic, colon, breast, melanoma,
and several hematologic cancers). It is expected that the next wave of advances will transform
27
CONTROL NUMBER 257 - CONFIDENTIAL
these diseases further from what has historically been a death sentence into a chronic, treatable
condition. As this happens, huge markets will be created for entirely new biopharmaceutical
products. While cancer is the leading disease area, this pace of dramatic scientific and
technological progress is extending into several other areas of medicine and will likely
accelerate. Many of the initial examples of targeted or personalized therapies in non-cancer
indications have been in rare or so called "orphan" diseases following discovery of the
underlying genetic abnormalities. This period of rapid technology advancement establishes a
cycle of innovation in the market that creates great opportunity for highly focused, small,
companies.
Information Convergence:
The rate of innovation in information convergence has already accelerated relative to the
historical rate of innovation in healthcare information technology (“HCIT”) due to several
underlying factors. First, as mentioned, the HITECH Act provided billions in direct incentives
to encourage healthcare providers to adopt information technology, beginning with electronic
medical record (“EMR”) systems. This led to a significant increase in spending on EMRs which
benefitted large established EMR vendors, but it also benefitted new smaller players in the EMR
market. Importantly, the broad upgrade of information technology and deployment of EMRs
across the healthcare provider market has established a technology infrastructure in the market
that benefits an entirely new generation of companies that are developing technologies that
layer onto existing EMRs and address the next levels of IT adoption. This next level of
information technology adoption is dictated by the HITECH Act through a series of
“meaningful use” incentive initiatives.
Another key factor that has led to an acceleration in innovation in information convergence is
that most of the highest value innovation in this sector is arising from integrating technologies
that have been discovered, developed, validated, and implemented in completely different
sectors (e.g., cloud storage, mobile computing, wireless communications, web-delivered
software, diagnostics and sensors). These product development efforts draw heavily from
existing technologies and allow small companies focused on addressing discrete problems and
opportunities within the healthcare market to develop and launch products with minimal
technology discovery. The bulk of the effort in these activities is in rapidly creating high value
products by combining well-understood and available technologies, and getting them into the
hands of customers to evaluate their performance in real world use conditions. This early
customer experience allows companies to generate revenues early in their life, but also provides
valuable user feedback which can be used to continuously improve product design elements.
The benefit of this type of product development effort in the information convergence sector is
that it reduces risk, lowers capital requirements, and results in more predictable timelines.
Considering the size of the opportunity and the large number of discrete problems and
inefficiencies that must be addressed, the Fund Managers expect the next decade will be a
period of robust innovation and company creation. Smaller companies are likely to thrive
during this period as they are better able to quickly move from opportunity to product launch.
28
CONTROL NUMBER 257 - CONFIDENTIAL
CONTRACTION IN HEALTHCARE VENTURE CAPITAL INDUSTRY & CAPITAL MARKET
DYNAMICS MORE BROADLY CREATE OPPORTUNITY IN DEVELOPMENT STAGE AND
EARLY COMMERCIAL STAGE COMPANIES
For the last several decades the healthcare venture capital industry has been the predominant
source of early and growth stage funding for smaller, technology focused companies while they
pursue product development, regulatory approval, and early commercialization. Over the last
several years, there has been a significant contraction in the size of the healthcare venture
capital industry in terms of amount of capital available to fund new companies, and the number
of active firms investing in new companies. This contraction creates significant opportunity for
those funds that remain active, as fewer firms and less capital is translating into less
competition for deals. The Fund Managers have benefited from the reduced level of
competition during the new investment period for NLV–II, and they believe these conditions
will remain in place for at least part of the new investment period of NLV-III. It is too soon to
know for sure, but it is likely the industry may have already reached the bottom of this cycle of
contraction and could see a re-set that begins to shift the industry to more normalized
conditions due to the recent stronger IPO and M&A markets.
Life Sciences Venture Fundraising
Investments into Biopharma and Medical Devices
Life Sciences Venture Fundraising - Dollars Raised ($B) **
$10.0
Life Sciences Venture Financings – $ Invested ($B) and Count
$15.0
700
$8.0
$6.0
$4.0
$2.0
$7.8 $7.8
$2.8 $2.9 $3.0
$2.5
$12.0
$9.0
$6.0
$3.0
404
$6.1
$1.2
$4.8
422
$5.7
$1.7
$4.1
485
$7.2
$2.3
$4.9
541
$8.5
$2.9
$5.7
517
500 499 498
$6.9
$6.3
$6.5
$5.6
$2.5
$2.2
$1.8
$2.5
$4.4 $4.0 $3.8 $4.0
422
$5.1
$2.0
$3.1
600
500
400
300
200
100
$0.0
2007 2008 2009 2010 2011 2012
$0.0
2004 2005 2006 2007 2008 2009 2010 2011 2012
0
Venture Capital Fundraising Allocated to Life Sciences
Biopharmaceuticals Therapeutic Medical Devices Deal Count
Source: Venture investments data from VentureSource (U.S. only). Includes therapeutic medical devices only.
** “Life Sciences Venture Fundraising data from Dow Jones; Fenwick & West Analysis in 2012 Trends in Terms of Life Science Venture Financings
The market for IPOs was strong during 2013 and the first quarter of 2014 for companies with
compelling stories based on differentiated technology, targeting important unmet medical
needs, large market opportunities, and experienced management teams. Although the number
of IPOs in the healthcare technology sector increased significantly, most of that activity was
driven by offerings for biopharmaceuticals companies. The significant increase in IPO activity
was driven by a number of factors, but one that had an important impact is the Jumpstart Our
Business Startups Act (JOBS Act). This legislation was signed into law in the U.S. in April, 2012
and it changed the regulations governing how certain private companies can interact with
investors in advance of an IPO. Under the new regulations, emerging growth companies can
file their IPO draft registration statement privately with the SEC, and continue to meet with
interested investors over several weeks or months to explain clearly their company strategy and
technology in “testing the waters” meetings. The Fund Managers believe these new regulations
are especially helpful to private biopharmaceutical companies, as they allow interested
29
CONTROL NUMBER 257 - CONFIDENTIAL
investors to grasp the complexities and opportunities of the small biotech companies before the
formal filing of their IPO registration statements, and the start of the traditional IPO road show.
The Fund Managers believe the JOBS Act and the use of “testing the waters meetings” has been
one of the factors that helped open the current biotech IPO window, expanded the base of
investors (public market specialist and generalist investors) participating in the recent offerings,
and helped drive the after-market performance of many of these offerings.
Biopharma IPO Trends
($ in millions)
$3,000
$2,852
40
Capital Raised ($ in millions)
$2,500
$2,000
$1,500
$1,000
$500
$0
$2,028
20
15
13
36
23
$1,451
$1,501
19
$754 $778
$693 8
0 2
$153
11
$526
$0
11
$769
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Q1
35
30
25
20
15
10
5
0
# of IPOs
Pre‐Phase 3 Phase 3 Marketed # of IPOs
The combination of all of these positive factors has significantly strengthened the position of
smaller development and early commercial stage healthcare technology companies, and creates
a unique period of opportunity for investors in the sector.
30
CONTROL NUMBER 257 - CONFIDENTIAL
V. NEW LEAF VENTURE PARTNERS INVESTMENT STRATEGY
New Leaf’s investment strategy is differentiated in the venture capital industry in terms of its
sector focus, specific approaches within each sector, and the depth of experience and long-term
track record that supports each element of the strategy. NLV-III will be invested in a diversified
portfolio across four sectors: a primary focus on Biopharmaceuticals and Information
Convergence, and a secondary focus on Medical Devices and Biological Research Tools &
Infrastructure. The Fund Managers believe that these are the sectors within the healthcare
technology industry where, with a targeted and specific sector strategy, there is the potential to
generate attractive returns within a time frame consistent with the goals of investors in a
venture capital fund. Importantly, the drivers behind the opportunity for value creation, major
risk factors, capital requirements, timelines, and universe of potential acquirers in each of these
sectors are distinct, and thus a portfolio constructed with investments with a combination of
these will benefit from this diversification.
The Fund Managers will invest the Fund in a diversified portfolio composed of an estimated 24
– 28 companies that will be predominantly domiciled in the U.S., but could include a small
number of companies based in Western Europe or Canada. The Fund Managers intend to serve
on the boards of directors for the majority of the companies in the portfolio and will generally
seek to establish ownership positions in companies that are large enough to allow them to exert
considerable influence on the company’s strategies, budgets, financing plans, operating
objectives, management team composition, and paths to exit.
Consistent with past transitions between funds, the Fund Managers have evolved the
investment strategy for NLV-III to reflect the team’s view of where the most attractive
opportunities will exist during the life of the Fund. The investment strategy for NLV-III will be
distinct from other recent funds in terms of the specific weightings that will be placed on the
targeted sectors, and certain considerations for company selection within those sectors.
BIOPHARMACEUTICALS INVESTMENT STRATEGY
As in all previous funds, biopharmaceutical investments will be the core focus for NLV-III and
will comprise approximately 50% - 60% of the Fund. The Fund’s biopharmaceutical
investments will be mostly in development stage and commercial stage private companies, and
will also likely include some investments in small capitalization public companies through
structured transactions. The Fund Managers intend to construct a well-diversified portfolio of
biopharmaceutical investments that includes a balanced mix of companies with earlier stage
and later stage development programs and product platform technologies. Regardless of stage,
by focusing on biopharmaceutical investments ahead of key risk inflection points, the Fund
Managers expect to fund companies through the periods of greatest value creation to points
where they will either become attractive targets for acquisition or partnership, or become of
high interest to public market investors. In some cases, private companies whose underlying
assets mature to these stages will become viable candidates for initial public offerings (IPOs) or
mergers into public companies.
31
CONTROL NUMBER 257 - CONFIDENTIAL
Focus: Private and public companies with novel product programs & product platforms
Investments in the biopharmaceutical sector within NLV-III will target companies that are
developing products that address clinically important unmet medical needs with competitively
differentiated technologies. The Fund will invest across all stages, usually in companies that fit
one of two different profiles. The first is companies with clearly differentiated, clinical stage
proprietary product programs focused on significant market opportunities, where value can be
built around a product(s) by financing it through one or more stages of clinical development,
and in some cases to regulatory approval and commercialization. The second are companies
with novel product platforms that are at or near the clinical stage with a lead product(s). These
companies build value around both the product(s) itself as it advances through clinical
development and around the product platform as its utility as a product creation engine is
validated through the progress of the lead product(s).
The Fund Managers expect to identify investment opportunities within private or public
companies whose primary asset(s) fall within one of the following categories:
�
�
�
Early and mid-clinical stage product programs targeting a well validated mechanism of
action in a disease with significant unmet medical need. The therapeutic areas and
specific mechanisms of action will be known to be of high strategic interest to a number
of larger biopharmaceutical companies. The target product profiles of the therapeutic
product(s) for these assets will have clear points of competitive differentiation around
efficacy and/or safety versus available therapeutics (and known clinical stage
programs), and the clinical development programs behind them will be designed to
provide clear data in support of these. Examples of these types of biopharmaceutical
investments in the NLV portfolio are Array Biopharma (NLV-II, NASDAQ: ARRY,
oncology, exited at 2.25x), Chimerix (NLV-II, private initially, now public on NASDAQ:
CMRX, novel anti-viral therapy), and Versartis (NLV-II, private, novel, long-acting
human growth hormone).
Novel product platforms that offer the potential to target known, and well understood
pharmacologic mechanisms of action in entirely new ways, or a product platform that
has the potential to open up a field of entirely new pharmacologic mechanisms in
diseases with large unmet medical need and rapidly advancing understanding of the
underlying biology (e.g., hematologic and solid tumors). These platforms will be
supported by validating data that provide strong support for the underlying biological
hypotheses, and the companies will be at or approaching the clinical stage with an
owned or partnered lead product program. The product platforms will usually have
strong evidence of strategic interest from large or mid-sized biopharmaceutical
companies through one or more partnerships that have generated non-dilutive capital
for the company. Examples of three novel product platform companies in the NLV
portfolio are Pearl Therapeutics (NLV-I, private, pulmonology, exited at 2.5x plus
milestones), Epizyme (NLV-II, NASDAQ: EPZM, oncology, exited at 2.0x), and
Principia (NLV-II, private, immunology & oncology).
Later development stage and commercial stage, biopharmaceutical investments, where
the investment theses will be to create value by funding companies through Phase 3
clinical trials, regulatory approval, and into early commercialization. In some cases, the
32
CONTROL NUMBER 257 - CONFIDENTIAL
Fund will seek to fund companies much later into commercialization to the point of
sustainable profitability. These investments will be into private or small capitalization
public companies in situations where the Fund Managers believe that the key risk
inflection and the period of greatest value creation will be around regulatory approval
and demonstration of commercial attractiveness of the product. These investments will
focus on products where the level of clinical and regulatory risk is relatively low, and
where commercial penetration can be driven by smaller, highly targeted sales and
marketing activities. Biopharmaceutical companies at this stage have historically been
attractive acquisition targets, and have consistently demonstrated that they can access
public markets through IPOs in a broad range of market conditions. Examples of this
type of later stage investment in the New Leaf portfolio include Acadia Pharmaceuticals
(NLV-II, NASDAQ: ACAD, exited at 2.5x), Phase III, focused on psychosis associated
with neurodegenerative diseases, Durata Therapeutics (NLV-II, private initially, now
public on NASDAQ: DRTX), Phase III, focused on a late stage antibiotic development
program spun out of Pfizer, and InterCept Pharmaceuticals (NLV-II, NASDAQ: ICPT,
exited at 3.2x), Phase III, focused on an orphan indication in liver disease.
�
Investments in public companies at any stage, whose primary assets are product
programs or product platforms. Most of these investments will be focused on small
capitalization companies at the clinical or early commercialization stage. New Leaf’s
focus on investment opportunities in small capitalization public biotech companies
leverage the broad investment capabilities within the firm and benefit from the focused
efforts of a small team of investment professionals dedicated exclusively to public
market activities. As a result of this integrated approach, investments in public
companies often target companies the Fund Managers have tracked over a number of
years, some from the time when they were private companies. The dedicated public
market team proactively tracks and screens the aggregate universe of biotech
companies, with the goal of identifying compelling risk/reward investment
opportunities. The primary focus of the screening efforts is to identify high-quality
companies with attractive valuations that require financing to fund the company
through key development milestones. The Fund will generally look to source or
augment transformative, structured transactions in public companies, where a New Leaf
partner will have the opportunity to join the board of directors. An example of an
investment that resulted from New Leaf’s focus on public market opportunities includes
MEI Pharma (NLV-II, NASDAQ: MEIP), an investment the Fund Managers made to
recapitalize the company after it had acquired a lead asset, Pracinostat, and needed
capital to advance the program through clinical development. Pracinostat was an asset
that was well known to New Leaf, as members of the team had followed it closely for
several years while it was owned by a private company (S*Bio), and had made attempts
to acquire and spin out the asset in the past. In addition to sourcing opportunities, the
public market team assists the broader biopharmaceutical investment efforts by
managing the sale and exit of New Leaf’s larger positions in public securities, and by
providing real-time insight into evolving market sentiment to the biotechnology and
broader healthcare technology sectors that helps guide decisions around new
investments and exit decisions.
For a complete list of investments made by the Fund Managers in healthcare technology
companies see Appendices 1 and 4 .
33
CONTROL NUMBER 257 - CONFIDENTIAL
Leadership: NLV are leaders in biopharmaceutical investing across all stages and transaction
types
The New Leaf team is well positioned to continue to play a leadership role in the sector. Over
the last two decades, the Fund Managers have demonstrated an ability to access high quality
biopharmaceutical investments at all stages, by sourcing opportunities through a range of
activities that result in differentiated and in many cases proprietary deal flow. Deal flow is
generated by relying on New Leaf’s extensive network of relationships that span senior
executives in the pharmaceutical and biotech companies, top scientists at world-class academic
institutions, and leading investors in the venture capital, private equity, and small cap public
sectors. By leveraging this network the Fund Managers gain visibility to interesting investment
ideas, and develop insight into the long term strategic interests of the larger pharmaceutical and
biotech companies and the evolving attitudes about value and risk of public market investors.
Through this continuous process the Fund Managers seek to ensure that they are able to view
the widest range of high quality opportunities and have a highly informed and discerning
screen to determine which of the opportunities have the greatest long term investment
potential. It is these efforts that have allowed the New Leaf team to create some of the best
performing portfolios of biopharmaceutical investments in the industry in the Sprout Funds
and in NLV-I and NLV-II, and has resulted in successful and consistent track records of returns
in the sector. The Fund Managers have demonstrated leadership in the sector over the long
term through transactions that span the full range of stages and transaction types, including:
�
�
�
�
Start-Ups: The Fund Managers have played important roles and have been founding
investors in a number of successful start-up companies. These have included Pearl
Therapeutics (NLV-I, exited in sale to Astra Zeneca, 2.5x multiple plus milestones),
Relypsa (NLV-I, private initially, now public on NASDAQ: RLYP),
Convergence/Calchan Pharmaceuticals (NLV-II, one start up that subsequently split to
become 2 separate companies), Durata Therapeutics (NLV-II: IPO – July, 2012,
NASDAQ: DRTX), and Ilypsa (Sprout IX, exited in sale to Amgen, 6.9x multiple).
Established Private Companies: The New Leaf Team has played the role of lead
investor in a large number of private investments. These have included Cerexa (NLV-I,
exited in sale to Forest Labs, 5.4x multiple), Stromedix (NLV-I, exited in sale to Biogen
Idec, 1.8x multiple plus milestones), Chimerix (NLV-II, IPO – April, 2013, NASDAQ:
CMRX), and Auxilium (Sprout IX, NASDAQ: AUXL, exited at 4.6x).
Restructuring Private Companies: The Fund Managers have led financings that have
restructured private companies, providing capital to fund business plans that have
refocused company’s business plans on certain key assets and product development
programs and significantly reducing or terminating investments into others. Examples
of this type of investment include Intarcia Therapeutics (NLV-I) and Synageva
Biopharma (NLV-II, reverse merger to become public – November, 2011, NASDAQ:
GEVA; exited at 7.3x).
Restructuring & Recapitalizing Public Companies: The New Leaf team has created
interesting investment opportunities through restructuring and recapitalizing public
companies. Examples include MEI Pharma (NLV-II, NASDAQ: MEIP) and Sirna
34
CONTROL NUMBER 257 - CONFIDENTIAL
Therapeutics (Sprout IX, formerly NASDAQ: RNAI, exited through sale to Merck, 8.1x
multiple).
�
Structured Investments in Public Companies: The Fund Managers have led and
participated in a number of structured investments into small cap public companies.
These have included Array Pharmaceuticals (NLV-II, NASDAQ: ARRY; led a structured
follow-on investment, NLV team member joined the board, exited at 2.25x), Acadia
Pharmaceuticals (NLV-II, NASDAQ: ACAD, exited at 2.5x) and Intercept
Pharmaceuticals (NLV-II, NASDAQ: ICPT; anchored company’s IPO, NLV team
member initially joined the company’s board, exited at 3.2x).
For a complete list of investments made by the Fund Managers in healthcare technology
companies see Appendix 1.
Favorable conditions for biopharmaceutical investments for NLV-III
The Fund Managers believe that NLV-III will be invested in a market with attractive conditions
for investment in the biopharmaceutical sector. As a result, the Fund should have the
opportunity to invest in compelling biopharmaceutical opportunities that have attractive riskreturn
profiles. A number of factors support this positive view of the investment thesis in the
biopharmaceuticals sector.
First, the Fund will invest in a portfolio of biopharmaceutical companies with an emphasis on
those that are developing targeted therapeutic opportunities that address mechanisms of
disease at the molecular level with high specificity and offer meaningful efficacy and safety
benefits to specific sub-groups of patients. Where possible, the Fund will look to invest in
companies with product programs that are guided by validated biomarkers that can enable
highly specific patient selection and provide an objective measurement of drug effect. The
Fund Managers believe that opportunities with these characteristics offer important benefits to
all market participants in the biopharmaceuticals sector, and that these substantially de-risk the
R&D and commercial sides of the biopharmaceutical business model in ways that can
meaningfully benefit investors.
Patients are offered therapies that are more targeted to their disease, and benefit from
improvements in efficacy and safety through increased life expectancy, improved quality of life,
and a more rapid return to a fully productive life;
Physicians have access to an arsenal of products that they can choose from to tailor therapy to
specific patients’ disease, and avoid the costs and risks associated with using less effective
therapies that carry all the safety risks, but may or may not have any effect on the specific
disease subtype of an individual patient;
Payers may pay higher prices for these therapies, but with the enhanced efficacy and safety
profile that’s possible with biomarker based targeting, they can expect to see better overall
patient outcomes, that ultimately save money within the system;
Pharmaceutical Companies benefit because with targeted approaches to drug discovery and
development, the probabilities of success improve, interactions with regulators become less
risky, timelines to move products from the lab to the market can be significantly shortened, and
35
CONTROL NUMBER 257 - CONFIDENTIAL
sales and marketing becomes more efficient as commercial campaigns only need to target those
physicians seeing specific subsets of patients;
Regulatory Authorities evaluate the risk-benefit of new therapeutics on specific subgroups of
patients that are known to be suffering from a specific sub-type of diseases, and can thus
require fewer patients and shorter timelines in clinical programs, ultimately lowering the risks
and costs of the approval pathway for developers of new therapeutics; and
Investors can expect to see improving returns as the risk/reward equation of drug
development is shifted significantly as a result of shortened timelines, smaller clinical trials,
improved probabilities of success, and reduced risks at the clinical, regulatory, and commercial
levels.
Second, the biopharmaceuticals sector is an improving regulatory environment in the U.S.,
helping set the stage for a positive investment cycle. There is strong evidence that over the last
decade the FDA has been working to improve the drug approval process in the U.S. in tangible
ways that benefit biopharmaceutical companies and reduce the risk for their investors.
Although the path to regulatory approval for product programs has not been made easy by any
standard, the FDA has made strides in making the process more predictable and streamlined.
Some of the most significant improvements have been in therapeutic areas where there is a high
level of unmet medical need. For example, the U.S. Food and Drug Administration (“FDA”) is
demonstrating clear interest in working more constructively with industry to bring new safe
and effective therapeutics to market that target diseases that have potentially large cost burdens
on the healthcare system (e.g., oncology). Additionally, the FDA has also improved the way
that they communicate and interact with sponsors of new products, by creating set
administrative procedures and timelines that they are required to meet through legislation like
the Prescription Drug User Fee Act (“PDUFA”) and the FDA Modernization Act. The FDA has
implemented other initiatives that attempt to clarify requirements and shorten regulatory
timelines for certain types of therapeutic products that they view as highest priority. These
initiatives include programs to grant special designations, including Breakthrough Therapy,
Accelerated Approval, and Priority Review, which can cut significant time out of the standard
approval process. The impact of these and other programs has become apparent in the number
of new drug approvals (“NDAs”) by FDA in both 2011 (30 NDAs) and 2012 (39 NDAs), which
trended higher compared to the previous six years and versus historic averages. 28 Overall,
these initiatives and others, both in the U.S. and in other markets (e.g., E.U. and Japan), have
made the regulatory environment more favorable for investors in the biopharmaceutical sector,
and have reduced some of the uncertainty in a critical part of drug development.
A third factor supporting the positive investment thesis in biopharmaceuticals is the interplay
of favorable conditions in the capital markets and the strategic needs of the large and mid-sized
companies in the sector. These dynamics should create a positive financing and exit
environment for biopharmaceutical companies for the foreseeable future, and the Fund
Manager expect them to contribute to improving venture returns. The aforementioned
contraction in the number of active firms and capital flows into healthcare technology venture
funds has significantly reduced the level of competition between firms. At the same time, large
and mid-sized biopharmaceutical companies have become increasingly dependent on
28 Food and Drug Administration. Center For Drug Evaluation and Research
36
CONTROL NUMBER 257 - CONFIDENTIAL
development stage companies as an important source of innovation and new products to
supplement R&D pipelines and drive future growth. Strong growth potential is critical for
these companies to support their valuation metrics, especially in light of expected patent
expirations on their commercial products. In total, over $290 billion of revenue is at risk from
patent expirations between now and 2018. 29 The large and mid-sized companies are addressing
this strategic need to a large extent through increased acquisitions and partnerships with
development stage companies that have maturing assets. The Fund Managers expect this
dynamic to increase competition between the larger strategic players in the industry as they vie
for the most interesting companies with maturing development stage assets. The development
stage companies should have strong negotiating leverage in these deal discussions, which
should drive premium valuations on acquisitions and attractive terms on partnerships.
The increased strategic need for acquisitions and partnerships comes at a time when the large
and many of the mid-sized companies in the industry are in a strong financial position to
complete high value deals. The top ten pharmaceutical companies have a total of $140 billion in
cash on their balance sheets today and have a combined market capitalization of over $1.3
trillion. 30 A relatively new set of well funded potential acquirers and/or partners has emerged
over the last decade, as many of the mid-sized biotech companies have seen their commercial
businesses thrive, and now have strong revenue and profit growth. Since 2002, the number of
public biotech companies with annual profit (EBIT) over $100 million has doubled to 16, and the
combined annual profit of these companies has increased 4.5 times to $16.6 billion. 31 This has
significantly increased the number of companies in the industry with the financial wherewithal
to complete large cash transactions. At the same time, the industry’s R&D productivity has
been disappointing in terms of new products generated by massive internal R&D budgets. To
address the gaps created in their R&D pipelines, most large and mid-sized players have shifted
a large percentage of their R&D budgets away from internal R&D projects and have increased
investment in “externalizing” a large portion of their R&D. These companies have slashed
internal R&D budgets, closed major R&D facilities, and made large cuts to headcount. It is
estimated that the pharmaceutical industry cut R&D spending by 5.7% in the U.S. and 2.2%
globally in 2012 alone, 32 and this trend has continued in 2013. Most large and mid-sized
biopharmaceutical companies now have large internal groups that include a combination of
business and scientific resources that are dedicated exclusively to external search and
evaluation, and are tasked with finding opportunities for mergers, acquisitions, and
partnerships that will bring in new technology. Some have taken this strategy even further and
have set up their own internal venture capital investment groups with the belief that by coinvesting
with more experienced institutional venture investors they can improve their
visibility into the latest innovations and improved access to the best opportunities. The Fund
Managers believe that this combination of financial strength and strategic need to source more
products than internal R&D efforts can produce will lead to a significant increase in deal
activity, creating a strong exit environment for smaller development stage companies for the
foreseeable future.
29 eValuatePharma
30 Burrill Biotech 2012 Report
31 New Leaf Analysis of public company financial data as provided by Bloomberg
32 Battelle-R&D Magazine Annual Global R&D Funding Forecast
37
CONTROL NUMBER 257 - CONFIDENTIAL
The Fund Managers expect this combination of positive market conditions to remain favorable
for generating attractive returns in the biopharmaceutical sector for the foreseeable future.
Although industry returns have been characterized by inconsistency and generally associated
with long timelines, a small number of top investors have been able to consistently build
portfolios that outperform the venture capital industry and relevant public market indices.
There is no substitute for experience in this sector, and the New Leaf team brings one of the
most powerful and proven combinations of team, strategy, and track record to investing in this
dynamic sector, and is positioned well for continued success in NLV-III.
INFORMATION CONVERGENCE INVESTMENT STRATEGY
The Fund Managers believe that U.S. is rapidly approaching a fiscal crisis that will be driven
largely by rising healthcare expenditures and the exponential increase in future healthcare
liabilities. This looming threat is a major driver behind Information Convergence (“I.C.”), the
second of the two primary focus areas in NLV-III. Governments and the private sector alike are
being forced to significantly increase the efficiency of the healthcare system, and consequently
are beginning to invest heavily in technologies that reduce cost and improve the quality of care.
New technology solutions are emerging from the intersection of a diverse, yet interconnected
set of technologies that define Information Convergence, including cloud storage, mobile
computing, wireless communications, web-delivered software, big data analytics, diagnostics
and sensors.
I.C. companies are integrating these technologies in ways that more cost effectively prevent,
diagnose, and treat disease. These applications and products can be highly valued by
addressing costly inefficiencies within the healthcare system. The Fund Managers believe I.C.
will play an enabling role in many of the initiatives that will form the core of healthcare reform,
including the transformation of healthcare reimbursement models from volume to value-based,
and that this will be a major area of opportunity for investors for the foreseeable future.
Within I.C. the Fund will seek opportunities that target some of the largest inefficiencies in the
healthcare system. These include: (1) inefficiency in delivery of care and excess administrative
costs; (2) unnecessary services and missed opportunities for prevention; and (3) inflated pricing
and fraud. Coming out of these large, identified problem areas are a number of discrete
investable themes. These are the primary target of New Leaf’s investment strategy in I.C. and
they include the following:
Problem Area: Inefficient Delivery and Excess Administrative Costs
�
Investment Theme - Operational & Care Delivery Efficiency: Process improvement and
optimization can only occur when data is available to identify the problems and
measure the impact of solutions. With shrinking margins and shifting value objectives,
healthcare providers are under pressure to understand and improve their businesses
and operations. Technologies that allow the collection and analysis of relevant data on
the efficiency of care-delivery will be foundational to this evolution. AwarePoint (NLV-
II) delivers enterprise awareness solutions for the hospital and other healthcare facilities,
is an example of a company fitting this theme.
38
CONTROL NUMBER 257 - CONFIDENTIAL
�
�
Investment Theme - Care Coordination: Today in healthcare, most conditions require the
involvement of multiple healthcare professionals, including primary care physicians,
specialists, nurses, assistants, and therapists, and the care they provide must be
managed closely with participation from the patients themselves and their family
members. Unfortunately, poor coordination and information sharing amongst
caregivers creates significant inefficiencies at the points of hand-off between providers,
leading to repeat tests, missed diagnoses, and expensive mistakes that diminish
outcomes, and in some cases put patients at substantial risk. TigerText (NLV-II) has
developed a secure text messaging platform that can be used on any mobile phone that
allows healthcare professionals to rapidly communicate and exchange clinical data files
to improve and coordinate care.
Investment Theme - Clinical Error Reduction: Administrative, medication and procedural
errors are responsible for billions of dollars of cost annually in the U.S. healthcare
system. Many of these problems can be reduced by bringing relevant information into
the right setting at the appropriate time. For example, ePocrates (Sprout IX, NASDAQ:
EPOC – Acquired by athenahealth for $293 million, 3.1x multiple) allows physicians to
quickly reference drug formulary, dosing and interaction information, thus reducing the
error rate in prescriptions.
Problem Area: Unnecessary Services & Missed Prevention Opportunities
�
Investment Theme - Analytics & Data-Driven Personalization: Many conditions are currently
diagnosed on single or limited data points, measured in the hospital or physicians’
office, that may not accurately reflect (or detect) the patients’ condition. Examples
include diseases with episodic or fluctuating symptoms such as cardiac arrhythmias,
Parkinson’s, Alzheimer’s, depression and other behavioral health issues. iRhythm
Technologies (NLV-II) developed and markets an innovative, highly wearable, patch
technology capable of recording continuous electrocardiograms for up to 14 days. This
product has demonstrated a 5x improvement in diagnostic yield for cardiac arrhythmias
relative to 24 - 48 hour Holter monitoring.
The large scale deployment of electronic medical records (“EMRs”), healthcare
information exchanges, and diagnostic and monitoring technologies, is driving
exponential growth in professional health data around patient care and outcomes. At
the same time, patients are discussing and sharing their own health care experiences and
personal health data involving providers, therapeutics, and procedures on the internet.
These vast and rapidly growing professional and consumer oriented healthcare data sets
create an unprecedented repository of longitudinal data on populations of patients. By
mining these data sets using big-data techniques and technologies that are being
deployed successfully in other industries, it is possible to identify important findings
that have huge commercial value that might previously have never have been detected.
Specifically, the Fund Managers believe analytics applied to these data sets will allow
care gaps to be readily identified and addressed, and best practices to be frequently
revised, leading to a consistent iterative cycle of improvement. Treato (NLV-II) has
developed a social health intelligence platform (aka “Social Listening”) that identifies,
analyzes and aggregates medical user generated content spread widely across the web
39
CONTROL NUMBER 257 - CONFIDENTIAL
in thousands of blogs and other written forums and converts this unstructured content
into structured information to support better-informed decision making by patients,
providers, and pharmaceutical marketing teams.
�
Investment Theme - Patient Engagement / Shift to Low-Cost Setting: As incentives move
away from procedural volume and towards cost-effective quality and outcomes,
providers and care delivery organizations are seeking ways to deliver care outside of the
hospital or physicians’ office through technologies that may allow remote monitoring,
and empowers other healthcare professionals, or even patients to play a greater role in
patient care and well-being. Audax Health (NLV-II; exited at 3.4x) touches on this
theme with its Zensey product, which engages patients in their own health through
programs endorsed by their payer.
Problem Area: Inflated Pricing & Fraud
�
Investment Theme - Price & Cost Transparency, Financial Error Reduction: Error reduction
can generate significant cost savings at the enterprise level. Truveris (NLV-II) allows
self-insured employers to verify the accuracy of all pharmaceutical benefit claims from
their pharmacy benefit managers in real time, thus resulting in more accurate payments
and significant cost savings.
These are just some of the illustrative themes for I.C. investments in NLV-III. This is an
emerging area with strong growth drivers, and the Fund Managers expect the opportunity set
to evolve and broaden substantially over NLV-III’s investment cycle.
An intriguing aspect of this sector is the possibility for significantly shortened development
timelines and product iteration cycles. Particularly because they are usually outside the
jurisdiction of the FDA and standard reimbursement paths, companies in the I.C. sector can
develop and launch products in months not years, and for single digit millions rather than
several tens of millions of dollars. Product development for these types of applications
leverages “off-the-shelf technologies” in sensors, communications, software and web
design/deployment that were invented and validated in non-healthcare market segments.
These products can be quickly and cheaply tested, iterated and refined in the marketplace with
customers while generating early revenue, which provides a greater degree of flexibility to
evolve the right solution through a series of incremental improvements rather than a single
track, expensive and prolonged development effort.
The Fund’s I.C. investments will be predominantly in private companies in the U.S, at or near
commercialization. Similar to the biopharmaceutical strategy, New Leaf’s objective in its I.C.
investments is to build ownership positions that are large enough to allow the Fund Managers
to exert influence on the company, and to actively manage the investments through board
participation. In certain circumstances, NLV may initially take smaller positions with plans to
significantly increase the Fund’s investment as the companies make progress through key early
technical or commercial hurdles. Utilizing this strategy, the Fund Managers expect to build
larger positions around select investments as they are progressively de-risked, and may not
continue to support investments that do not demonstrate appropriate progress.
40
CONTROL NUMBER 257 - CONFIDENTIAL
The New Leaf team is one of the most experienced and proven teams in this sector. The Fund
Managers’ combination of proven track record, in-depth knowledge of the medical device and
diagnostics fields, a strong current I.C. portfolio, and a thought-leading network of I.C.
advisors, puts New Leaf in a position of leadership within this sector.
MEDICAL DEVICES INVESTMENT STRATEGY
NLV-III’s investment strategy in medical devices will focus on identifying a limited number of
investment opportunities in companies with compelling later stage risk profiles. The Fund will
seek to identify investments in companies that are developing innovative and differentiated
medical devices, targeting large market opportunities, that offer the potential to meaningfully
reduce overall patient treatment costs in high morbidity disease settings through substantial
efficacy and safety benefits versus existing standards of care. Investments in this sector will
have established regulatory approval pathways and clear regulatory precedents, or are already
at the commercial stage at the time of initial investment. The objective will be to identify
companies that because of their specific therapeutic area or technology focus, or because the
company already has received key regulatory approvals, that they will be less affected by the
headwinds that are challenging the sector more broadly. Importantly, these investments will be
in therapeutic areas that are known to be of high strategic interest to a number of larger medical
device companies, and thus have a high potential of generating M&A interest. The primary
risks in these investments will be mostly operational execution, competition, and other market
related risks.
Similar to the second half of the investment period for NLV-II, the Fund will have a more
limited focus on medical device investments in NLV-III compared to previous funds. The
slower projected pace of investment is based on the view that the operating and exit
environment for companies in this sector will continue to be challenging due to increased
regulatory and reimbursement uncertainty in the U.S. and E.U. These headwinds have resulted
in increased development costs and significantly lengthened timelines for most development
stage companies.
While the Fund Managers expect to see fewer compelling investment opportunities than have
been available historically in the medical device sector, they do believe that they will be able to
identify and source a number of later stage opportunities that are less affected by these
obstacles, and that these will be attractive investment opportunities for NLV-III. One factor that
supports this view is that the reduced level of competition for deals resulting from the decline
in the number of active venture capital firms mentioned previously is even more pronounced in
the medical device sector. Given New Leaf’s historic leadership within this sector, and its clear
commitment to remain active during this period of reduced funding, the Fund Managers expect
that they will have excellent deal flow. Although the number of deals in this sector is likely to
be somewhat lower than in previous funds, with the later stage focus, it is likely that the size of
investments in this sector will be larger. Recent medical device investments in the New Leaf
portfolio that fit this later stage definition include: Neuronetics (NLV-II, commercial stage),
CardioKinetix (NLV-II, clinical development stage), and Interlace Medical (NLV-I, start-up
focused on 510k product, acquired by Hologix, exited at 8.6x).
41
CONTROL NUMBER 257 - CONFIDENTIAL
BIOLOGICAL RESEARCH TOOLS & INFRASTRUCTURE INVESTMENT STRATEGY
NLV-III’s investment strategy in Biological Research Tools and Infrastructure will focus on
identifying companies that are at or near the commercial stage with novel products targeting
established, high growth markets -- such as DNA sequencing and personalized medicine. The
products of interest will be those based on differentiated technologies that offer higher quality
biological results at significant cost savings to customers than current products. The investment
theses for these companies will be based on rapidly building high-gross margins businesses that
reach break-even on manageable timelines and limited capital budgets. An example of a tools
company in the New Leaf portfolio is Advanced Cellular Diagnostics (NLV-II, commercial
stage).
Research tools and infrastructure technology companies are benefiting from several positive
healthcare industry tailwinds. Technology advancements over the past decade, such as genomic
sequencing and personalized diagnostics, have generated the need for additional reagents and
instruments to efficiently interrogate vast amounts of biological samples and process massive
quantities of resulting data. Unlike biopharmaceutical or medical device product development,
these new reagents are not subject to the risks of costly clinical trials, regulatory approvals and
payer reimbursement. Thus, timelines are more manageable and predictable, and budgets are
much more capital efficient. In fact, in this sector, the Fund Managers expect to identify
opportunities for investment in technologies that have been largely de-risked, are commercialready,
and can be funded to profitability on VC dollars. While substantial commercial adoption
will likely be required for most companies in this sector to be acquired, given the high margins,
rapid sales adoption, and relatively low sales and marketing costs, funding the launch of a new
tool or technology in this sector can represent an attractive risk-reward investment.
This dynamic sector is growing rapidly and small companies have been a prolific source of
innovative new products for the large, established companies that dominate the commercial
distribution channels. The Fund will approach this sector opportunistically and will invest in a
small number of companies with novel and clearly differentiated products targeting sectors of
rapid growth that are at or near the commercial stage.
The Fund Managers expect investments in this sector and the medical device sector to comprise
up to 15% of the Fund.
42
CONTROL NUMBER 257 - CONFIDENTIAL
VI. DEAL SOURCING & INVESTMENT PROCESS
The Fund Managers have a proactive approach to deal sourcing, which focuses on both private
and public opportunities. The established and proven sourcing activities seek to identify the
most compelling healthcare technology investment opportunities, at the most attractive time
points for venture capital investment. The Fund Managers’ goal is to identify opportunities that
are based on the most interesting novel and proprietary technologies, but place their emphasis
on being positioned for investing in these technologies in the round(s) that offer the most
attractive risk-adjusted returns potential. These investment opportunities are identified
through a number of parallel efforts, including:
�
�
�
�
�
�
Systematic tracking of private and public companies that have product programs and
technologies targeting disease areas and biological targets of high interest that are
approaching key value inflection points. Current activities include comprehensive
screening of companies with programs targeting high unmet medical needs where the
strength of the science coupled with a rapid and lower capital intensity development
path, provides a compelling risk-reward case for investment. At the present time, the
Fund Managers are tracking a biopharma investment universe of approximately 1,000
mid-late stage private and small-cap public companies, many of which are in
therapeutic areas of specific interest to the Fund Managers (e.g. Oncology, Infectious
Disease, Central Nervous System, etc.);
Continuous contact with a network of current and former portfolio company
management teams;
Networking with current and former senior management team members from leading
pharmaceutical, biotech, medical device, and HIT companies to understand their
strategic priorities and to identify assets/programs that may become available for
spinouts or structured financings;
Staying up to date and in contact with leading academic thought leaders working in
NLV’s fields of interest;
Active coverage of major investor, medical and scientific meetings; and
Working closely with other venture capitalists with overlapping interests to ensure NLV
sees the broadest range of high quality opportunities and are positioned for working
with the strongest syndicates.
A key success factor behind the Fund Managers’ deal sourcing activities is a strong network of
entrepreneurs, industry executives, renowned clinicians, leading academic scientists, other
venture investors, and experienced consultants. The Fund Managers believe that this network
plays a critical role in helping to identify the most interesting opportunities, bringing the
leading resources to bear to assist in due diligence, and in providing important technical and
recruiting support in building portfolio companies. The Fund Managers continuously invest
time and energy in updating and building this strong network to ensure access to the managers
and thought leaders that are the industry’s leaders in the sectors of interest.
43
CONTROL NUMBER 257 - CONFIDENTIAL
The New Leaf team applies a rigorous, systematic, fundamentals-driven approach to diligence
on all new deals, which, in addition to assessment against the sector specific strategies, includes
consideration of the following risk/reward factors:
�
�
�
�
�
�
�
�
�
Medical need and market size
Competing therapies, both drugs and devices
Strength of intellectual property
Ease of physician adoption of new therapy
Specific details of clinical trial design and trial execution risks
Regulatory and reimbursement risks across relevant geographies
Management team’s ability to both execute the business plan and the exit
Time and money required to reach next important milestone(s)
Likely exit; potential acquirers, IPO prospects.
The Fund Managers will continue their proven investment philosophy and investment process,
which emphasizes a team approach to proactive deal sourcing, rigorous investment analysis,
significant involvement with portfolio companies and active management of investments and
exits, and a focus on key “risk inflection” points based on the disease and technology.
Investments will include both development stage and start-up stage companies, as well as
growth equity or expansion capital investment in NLV-III’s targeted sectors, in the private and
public markets.
The Fund Managers have a long history of separating the roles of transaction finder,
negotiating/closing the transaction, and board member, as needed. New Leaf seeks to put the
most appropriate investment professional on the board of companies, based on experience. The
Fund Managers have fostered a culture that discourages any professional from feeling the need
to control all aspects of an investment. Credit is given for each professional’s role, and for each
team member’s ability to be a team player. New Leaf seeks to avoid “lone ranger” behavior and
instead actively implements a team approach.
The Fund Managers intend to create a very selective portfolio of 24 to 28 companies, which will
include a balanced mix of investments in private companies and small capitalization public
companies. The targeted portfolio is expected to be diversified across biopharmaceuticals (50 -
60%), information convergence (up to 25%), and the remainder across investments in later stage
medical device and biological tools and infrastructure companies. While the Fund Managers
believe this distribution of investments is the most likely outcome, it also intends to take full
advantage of pricing discontinuities should they emerge in any of the identified sectors of
interest, possibly resulting in variance from this targeted allocation.
44
CONTROL NUMBER 257 - CONFIDENTIAL
VII. ONGOING RELATIONSHIP WITH SPROUT FUNDS
Since 2005, the Fund Managers have managed the remaining portfolio of healthcare technology
investments in Sprout Capital VII, L.P., Sprout Capital VIII, L.P., and Sprout Capital IX, L.P.
under a Sub-Management Agreement between Credit Suisse and New Leaf Venture Partners,
L.L.C. (the “Management Company”). In return for these management services, the
Management Company had received a portion of the management fee collected by those Sprout
funds related to the healthcare portfolio.
At the present time, Sprout Capital IX, L.P. is the only fund with any remaining active
healthcare technology investments. There were six active health care technology companies
(three board seats) in the Sprout Capital IX, L.P. portfolio that are managed by the Fund
Managers, which represented $68 million of carrying value as of March 31, 2014. These
remaining investments are in mature companies and the Fund Managers intend to continue to
manage the investments with an emphasis on finding exit opportunities for each company at an
appropriate time. The Fund Managers have already exited a portion of these companies in
early 2014, leaving a very limited tail of Sprout investments and board seats.
The Fund Managers expect the arrangement with Credit Suisse to continue for the foreseeable
future, but the Management Company no longer receives any management fees for these
services. The Sub-Management Agreement between Credit Suisse and the Management
Company will wind down and eventually be terminated as the investments in the Sprout
Capital IX, L.P. portfolio are exited.
45
CONTROL NUMBER 257 - CONFIDENTIAL
VIII. SUMMARY OF PARTNERSHIP TERMS
The following information is presented as a summary of the Fund’s principal terms only and is qualified
in its entirety by reference to the Fund’s Amended and Restated Limited Partnership Agreement (as
amended, restated or otherwise modified from time to time, the “Partnership Agreement”) and the
subscription agreement relating thereto (together with the Partnership Agreement, the “Agreements”),
copies of which will be provided to each prospective investor prior to the acceptance of any subscription.
Prior to making any investment in the Fund, the forms of such Agreements should be reviewed carefully.
If the terms described in this Memorandum are inconsistent with or contrary to the terms of the
Agreements, the Agreements shall control.
The Fund:
General Partner:
Investment Objective:
Size of Offering:
Minimum Investment:
Closing(s):
New Leaf Ventures III, L.P., a Delaware limited partnership
(the “Fund”).
New Leaf Venture Associates III, L.P., a Delaware limited
partnership (the “General Partner”), is the sole general partner
of the Fund. The general partner of the General Partner is New
Leaf Venture Management III, L.L.C., a Delaware limited
liability company (the “GPLLC”). The initial managing
members (the “Principals”) of the GPLLC are Philippe
Chambon, Jeani Delagardelle, Ronald Hunt, Vijay Lathi and
Liam Ratcliffe.
To generate significant returns, principally through long-term
capital appreciation, by making, holding and disposing of
equity and equity-related investments, principally in healthcare,
medical device and life sciences companies.
The Fund is targeting capital commitments (“Commitments”) of
$375 million with respect to limited partner interests (the
“Limited Partner Interests”). The General Partner may accept a
greater or lesser amount of Commitments from Limited
Partners (as defined below) in its discretion.
The minimum capital commitment of a limited partner to the
Fund (collectively, the “Limited Partners” and together with the
General Partner, the “Partners”) will be $5 million, although
individual capital commitments of lesser amounts may be
accepted at the discretion of the General Partner. The General
Partner may, in its discretion, reject any subscription that is
tendered.
The initial closing will occur as soon as practicable. The General
Partner may hold additional closings thereafter; provided that
the final closing will occur no later than 12 months after the
initial closing (the “Final Closing Date”).
Each Limited Partner admitted at a subsequent closing will be
46
CONTROL NUMBER 257 - CONFIDENTIAL
required to contribute the same percentage of its Commitment
as each of the other Limited Partners had been required to
contribute prior to such closing plus an additional amount,
calculated like interest at the prime rate plus 2% per annum,
compounded quarterly, on the amount of such contribution.
General Partner
Commitment
Term:
Drawdowns:
Investment Period:
Diversification &
Investment Limitations:
The General Partner will commit to the Fund at least 1.5% of the
aggregate Commitments of the Partners.
10 years, subject to the General Partner’s right to extend the
term for up to three one-year periods, with the approval of the
Advisory Board (as defined below).
Commitments are expected to be drawn down on an as needed
basis, generally, with not less than 10 business days’ prior
written notice. The initial capital contributions of the Partners
will be due on not less than 7 business days’ prior written
notice.
The Partners will have no obligation to make additional capital
contributions to fund new investments during a Suspension
Period (as defined below) or after the period commencing on
the Fund’s initial closing date and ending on the earliest of (i)
the fifth anniversary of the Final Closing Date and (ii) the date
on which a Suspension Period becomes permanent (the
“Investment Period”); provided, however, that the Partners will
have a continuing obligation to make capital contributions to
fund prospective investments in process, follow-on investments,
and to pay Fund expenses and other Fund obligations
(including, without limitation, the Management Fee (as defined
below) and indemnification obligations).
Without the approval or ratification of the Advisory Board:
(a) the Fund’s total investment in any single Portfolio
Company shall not exceed 10% of the aggregate Subscriptions
of all Partners;
(b) the Fund’s total investment in Portfolio Companies
organized in jurisdictions outside of the United States and
Canada shall not exceed 15% of the aggregate Subscriptions of
all Partners;
(c) the Fund may not as of any time invest more than 10% of
the aggregate Subscriptions of all Partners in open market
purchases of securities that, at the time of investment, are
traded on a Public Securities Market and are being purchased as
a stand-alone passive investment; provided, however, that for
the avoidance of doubt, the foregoing restriction shall not apply
47
CONTROL NUMBER 257 - CONFIDENTIAL
to Temporary Investments, “PIPES” and other purchases of
securities in private placements that are not traded on a Public
Securities Market at the time of such investment, “toe-hold”
investments (e.g. investments that are intended to lead to a
potential private or larger investment), Portfolio Investments
where the Partnership has the right to designate a director, and
follow-on investments in or related to the foregoing;
(d) the Fund shall not invest in the securities of any other
pooled investment vehicle with respect to which any Person is
entitled to a share of profits (whether in the form of fees,
distributions or otherwise) disproportionate to its share of the
contributed capital of the vehicle unless the General Partner
arranges for a reduction in the Management Fee in the amount
of the “management fee” and “carried interest” attributable to
the Fund’s interest in such vehicle; provided, however, that the
Fund shall not, without the approval or ratification of the
Advisory Board, invest more than 5% of the aggregate
Subscriptions of all Partners in the securities of any such pooled
investment vehicle; and provided, further, however, that
nothing herein shall prevent the Fund from (1) investing the
Fund’s cash in a regulated investment company or similar entity
or fund sponsored by a bank subject to the Bank Holding
Company Act as a Temporary Investment or (2) investing in
operating businesses through an alternative investment vehicle;
or
(f) The Fund shall not invest in any uncovered options,
futures contracts or other derivative securities, or sell securities
short in an uncovered transaction.
Advisory Board:
The Fund will have a limited partner advisory board (the
“Advisory Board”) consisting of at least three persons chosen by
the General Partner from persons associated with the Limited
Partners; provided that neither the General Partner nor any of
its affiliates may be a member of the Advisory Board. The
duties of the Advisory Board (or its committees) shall be to: (a)
be available to offer advice to the General Partner regarding the
activities of the Fund; (b) review and advise the General Partner
regarding transactions involving potential conflicts of interest
submitted to them by the General Partner; (c) approve the
valuation methodology formulated by the General Partner for
determining the value of the Fund’s assets and review periodic
valuations submitted to it by the General Partner; and (d)
undertake such other duties as are required by this Agreement
or reasonably requested by the General Partner.
48
CONTROL NUMBER 257 - CONFIDENTIAL
Limited Reinvestment:
Distributions:
Allocations:
General Partner Clawback:
Without the consent of the Advisory Board, the General Partner
shall not permit the aggregate purchase price of long-term
investments to exceed 110% of aggregate Commitments.
All distributions prior to the dissolution of the Fund will be
made at such times and in such amounts as the General Partner
shall determine. All such distributions will be apportioned
among the Partners as follows:
(i) First, 100% to all Partners in proportion to their capital
contributions until each Partner has received distributions in an
amount equal to such Partner’s capital contributions; and
(ii) Thereafter, 20% to the General Partner and 80% to all
Partners in proportion to their respective capital contributions.
With respect to any fiscal year, the Fund may make cash
distributions to the Partners in amounts intended to defray the
Partners’ tax liability resulting from their interests in the Fund
during such fiscal year.
Liquidating distributions will be made in accordance with
positive capital account balances.
The Fund will maintain capital accounts on behalf of each
Partner in accordance with U.S. Federal income tax
requirements. In general, any cumulative net loss will be
allocated to the capital accounts of the Partners in proportion
their contributions, and any cumulative net gain will be
allocated 20% to the capital account of the General Partner and
80% to the capital accounts of all Partners in proportion to their
contributions. Notwithstanding the foregoing, items of expense
will be allocated to the Partners in proportion to their
contributions and will be offset by subsequent allocations of net
profit (to the extent thereof), provided that the General Partner
will not be allocated any items of expense attributable to the
Management Fee.
If, after the Fund has made its final liquidating distribution, the
General Partner has received aggregate distributions with
respect to its “carried interest” in excess of the cumulative net
profit allocated to the General Partner with respect to its
“carried interest,” the General Partner will return to the Fund
the amount of that excess; provided, however, that in no event
shall the General Partner be required to return to the Fund an
amount in excess of the aggregate distributions made to the
General Partner that are attributable to its “carried interest” less
tax distributions. All carry recipients shall be severally, but not
jointly, liable for their respective proportional shares of the
49
CONTROL NUMBER 257 - CONFIDENTIAL
General Partner’s return obligation set forth in the preceding
sentence; provided, however, that in no event shall any carry
recipient be required to return to the Fund an amount in excess
of the aggregate distributions made to it that are attributable to
the General Partner’s “carried interest” less tax distributions
with respect thereto.
Management Fee:
Commitment, Break-Up and
Monitoring Fees:
The Fund will enter into a management agreement with New
Leaf Venture Partners, L.L.C., a Delaware limited liability
company, or an affiliate thereof (the “Management Company”)
to provide management and administrative services to the
Fund.
The Fund will pay the Management Company an annual
management fee (the “Management Fee”) equal to 2.5% per
annum of Commitments, payable in advance on a quarterly
basis. For each successive twelve-month period beginning on
the first day of the fiscal quarter following the date which is the
fourth anniversary of the Final Closing Date, the percentage
used in calculating the annual Management Fee shall be
determined by multiplying the percentage used to determine
the Management Fee for the prior twelve-month period by 88%;
provided, however, in no event shall such percentage be
reduced below 1.35%per annum.
100% of all directors’ fees, consulting fees, commitment fees,
monitoring fees, investment banking, transaction or break-up
fees or other remuneration (excluding directors’ fees and
options for service on the board of a publicly-traded portfolio
company) paid by the Fund’s portfolio companies to the
General Partner, the Management Company or the Managers
(“Portfolio Company Remuneration”), net of expenses, will be
treated as an offset to the Management Fee; provided, however,
that the Management Fee shall not be reduced below zero. Any
reimbursement of the General Partner, the Management
Company or the Managers for out-of-pocket expenses incurred
on behalf of a portfolio company will not offset the
Management Fee.
50
CONTROL NUMBER 257 - CONFIDENTIAL
Organizational Expenses:
Operating Expenses:
The Fund will bear expenses relating to the organization of the
Fund and its affiliates and the offering of the Limited Partner
Interests, including legal, accounting, travel, meeting, printing
and other administrative expenses, up to an aggregate of
$1,250,000. The Management Fee will be reduced by
organizational expenses paid by the Fund in excess of this
amount and by any placement fees paid by the Fund.
The Management Company will assume and pay all normal
operating expenses attributable to the Fund’s investment
activities, including all routine, recurring expenses incident to
the investment activities of the Fund; compensation and
expenses of the employees of the Management Company and
fees and expenses for administrative, clerical and related
support services, maintenance of books and records for the
Fund, office space and facilities, utilities, telephone and travel
insofar as they relate to the investment activities of the Fund.
In addition to the Management Fee, the Fund will be
responsible for all other costs and expenses of the Fund that are
not reimbursed by third parties, including without limitation,
organizational expenses and placement fees (each as described
above); liquidation expenses of the Fund; any sales or other
taxes, fees or government charges which may be assessed
against the Fund; commissions or brokerage fees or similar
charges incurred in connection with the purchase or sale of
securities (including any merger fees payable to third parties
and whether or not any such purchase or sale is consummated);
fees and compensation (if any) and expenses of members of the
Advisory Board (including travel-related costs and expenses);
the fees and compensation (if any) and expenses of any
technical or scientific advisory board with which the Fund
consults; the costs and expenses (including travel-related
expenses) of hosting annual or special meetings for the Partners
of the Fund, or otherwise holding meetings or conferences with
Partners of the Fund, whether individually or in a group; fees
and expenses for consulting services; interest expense for
borrowed money (if any); all expenses relating to litigation and
threatened litigation involving the Fund, including
indemnification expenses; expenses attributable to normal and
extraordinary investment banking, commercial banking,
accounting, appraisal, legal, custodial and registration services
provided to the Fund, including in each case services with
respect to the proposed purchase or sale of securities by the
Fund that are not reimbursed by the issuer of such securities
(whether or not any such purchase or sale is consummated and
including expenses incurred by the tax matters partner);
51
CONTROL NUMBER 257 - CONFIDENTIAL
premiums for liability insurance to protect the Fund, the
General Partner, the partners of the General Partner, the
members of the GPLLC, the members of the Advisory Board,
and any of their respective partners, members, stockholders,
officers, directors, trustees, employees, agents or affiliates in
connection with the activities of the Fund and premiums to pay
“key-man” insurance; and all other expenses properly
chargeable to the activities of the Fund.
Distributions may be recalled for up to one year following the
date of liquidation of the Fund to satisfy (1) any obligations,
liabilities and other expenses that arise from the Fund’s
Portfolio Investments and (2) the Fund’s indemnification
obligations; provided that no Partner shall be required to return
an aggregate amount greater than the lesser of (A) the aggregate
amount of distributions made to such Partner (and such
Partner’s predecessors in interest) and (B) 25% of such Partner’s
Commitment
Key Person Event:
No Fault Termination of the
Investment Period:
No Fault Termination of the
Fund:
Removal of the General
Partner for Cause:
The General Partner shall promptly notify the Advisory Board
in writing if, prior to the end of the Investment Period, fewer
than three Principals satisfy their obligation to devote
substantially all of their business time to the affairs of the
Management Company and its affiliates (including by reason of
death or disability) for a period exceeding 60 days. Following
any such occurrence, the Fund shall not make any new portfolio
investments other than permitted investments (a “Suspension
Period), unless such Suspension Period is lifted as provided in
the Partnership Agreement.
Eighty-five percent in interest of the Limited Partners may cause
a termination of the Investment Period at any time after the
second anniversary of the Initial Closing Date, with such
termination to be effective as of the date they deliver written
notice of such termination to the General Partner, after which
the Fund shall not make any new portfolio investments other
than permitted investments as set forth in the Partnership
Agreement.
Eighty per cent in interest of the Limited Partners (excluding
affiliates of the General Partner) may vote to dissolve the Fund
at any time after the second anniversary of the initial closing
date upon 120 days’ notice.
66 2/3% in interest of the Limited Partners may remove the
General Partner upon the occurrence of certain cause events
specified in the Partnership Agreement.
52
CONTROL NUMBER 257 - CONFIDENTIAL
Transferability of Interests
and Withdrawal:
Borrowings
and Guarantees:
Default:
Reports:
Parallel Funds:
Alternative Investment
Vehicles:
A Limited Partner may not sell, assign, or transfer any interest
in the Fund or withdraw from the Fund except under certain
limited circumstances and with the prior written consent of the
General Partner.
The Fund may borrow money on a short-term basis pending
drawdowns of capital contributions in an aggregate amount
outstanding at any time not exceeding 15% of aggregate
Commitments, or such greater amount as is otherwise approved
by the Advisory Board; provided that the maturity of any such
borrowing shall not exceed 90 days. The Fund may guarantee
the indebtedness of any portfolio company; provided, however,
that, without the approval of the Advisory Board, the total
amount of outstanding Fund guarantees shall not exceed 15% of
aggregate Commitments.
If any Limited Partner defaults in the payment of any part of its
Commitment when due, it will be subject to significant penalties
as specified in the Partnership Agreement, including forfeiture
of all or a portion of such Limited Partner’s interest in the Fund.
The Partners will receive (i) audited annual financial statements,
(ii) unaudited quarterly financial statements for the first three
quarters of each fiscal year, (iii) annual tax information
necessary for completion of their income tax returns and (iv)
periodically certain descriptive information related to portfolio
investments. Reports and information, and the General
Partner’s obligation to provide such reports and information,
will be subject to confidentiality restrictions and limitations as
set forth in the Partnership Agreement. Each Limited Partner
will be required to maintain information provided to it about
the Fund, its business and portfolio investments in the strictest
confidence and to not disclose such information except in
certain limited circumstances.
In order to facilitate investments by certain investors, the
General Partner may create parallel or other investment vehicles
or investment advisory programs, the structure of which may
differ from that of the Fund but which will generally invest
proportionately in all portfolio investments on substantially the
same terms and conditions as the Fund, subject to applicable
investment restrictions.
If the General Partner determines that for legal, tax or
regulatory reasons that an investment should be made through
an alternative investment vehicle, the General Partner may
structure the making of all or a portion of such investment
53
CONTROL NUMBER 257 - CONFIDENTIAL
outside the Fund, by requiring some or all of the Limited
Partners to make such investment through a limited liability
entity that will invest on a parallel basis with, or in lieu of, the
Fund, as the case may be.
Successor Fund:
Exculpation and
Indemnification:
Without the prior written consent of the Advisory Board, none
of the General Partner, the GPLLC or any Principal may hold an
initial closing for a limited partnership or other investment
vehicle with an investment strategy substantially similar to the
Fund (a “Successor Fund”) prior to the earlier of (i) the end of
the Investment Period and (ii) the date on which at least 70% of
aggregate Commitments of all Partners have been invested,
expended, committed, or reserved for future investments in
existing portfolio companies or for reasonably anticipated Fund
expenses.
None of General Partner, the partners of the General Partner,
the members of the GPLLC, the Principals, the Management
Company, or any partner, member, stockholder, officer,
director, manager, trustee, employee, agent or affiliate of any of
the foregoing shall be liable to the Fund or any Partner for any
loss suffered by the Fund or any Partner which arises out of any
investment or any other action or omission of such person if (a)
such person acted in good faith and reasonably believed that
such course of conduct was in, or not opposed to, the best
interest of the Fund and (b) such conduct did not constitute a
breach of such person’s fiduciary duty (if any) to the Fund,
gross negligence, intentional misconduct, intentional and
material breach by such person of its obligations under the
Partnership Agreement (provided that such breach is not cured
within 60 days of notice from a majority in interest of the
Limited Partners of such breach), a willful violation of law or
the commission of a felony.
No member of the Advisory Board or any other board or
committee formed to assist or advise the General Partner and no
Limited Partner who may have designated such member shall
be liable to the Fund or any Partner for any loss suffered by the
Fund or any Partner which arises out of any action or omission
of such member, provided that such member acted in good faith
and reasonably believed that such course of conduct was in, or
was not opposed to, the best interest of the Fund and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe that his or her conduct was unlawful.
The General Partner, the partners of the General Partner, the
members of the GPLLC, the Principals, the Management
Company, each liquidator, each member of the Advisory Board
54
CONTROL NUMBER 257 - CONFIDENTIAL
or any other board or committee formed to assist or advise the
General Partner, each Limited Partner that designated a
member of the Advisory Board, and each partner, member,
stockholder, director, officer, manager, trustee, employee, agent
and affiliate of any of the foregoing shall be indemnified by the
Fund against any claim, demand, controversy, dispute, cost,
loss, damage, expense (including attorneys’ fees), judgment
and/or liability incurred by or imposed upon the indemnitee in
connection with any action, suit or proceeding to which the
indemnitee may be made a party or otherwise involved or with
which the indemnitee shall be threatened, in connection with
their activities on behalf of, or their association with, the Fund;
provided, however, that such an indemnitee, other than an
indemnitee acting in his capacity as a member of the Advisory
Board or any other board or committee formed to assist or
advise the General Partner and a Limited Partner who has
designated such member, shall not be indemnified with respect
to matters as to which the indemnitee shall have been finally
adjudicated in any such action, suit or proceeding (a) not to
have acted in good faith and in the reasonable belief that the
indemnitee’s action was in, or not opposed to, the best interests
of the Fund or (b) to have committed a breach of such person’s
fiduciary duty (if any) to the Fund, gross negligence, intentional
misconduct, intentional and material breach by such person of
its obligations under the Partnership Agreement (provided that
such breach is not cured within 60 days of notice from a
majority in interest of the Limited Partners of such breach), a
willful violation of law or the commission of a felony. An
indemnitee either acting in his capacity as a member of the
Advisory Board or any other board or committee formed to
assist or advise the General Partner or that is a Limited Partner
who has designated such member shall not be indemnified with
respect to matters as to which the indemnitee shall have been
finally adjudicated in any such action, suit or proceeding (1) not
to have acted in good faith and in the reasonable belief that the
indemnitee’s action was in, or not opposed to, the best interests
of the Fund or (2), with respect to any criminal action or
proceeding, such person had reasonable cause to believe that his
or her conduct was unlawful.
Notwithstanding the foregoing, in no event will the Fund
provide indemnification to any indemnitee for any action or
omission taken by such indemnitee in such person’s capacity as
a director of any portfolio company in which the Fund no
longer holds an investment, to the extent such liabilities solely
relate to activities of such person during the period
commencing 18 months after the date on which the Fund has
sold or otherwise disposed of its entire interest in such portfolio
55
CONTROL NUMBER 257 - CONFIDENTIAL
company.
Certain ERISA
Considerations:
U.S. Tax-Exempt Investors:
Non-U.S. Investors:
Under the Employee Retirement Income Security Act of 1974, as
amended (“ERISA”), fiduciaries of prospective investors that
are retirement plans subject to ERISA (“ERISA Plans”) must
determine that an investment in the Fund is prudent, that such
investment satisfies the requirement that plan assets be
diversified and that such investment complies with the other
requirements applicable to ERISA Plans. The General Partner
intends to conduct the operations of the Fund so that it will be
an appropriate investment for ERISA Plans. In particular, the
General Partner will use reasonable best efforts to conduct the
affairs and operations of the Fund in such a manner so that the
assets of the Fund will not be treated as “plan assets” of any
ERISA Plan for purposes of ERISA. Prospective investors that
are ERISA Plans are advised to consult their own advisors as to
the effect of ERISA (or other applicable law) on an investment in
the Fund. The fiduciary of each prospective ERISA Plan
investor must independently determine that the Fund is an
appropriate investment for such ERISA Plan, taking into
account the fiduciary’s obligations under ERISA and the facts
and circumstances of each investing ERISA Plan. (See Section X,
“Certain Tax and ERISA Considerations.”)
Prospective investors are advised to consult their own tax
advisors as to the tax consequences of an investment in the
Fund. Subject to certain exceptions, the General Partner will use
reasonable best efforts to conduct the affairs of the Fund in a
manner that is not expected to cause any tax- exempt partner to
realize any “unrelated business taxable income” within the
meaning of Sections 512 through 514 of the Code. (See Section
X, “Certain Tax and ERISA Considerations.”) The General
Partner’s undertaking will be deemed satisfied with respect to
the making, holding or disposing of any portfolio investment if
the tax exempt U.S. Partners are given the opportunity to (or if
all Limited Partners are otherwise required to) hold their
proportionate shares of such portfolio investment directly or
indirectly through an alternative investment vehicle treated as a
corporation for U.S. federal income tax purposes.
Prospective investors are advised to consult their own tax
advisors as to the tax consequences of an investment in the
Fund. Subject to certain exceptions, the General Partner will use
commercially reasonable efforts to conduct the affairs of the
Fund in a manner that is not expected to cause the Fund to be
treated for United States federal income tax purposes as
engaged in a “trade or business within the United States,”
56
CONTROL NUMBER 257 - CONFIDENTIAL
within the meaning of Section 864(b) of the Code. (See Section
X, “Certain Tax and ERISA Considerations.”) The General
Partner’s undertaking will be deemed satisfied with respect to
the making, holding or disposing of any portfolio investment if
the Non U.S. Partners are given the opportunity to (or if all
Limited Partners are otherwise required to) hold their
proportionate shares of such portfolio investment directly or
indirectly through an alternative investment vehicle treated as a
corporation for U.S. federal income tax purposes.
Risk Factors:
Legal Counsel:
An investment in the Fund involves a high degree of risk.
Prospective investors should carefully review the matters
discussed under Section IX, “Certain Investment
Considerations.”
Proskauer Rose LLP
57
CONTROL NUMBER 257 - CONFIDENTIAL
IX. CERTAIN INVESTMENT CONSIDERATIONS
An investment in the Fund entails a significant degree of risk and, therefore, should be undertaken only
by investors capable of evaluating the risks of the Fund and bearing the risks it represents. There can be
no assurance that the Fund’s investment objectives will be achieved or that an investor will receive a
return of its capital, and therefore, an investor should only invest in the Fund if such investor is able to
withstand a total loss of its investment. In addition, there will be occasions when the General Partner
and its affiliates may encounter potential conflicts of interest in connection with the Fund. Prospective
investors in the Fund should carefully consider the following factors in connection with an investment in
the Fund. The following is not a complete list of all risks involved in connection with an investment in
the Fund. In addition to the items discussed below, prospective investors should also consider the
information described in Section XI, “Certain Tax & ERISA Considerations” and elsewhere in this
Memorandum. Prospective investors are cautioned not to rely on the prior returns set forth in this
Memorandum in making a decision whether or not to purchase the Limited Partner Interests offered
hereby. The return information contained in this Memorandum has not been audited or verified by any
independent party and should not be considered representative of the returns that may be received by an
investor in the Fund. Past performance is not a guarantee of future results.
Risk of Venture Capital Investments
While venture capital investments offer the opportunity for significant gains, such investments
also involve a high degree of business and financial risk and can result in substantial losses.
Among these risks are the general risks associated with investing in companies at an early state
of development or with little or no operating history, companies operating at a loss or with
substantial variations in operating results from period to period, and companies with the need
for substantial additional capital to support expansion or to achieve or maintain a competitive
position. Such companies may face intense competition, including from companies with greater
financial resources, more extensive development, manufacturing, marketing and service
capabilities and a larger number of qualified managerial and technical personnel. Due to the
limited number of investments that the Fund may make, poor performance by some of the
Fund’s investments could significantly affect the total returns to Limited Partners.
Focused Investment Strategy
The Fund will be focused on life sciences and healthcare technology investments and may not
enjoy the reduced risks of a broadly diversified portfolio. A specific investment focus is
inherently more risky and could cause the Fund’s investments to be more susceptible to
particular economic, political, regulatory, technological or industry conditions or occurrences
compared with a fund, or a portfolio of funds, that is more diversified or has a broader industry
focus.
Risks Associated with Investments in Life Sciences and Healthcare Technology Companies
The success of the Fund’s portfolio companies may be dependent upon obtaining certain
governmental approvals. Companies in the life sciences and healthcare technology industry
typically require the approval of agencies such as the FDA prior to marketing their products to
the public. Of particular significance are the FDA requirements covering research and
development, testing, manufacturing, quality control, labeling and promotion of drugs for
human use. The approval process is very lengthy and very costly, and there can be no
guarantee that a portfolio company will obtain the necessary approvals for its products. If a
portfolio company is unable to obtain these approvals in a timely fashion, the portfolio
58
CONTROL NUMBER 257 - CONFIDENTIAL
company may experience significant adverse effects, which in turn could negatively affect the
performance of the Fund. Moreover, the current regulatory framework may change or
additional regulations may arise at any stage during the product development phase of a
portfolio company, which may affect the company’s ability to obtain approval of its products.
The Fund may invest in companies that will need to obtain patents for their products, both in
the U.S. and in other countries. The patent protection of the intellectual property of healthcare
technology companies in many countries is highly uncertain and involves complex legal,
scientific and factual issues. The policy regarding allowable claimed subject matter of life
sciences or healthcare technology patents varies from jurisdiction to jurisdiction.
Dependence on Single Products
Companies in which the Fund invests may only have one product under development. There
can be no assurance that the product will be approved for marketing by the FDA or any foreign
regulatory agency. Further, competition to the product may develop from other new and
existing products. In either case, if a company is dependent on that one product, the
consequences of such failure could be devastating to the prospects of such company, which in
turn could negatively affect the performance of the Fund.
Dependence on Reimbursement and Third-Party Pricing Policies for Products
The ability of the Fund’s portfolio companies to commercialize any product candidate
successfully also will depend in part on the extent to which reimbursement for these products
and related treatments will be available from government health administration authorities,
private health insurers and other organizations. Government authorities and third-party
payors, such as private health insurers and health maintenance organizations, decide which
medications they will pay for and establish reimbursement levels. A major trend in the U.S.
healthcare industry and elsewhere is cost containment. Government authorities and third-party
payors, particularly Medicare, have attempted to control costs by limiting coverage and the
amount of reimbursement for particular medications. Increasingly, third-party payors are
requiring that drug companies provide them with predetermined discounts from list prices and
are challenging the prices charged for medical products. Portfolio companies cannot be sure
that coverage and reimbursement will be available for any product that they commercialize,
and, even if these are available, the level of reimbursement may not be satisfactory.
Reimbursement may affect the demand for, or the price of, any product candidate for which a
portfolio company obtains marketing approval. Obtaining and maintaining adequate
reimbursement for a portfolio company’s products may be particularly difficult because of the
higher prices often associated with drugs administered under the supervision of a physician or
because a drug may be administered in combination with other drugs that may carry high
prices. A portfolio company may be required to conduct expensive pharmacoeconomic studies
to justify coverage and reimbursement or the level of reimbursement relative to other therapies.
If coverage and adequate reimbursement are not available or reimbursement is available only to
limited levels, a portfolio company may not be able to successfully commercialize any product
candidate for which it obtains marketing approval. This, in turn, could negatively affect the
performance of the Fund.
59
CONTROL NUMBER 257 - CONFIDENTIAL
There may be significant delays in obtaining reimbursement for newly approved drugs, and
coverage may be more limited than the purposes for which the drug is approved by the FDA or
similar regulatory authorities outside the United States. Moreover, eligibility for reimbursement
does not imply that any drug will be paid for in all cases or at a rate that covers a portfolio
company’s costs, including research, development, manufacture, sale and distribution. Interim
reimbursement levels for new drugs, if applicable, may also not be sufficient to cover a portfolio
company’s costs and may not be made permanent. Reimbursement rates may vary according to
the use of the drug and the clinical setting in which it is used, may be based on reimbursement
levels already set for lower cost drugs, and may be incorporated into existing payments for
other services. Net prices for drugs may be reduced by mandatory discounts or rebates required
by government healthcare programs or private payors and by any future relaxation of laws that
presently restrict imports of drugs from countries where they may be sold at lower prices than
in the United States. Third-party payors often rely upon Medicare coverage policy and payment
limitations in setting their own reimbursement policies. A portfolio company’s inability to
promptly obtain coverage and profitable payment rates from both government-funded and
private payors for any approved products that a portfolio company may develop could have a
material adverse effect on its operating results, its ability to raise capital needed to
commercialize products and its overall financial condition. This, in turn, could negatively affect
the performance of the Fund.
Political Risk; Current and Future Healthcare Reforms
Political events can have an impact on pharmaceutical and biotechnology companies. There can
be no guarantee that government’s role in the healthcare industry will not adversely impact the
performance of the Fund.
In both the U.S. and foreign markets, sales of healthcare products and services and their success
will depend in part on the availability of reimbursement from third-party payors such as
government health administration authorities, private health insurers, and other organizations.
The levels of revenues and profitability of providers of healthcare products and services may be
affected by the continuing efforts of governmental and third-party payors to contain or reduce
the costs of health care. Significant uncertainty exists as to the reimbursement status of newly
approved health care products. There can be no assurance that a company’s proposed products
or services will be considered cost-effective or that adequate third-party reimbursement will be
available to enable a company to maintain price levels sufficient to realize an appropriate return
on its investment.
Moreover, there continues to be significant interest among policy makers and government and
private payors in the United States and foreign jurisdictions in promoting changes in healthcare
systems to contain healthcare costs and improve the overall quality of care and wellness.
For example, on March 23, 2010, President Obama signed into law the Patient Protection and
Affordable Care Act, which Congress modified pursuant to the Health Care and Education
Reconciliation Act of 2010 (collectively, the “Act”). The Act expands insurance coverage to
more individuals, which could have a negative impact on the pharmaceutical industry. Among
the aspects of the Act that may have an adverse impact on the Fund are (i) mandatory annual
fees on pharmaceutical manufacturers, (ii) discounts of 50% on brand name prescription drugs
for certain Medicare Part D beneficiaries (i.e., those who are required to pay 100% of their
60
CONTROL NUMBER 257 - CONFIDENTIAL
prescription drug costs during the temporary “gap” from Medicare coverage until their
prescription drug costs reach the threshold for catastrophic coverage by Medicare), (iii) an
approval process for generic biologics and granting exclusive marketing rights to original
manufacturers for 12 years, (iv) increased drug rebates to the Medicaid program, and (v)
disclosure requirements for financial relationships between various healthcare entities.
Within the U.S., the pharmaceutical industry has been a particular focus of both state and
federal governments’ reform efforts. Other than reform measures adopted in the Act, proposed
reforms include, but are not limited to, the following:
• increasing regulation of pharmaceutical sales representatives;
• restricting direct to consumer advertising and off-label uses;
• limiting manufacturers’ access to marketing data;
• authorizing the importation of drugs from Canada and other foreign countries to lower
pharmaceutical costs to U.S. consumers;
• price discounts, formularies or rebates to government healthcare programs; and
• allowing government healthcare programs to negotiate prescription drug prices directly
with manufacturers.
While the Fund cannot predict which legislative or regulatory proposals will be adopted or
what affect the adopted proposals, including the Act, may have on the biopharmaceutical
companies in which the Fund invests, the pendency, approval or implementation of such
proposals could decrease the Fund’s anticipated returns or adversely affect its investment
opportunities.
Availability of Investment Capital
Many portfolio companies will require several rounds of capital infusions before reaching
maturity. The Fund and its co-investors may not provide all necessary follow-on capital to
portfolio companies. Accordingly, third-party sources of financing may be required. There is
no assurance that such additional sources of financing will be available, or, if available, will be
on terms beneficial to the Fund. Furthermore, the Fund’s capital is limited and may not be
adequate to protect the Fund from dilution resulting from multiple rounds of portfolio
company financings. If the Fund does not have capital available to participate in subsequent
rounds of financing, failure to participate may have a significant negative impact on the
portfolio company as well as the value of the Fund’s investment.
Economic and Market Risk
Companies in which the Fund invests may be sensitive to general downward swings in the
overall economy or in the healthcare technology sector. Changes in economic conditions,
including, for example, inflation rates, industry conditions, competition, technological
developments, political and diplomatic events and trends, tax laws and innumerable other
factors, none of which will be within the control of the General Partner, can affect substantially
and adversely the business and prospects of the Fund. A major recession or adverse
developments in the securities market might have an impact on some or all of the Fund’s
investments. In addition, factors specific to a portfolio company may have an adverse effect on
the Fund’s investment in such company. The General Partner may rely upon its own or a
portfolio company’s projections concerning the portfolio company’s future performance in
making investment decisions. Such projections are inherently subject to uncertainty and to
61
CONTROL NUMBER 257 - CONFIDENTIAL
certain factors beyond the control of the portfolio company and the General Partner. The
economic environment for all companies, and in particular for healthcare technology and startup
companies, may remain challenging. Business risks may be more significant in portfolio
companies embarking on a build-up or operating turnaround strategy and in smaller or
development stage portfolio companies. All portfolio companies may face intense competition,
changing business and economic conditions, risks of technological acceptance and obsolescence
or other developments that may adversely affect their performance.
Illiquidity of Portfolio Investments
Investments by the Fund generally will be illiquid securities acquired through privately
negotiated transactions. The Fund may be unable to realize its investment objectives by sale or
other disposition at attractive prices or will otherwise be unable to complete an exit strategy.
External factors beyond the General Partner’s control, such as overall economic conditions, the
competitive environment and the availability of potential acquirors of the Fund’s interests in
portfolio companies may shorten or lengthen the Fund’s holding period in such portfolio
companies. In some cases, the Fund may be prohibited by contract from selling such securities
for a period of time or otherwise may be restricted from the disposition of such securities.
Lack of Operating History
The Fund and the General Partner are newly formed entities, and, accordingly have no
operating history or investments upon which investors can evaluate the potential performance
of the Fund. The prior performance of the Fund Managers or their investments as described in
this Memorandum is not necessarily indicative of the Fund’s future results. There can be no
assurance that investments by the Fund will achieve returns comparable to the historical
performance reflected in this Memorandum, and in any event, the returns achieved by the Fund
will be subject to the Management Fee and the General Partner’s carried interest. Any given
investment made by the Fund may prove to be worthless, and there is a risk that investors
could lose money.
No Assurance of Profit or Distributions
The Fund’s task of identifying opportunities in private and public operating companies,
managing such investments and realizing a significant return for investors is difficult. Many
organizations operated by persons of competence and integrity have been unable to make,
manage and realize such investments successfully. There is no assurance that the investments
of the Fund will be profitable or that any distribution will be made to the Limited Partners.
Any return on investment to the Limited Partners will depend upon successful investments
being made by the Fund. The marketability and value of any such investment will depend
upon many factors beyond the control of the Fund. The Fund may not have sufficient cash
available to make tax distributions to the Partners. The expenses of the Fund may exceed its
income, and the Limited Partners could lose the entire amount of their contributed capital.
Accordingly, prospective investors should not subscribe to the Fund unless they can readily
bear the consequences of such a loss.
Competition
The business of identifying, structuring and implementing venture capital investments, along
with other investments within the strategy of NLV-III is highly competitive. The Fund will be
competing for investments against other groups, including institutional investors, investment
managers and industrial groups owned by large and well-capitalized investors. It is possible
62
CONTROL NUMBER 257 - CONFIDENTIAL
that competition for appropriate investment opportunities may limit significantly the number of
opportunities available to the Fund and adversely affect the terms upon which investments can
be made. There can be no assurance that the Fund will be successful in its efforts to identify
attractive investment opportunities, and it is possible that the Fund’s Commitments will not be
fully utilized if sufficient attractive investments are not identified and consummated by the
Fund during the Investment Period.
Management of the Fund
The General Partner will make decisions with respect to the management of the Fund. Limited
Partners have no right or power to take part in the management of the Fund. The Limited
Partners will not receive the detailed financial information issued by portfolio companies that
will be available to the Fund. Accordingly, the Limited Partners will not have the opportunity
to evaluate the relevant economic, financial and other information that will be utilized by the
General Partner in its selection of investments. An investor in the Fund must rely upon the
ability of the General Partner with the assistance of the Management Company to identify,
structure, and implement investments consistent with the Fund’s investment objectives and
policies. Accordingly, no person should purchase Limited Partner Interests unless such person
is willing to entrust all aspects of the management of the Fund to the General Partner.
Reliance on Management of Fund
The success of the Fund will be largely dependent upon the activities of the Fund Managers.
The loss of one or more of these individuals could have a significant adverse impact on the
business of the Fund and its financial performance.
Reliance Upon Portfolio Company Management
Although the Fund may seek representation on the board of directors of each of the portfolio
companies or otherwise provide management and strategic planning assistance, the Fund will
not have an active role in the day-to-day management of the companies in which it invests. To
the extent that the senior management of a portfolio company performs poorly, or if a key
manager of a portfolio company terminates employment, the Fund’s investment in such
company could be adversely affected.
Potential Conflicts of Interest
The Fund Managers will continue to devote a portion of their time to the business of the Sprout
Funds, NLV-I, NLV-II and to any future funds that they may organize in accordance with the
Partnership Agreement. Conflicts may arise in the allocation of investment opportunities and
the Fund Managers’ time among the Fund and other such partnerships and any such future
funds. Prospective investors should be aware that there may be occasions when the General
Partner, the Fund Managers, the Management Company and their affiliates will encounter
potential conflicts of interest in connection with the Fund’s activities. The Partnership
Agreement will contain certain protections for Limited Partners against conflicts of interest
faced by the General Partner and its partners, but will not purport to address all types of
conflicts that may arise. Moreover, as a practical matter, it may be difficult for Limited Partners
to subject the behavior of the General Partner, the Management Company and their partners to
close scrutiny.
63
CONTROL NUMBER 257 - CONFIDENTIAL
Profits Not Shared in Proportion to Contributed Capital
The capital contribution of the General Partner will represent only a small portion of the Fund’s
capital. Limited Partners may invest greater amounts and may receive a proportionately
smaller amount of the profits of the Fund than the General Partner. The General Partner may
have an incentive to make investments that are riskier or more speculative than if the General
Partner received allocations on a basis identical to that of the Limited Partners in the Fund or
was compensated on a basis not tied to the performance of the Fund.
Investment Opportunities
The General Partner may in certain circumstances allocate investment opportunities to prior
funds or potential successor funds. Allocation of investment opportunities will be made in
good faith by the General Partner. There can be no assurance that the allocation of investment
opportunities by the General Partner will not give rise to conflicts of interest between the
investors of the respective funds.
Long-Term Investment
An investment in the Fund is a long-term commitment, and there is no assurance of any
distribution to the Limited Partners prior to or upon liquidation of the Fund.
Illiquidity of Limited Partner Interests
The Limited Partner Interests are highly illiquid. There is no public market for the Limited
Partner Interests and none is expected to develop. Limited Partner Interests in the Fund may
not be assigned, transferred or encumbered without the prior written consent of the General
Partner. Voluntary withdrawals of Limited Partner Interests are not permitted, except in
limited circumstances where necessary to comply with laws or regulations applicable to a
Limited Partner. Consequently, a Limited Partner may not be able to liquidate their investment
in the event of a change in circumstances or for other reasons and, therefore, must be prepared
to bear the risks of owning its interest in the Fund for an extended period of time. The Limited
Partner Interests will not be registered under the Securities Act of 1933, as amended (the
“Securities Act”), or under the various “Blue Sky” or securities laws of the state or jurisdiction
of residence of any Limited Partner of the Fund. The Limited Partner Interests are being offered
only to “accredited investors” under an exemption in Section 4(2) of the Securities Act and the
rules of the Securities and Exchange Commission thereunder and exemptions under the various
applicable “Blue Sky” and other state securities laws.
Bridge Financings and Guarantees
From time to time, the Fund may lend to portfolio companies on a short-term, unsecured basis
or guaranty portfolio company obligations in anticipation of a future issuance of equity or longterm
debt securities. Such bridge loans would typically be convertible into a more permanent,
long-term security; however, for reasons not always in the Fund’s control, such long-term
securities may not issue and such bridge loans or guarantees may remain outstanding. In such
event, the interest rate on such loans or compensation for such guaranty (if any) may not
adequately reflect the risk associated with the unsecured position taken or guaranty given by
the Fund.
64
CONTROL NUMBER 257 - CONFIDENTIAL
Portfolio Company Leverage
To the extent that any investment is made in a portfolio company with a leveraged capital
structure, such investment will be subject to increased exposure to adverse economic factors
such as a significant rise in interest rates, a severe downturn in the economy or deterioration in
the condition of such company or its industry. If such a company is unable to generate
sufficient cash flow to meet principal and interest payments on its indebtedness, the value of
any equity investment by the Fund in such company could be significantly reduced or even
eliminated.
Investments in Public Companies
The Fund may invest in public companies or take private portfolio companies public.
Investments in public companies may subject the Fund to risks that differ in type or degree
from those involved with investments in privately held companies. Such risks include, without
limitation, greater volatility in the valuation of such companies, increased obligations to
disclose information regarding such companies, limitations on the ability of the Fund to dispose
of securities at certain times (including due to the possession by the Fund of material non-public
information), increased likelihood of shareholder litigation against such companies’ board
members, which may include the Fund Managers or other Management Company personnel,
regulatory action by the U.S. Securities and Exchange Commission and increased costs
associated with each of the aforementioned risks.
Hedging Techniques
From time to time, the Fund might have investments that are publicly traded, yet illiquid. The
General Partner might engage in hedging techniques, such as selling the corresponding shares
short “against the box,” to “lock in” or secure the value in an investment until it becomes liquid
and freely tradable. The Fund will only sell short a stock to the extent it holds a corresponding
long and illiquid position in the same company.
Portfolio Trading
The Fund does not generally intend to trade its assets for short-term profits, however, when
circumstances warrant, securities may be sold by the Fund without regard to the length of time
held. Any active short-term trading of the Fund will increase its rate of turnover and related
transaction expenses.
Non-U.S. Investments
The Fund may invest a portion of Fund’s total committed capital in the securities of issuers that
are organized outside of the U.S. and Canada. Investing in non-U.S. securities may involve
substantially greater risks than investing in U.S. securities including risks relating to (i) currency
exchange matters, including fluctuations in the rate of exchange between the U.S. dollar and the
various foreign currencies in which the Fund’s non-U.S. investments are denominated, and
costs associated with conversion of investment principal and income from one currency to
another; (ii) differences between the U.S. and non-U.S. securities markets, including potential
price volatility in and relative illiquidity of some non-U.S. securities markets; (iii) the absence of
uniform accounting, auditing and financial reporting standards, practices and disclosure
requirements, and differences in government supervision and regulation; (iv) certain economic
and political risks, including potential exchange control regulations, potential restrictions on
foreign investments and repatriation of capital and the risks associated with political, economic
or social instability, diplomatic developments, and the possibility of expropriation or
65
CONTROL NUMBER 257 - CONFIDENTIAL
confiscatory taxation; and (v) the possible imposition of non-U.S. taxes on income and gains
recognized with respect to such securities. While the General Partner will take these factors into
consideration in making investment decisions for the Fund and intends to manage the Fund in a
manner to minimize exposure to the foregoing risks, there can be no assurance that the General
Partner will be able to evaluate the risks accurately or that adverse developments with respect
to such risks will not adversely affect the value or realization of investments that are held by the
Fund in certain countries.
Reserves
As is customary in the industry, the General Partner may establish reserves for follow-on
investments by the Fund in portfolio companies, operating expenses (including the
Management Fee), Fund liabilities, and other matters. Estimating the appropriate amount of
such reserves is difficult, especially for follow-on investment opportunities, which are directly
tied to the success and capital needs of portfolio companies. Inadequate or excessive reserves
could impair the investment returns to the Limited Partners. If reserves are inadequate, the
Fund may be unable to take advantage of attractive follow-on or other investment opportunities
or to protect its existing investments from dilutive or other punitive terms associated with “payto-play”
or similar provisions. If reserves are excessive, the Fund may decline attractive
investment opportunities or hold unnecessary amounts of capital in money market or similar
low-yield accounts.
Diverse Investors
The Limited Partners may have conflicting investment, tax, and other interests with respect to
their investments in the Fund. The conflicting interests of individual Limited Partners may
relate to or arise from, among other things, the nature of investments made by the Fund, the
structuring or the acquisition of investments and the timing of disposition of investments. As a
consequence, conflicts of interest may arise in connection with decisions made by the Fund
Managers, including with respect to the nature or structuring of investments that may be more
beneficial for some Limited Partners than for others, particularly with respect to investors’
individual tax situations. In selecting and structuring investments appropriate for the Fund, the
General Partner will consider the investment and tax objective of the Fund and the Partners as a
whole, not the investment, tax or other objective of any Limited Partner individually.
Failure of Limited Partners to Fulfill Their Commitment Obligations
The Fund’s investments in portfolio companies will require capital calls on Limited Partners
over an extended period of time. Failure by a Limited Partner to meet a capital call could result
in the failure of the Fund to make desired investments, which could have adverse consequences
for the Fund and thus all of the Limited Partners. The failure by the Fund to receive a
significant portion of capital contributions due from Limited Partners in respect of their
Commitments could materially impair the Fund’s ability to realize its financial objectives. In
the event that a Limited Partner defaults, such Limited Partner may be subject to various
penalties, including forfeiture of all or a portion of its interest in the Fund, as provided in the
Partnership Agreement.
Risk of Dilution
Limited Partners subscribing for interests at subsequent closings will participate in existing
investments of the Fund, diluting the interest of existing Limited Partners therein. Although
such Limited Partners will contribute their pro rata share of prior capital contributions
66
CONTROL NUMBER 257 - CONFIDENTIAL
previously drawn down by the Fund (plus an additional amount thereon), there can be no
assurance that such payment will reflect the fair value of the Fund’s existing investments at the
time such additional Limited Partners subscribe for such interests.
Difficulty in Valuing Portfolio Investments and Distribution in Kind
Generally, there will be no readily available market for a substantial number of the Fund’s
investments and hence, most of the Fund’s investments will be difficult to value. The securities
in which the Fund will invest may be among the most junior in a portfolio company’s capital
structure, and thus subject to the greatest risk of loss. It is highly speculative as to the whether
and when a portfolio company will be able to register its securities so that the securities become
eligible for trading in public markets. Certain investments may be distributed in kind to the
Partners of the Fund. An investor that receives assets other than cash from the Fund may incur
costs and delays in converting those assets to cash.
Non-Controlling Investments
The Fund generally expects to make non-controlling investments in portfolio companies where
the Fund may not be able to control or effectively influence the business or affairs of such
entities. Portfolio companies in which the Fund’s investments are made may have economic or
business interests or goals which are inconsistent with those of the Fund, and the Fund may not
be in a position to influence those interests or goals or otherwise protect the value of the Fund’s
investments in such entities. In addition, although the Fund may seek board representation in
connection with its investments, there is no assurance that such representation, if sought, will
be obtained.
Service on Board of Directors
The Fund typically will seek to have observation or visitation rights or the right to designate
directors to serve on the boards of directors of the Fund’s portfolio companies. In addition,
affiliates of the General Partner may serve, from time to time, as officers or directors of the
portfolio companies. The foregoing rights and activities could expose the General Partner, its
affiliates and the assets of the Fund to regulatory action and/or lawsuits and claims by a
portfolio company, its security holders and its creditors. While the General Partner intends to
manage the Fund in a way that will minimize exposure to these risks, the possibility of
successful claims or lawsuits or adverse regulatory action cannot be eliminated, and such events
could have significant adverse effects on the Fund.
Material Non-Public Information
By reason of their responsibilities in connection with their other activities, certain affiliates of
the General Partner may acquire confidential or material non-public information or be
otherwise restricted from initiating transactions in certain securities. The Fund will not be free
to act upon any such information. Due to these restrictions, the Fund may be not be able to
initiate a transaction that it otherwise might have initiated and may not be able to sell an
investment that it might otherwise might have sold.
In their capacity as officers or directors, affiliates of the General Partner will be subject to
fiduciary or other duties to the portfolio company, which may adversely affect the Fund. For
example, the Fund may be prohibited from selling publicly traded securities of a portfolio
company if the General Partner or any of its affiliates is in possession of material non-public
information relating to such company.
67
CONTROL NUMBER 257 - CONFIDENTIAL
Recourse to the Fund’s Assets
The Fund’s assets, including any investments made by the Fund and any funds held by the
Fund, are available to satisfy all liabilities and other obligations of the Fund. If the Fund
becomes subject to a liability, parties seeking to have the liability satisfied may have recourse to
the Fund’s assets generally and will not be limited to any particular assets, such as the asset
representing the investment giving rise to the liability. Accordingly, investors could find their
interest in the Fund’s assets adversely affected by a liability arising out of an investment of the
Fund.
Contingent Liabilities on Disposition of Investments
In connection with the disposition of an investment in a portfolio company or otherwise, the
Fund may be required to make representations about the business and financial affairs of the
portfolio company typical of those made in connection with the sale of any business. The Fund
may also be required to indemnify the purchasers of such portfolio company to the extent that
any such representations turn out to be inaccurate. These arrangements may result in
contingent liabilities, which might ultimately have to be funded by the investors to the extent of
their Commitment to the Fund or previous distributions made to them.
Certain Litigation Risks
The Fund will be subject to a variety of litigation risks, particularly if one or more of its portfolio
companies face financial or other difficulties during the term of the Fund. Legal disputes,
involving any or all of the Fund, the General Partner, its partners or its affiliates, may arise from
the Fund’s activities and investments and could have a significant adverse effect on the Fund.
Indemnification
The Fund will be required to indemnify, among others, the General Partner, the general partner
of the General Partner, the Management Company, the Fund Managers, their respective
partners, members, employees, venture partners and affiliates, the Fund’s other agents and
members of the Advisory Board for liabilities incurred in connection with the affairs of the
Fund. Such liabilities may be material. For example, in their capacity as directors of portfolio
companies, the partners, managers, or affiliates of the General Partner may be subject to
derivative or other similar claims brought by security holders of such companies. The
indemnification obligations of the Fund would be payable from the assets of the Fund,
including the unused capital commitments of the Partners. If the assets of the Fund are
insufficient to pay such indemnification obligations, the Limited Partners may be required to
return distributions previously made to them in order to satisfy such obligations.
Changes
The Fund’s investment program is intended to extend over a period of years, during which the
business, economic, political, regulatory, and technology environment within which the Fund
operates may undergo substantial changes, some of which may be adverse to the Fund. The
General Partner will have the exclusive right and authority (within limitations set forth in the
Partnership Agreement) to determine the manner in which the Fund shall respond to such
changes, and Limited Partners generally will have no right to withdraw from the Fund or to
demand specific modifications to the Fund’s operations in consequence thereof. A major
recession or adverse developments in the securities or credit markets might have an impact on
some or all of the Fund’s investments. A sustained period of inactivity and/or low valuations
68
CONTROL NUMBER 257 - CONFIDENTIAL
in the public equity markets could result in substantially lower liquidation values and
substantially longer periods before liquidity is achieved in comparison with historical values,
which would reduce the returns that could be achieved by the Fund. In addition, factors
specific to a portfolio company may have an adverse effect on the Fund’s investment in such
company. The General Partner may rely upon its own or a portfolio company’s projections
concerning the portfolio company’s future performance in making investment decisions. Such
projections are inherently subject to uncertainty and to certain factors beyond the control of the
portfolio company and the General Partner. Prospective investors are particularly cautioned
that the investment sourcing, selection, management and liquidation strategies and procedures
exercised by partners of the General Partner in the past may not be successful, or even
practicable, during the Fund’s term.
Industry Specific Terminology
Prospective investors are cautioned that certain terms and phrases of common usage within the
venture capital industry may be misleading to those unfamiliar with such usage. In particular,
individuals who participate in the management of a fund often are referred to, in a colloquial
sense, as “general partners” even though they are not actually general partners of any
partnership. Prospective investors are reminded that the Fund will be a limited partnership,
that the General Partner will be a limited partnership, that the general partner of the General
Partner will be a limited liability company, and that the individuals directing the management
of the Fund through the General Partner will be members of such limited liability company. It
is not intended that the Fund will have any general partner other than the General Partner or
that any actual general partnership will in any manner be associated with the formation,
operation, dissolution or termination of the Fund. Prospective investors must not presume or
rely upon the existence of any actual legal entities other than the Fund, the General Partner and
the general partner of the General Partner. With respect to all matters involving industry
specific terminology, prospective investors are urged to consult with their own legal and other
advisors.
Fund and General Partner Not Registered
The Fund will not be registered under the Investment Company Act of 1940, as amended (the
“Investment Company Act”) pursuant to an exemption set forth in Sections 3(c)(1) and/or
3(c)(7) of the Investment Company Act. There is no assurance that such exemptions will
continue to be available to the Fund. Due to the burdens of compliance with the Investment
Company Act, the performance of the Fund’s investment portfolio could be materially
adversely affected, and risks involved in financing portfolio companies could substantially
increase, if the Fund becomes subject to registration under the Investment Company Act.
Neither the Fund nor its counsel can assure investors that, under certain conditions, changed
circumstances, or changes in the law, the Fund may not become subject to the Investment
Company Act or other burdensome regulation. The General Partner is not registered as a
broker/dealer under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and
with the National Association of Securities Dealers, Inc. (the “NASD”) and is consequently not
subject to the record keeping and specific business practice provisions of the Exchange Act and
the rules of the NASD.
69
CONTROL NUMBER 257 - CONFIDENTIAL
Tax Risks
Certain tax risks relating to an investment in the Fund are discussed in Section XI “Certain Tax
& ERISA Considerations”, which prospective investors should read carefully. No assurances
can be given that current tax laws, rulings and regulation will not be changed during the life of
the Fund. Prospective Limited Partners should consult their tax advisors for further
information about the tax consequences of purchasing a Limited Partner Interest in the Fund.
Withholding and Other Taxes
The General Partner intends to structure the Fund’s investments in a manner that is intended to
achieve the Fund’s investment objectives and, notwithstanding anything contained herein to the
contrary, there can be no assurance that the structure of any investment will be tax efficient for
any particular investor or that any particular tax result will be achieved. In addition, tax
reporting requirements may be imposed on investors under the laws of the jurisdictions in
which investors are liable to taxation or in which the Fund makes portfolio investments.
Prospective investors should consult their own professional advisors with respect to the tax
consequences to them of an investment in the Fund under the laws of the jurisdiction in which
they are liable to taxation. Furthermore, the Fund’s returns in respect of its investments may be
reduced by withholding or other taxes imposed by jurisdictions in which the Fund’s portfolio
companies are organized.
Confidential Information
The Partnership Agreement will contain confidentiality provisions intended to protect
proprietary and other information relating to the Fund and the Fund’s portfolio companies. To
the extent that such information is publicly disclosed, competitors of the Fund and/or
competitors of its portfolio companies, and others, may benefit from such information, thereby
adversely affecting the Fund, its portfolio companies and the General Partner and the economic
interests of Limited Partners.
Written Agreements
The Fund, the General Partner and the Management Company will be authorized, without the
approval of any Limited Partner, to enter into side letters or similar written agreements with
Limited Partners that have the effect of establishing rights under, or altering or supplementing
the terms of this Memorandum, the Partnership Agreement, such Limited Partner’s
Subscription Agreement or other related agreements. The ability of other Limited Partners to
receive copies of and/or elect to receive the benefit of such side agreements will be limited.
Market volatility
Since 2008, the capital, credit and securities markets have been experiencing unprecedented
levels of volatility and disruption. Ongoing volatility could negatively impact the Fund in a
number of ways. Many of the investments purchased, held and sold on behalf of the Fund may
be complex, and their market values will be highly sensitive to market changes. Overall Fund
returns may be reduced as relatively small changes in the capital, credit or securities markets
may have significant impacts on the profitability of Fund investments. In addition, the U.S.
Congress and regulatory agencies may adopt new financial regulations and tax policies in
response to continued volatility, which could restrict the Fund’s investment options and be
otherwise unfavorable to the Fund.
70
CONTROL NUMBER 257 - CONFIDENTIAL
Regulatory Changes
On June 22, 2011, to implement provisions of Title IV of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, the U.S. Securities and Exchange Commission (the “SEC”) adopted
final rules implementing new exemptions from the registration requirements of the Investment
Advisers Act of 1940 (the “Advisers Act”), one of which is commonly known as the venture
capital fund exemption. Neither the General Partner nor the Management Company is currently
expected to register as an investment adviser with the SEC in reliance on the venture capital
fund exemption. The General Partner may need to take into consideration certain conditions
regarding the nature of investments that may be made by investment vehicles advised by an
investment adviser relying on the venture capital exemption, which may constrain the Fund’s
investment flexibility or require certain non-qualifying investments to be disposed of earlier
than they might otherwise be. In addition, compliance with the venture capital fund exemption
may subject the Fund to limitations on the Fund’s operations, including limitations on the
Fund’s ability to borrow, provide guarantees and make short-term investments that are more
restrictive than any limitation set forth in the Partnership Agreement.
Reliance on the venture capital exemption also will necessitate reporting certain information to
the SEC about the Management Company, the General Partner and their affiliates and may
result in such entities being subject to SEC examination authority and certain Advisers Act
compliance obligations. If the General Partner and the Management Company are able to rely
on the venture capital exemption, investors in the Fund will not be entitled to the benefits of
certain protections under the Advisers Act. If the General Partner or the Management Company
cannot rely on the venture capital exemption, the General Partner or the Management Company
may need to register as an investment adviser under the Advisers Act. Registration under, and
compliance with, the Advisers Act could be costly and could divert attention of the Fund’s
management team. There also can be no assurance that statutory, regulatory, judicial or
administrative interpretations of existing laws and regulations will not in the future impose
more comprehensive or stringent requirements on the General Partner or the Management
Company.
Cautionary Statements Regarding Forward-Looking Statements. Certain information
contained in this Memorandum constitutes “forward-looking statements,” which can be
identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,”
“anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof
or other variations thereon or comparable terminology. Such forward-looking statements,
including the intended actions and performance objectives for the Fund, involve known and
unknown risks, uncertainties and other important factors that could cause actual results,
performance or achievements of the Fund to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking statements.
Although this information was prepared by the General Partner based on its experience in the
industry and on assumptions of fact and opinion as to future events that the General Partner
believed to be reasonable when made, no representation is made or assurance given that such
statements, views, projections or forecasts are correct or that the objectives of the Fund will be
achieved or that investors will receive a return of their capital. Moreover, neither the Fund nor
the General Partner, nor any of their affiliates, assumes responsibility for the accuracy and
completeness of any forward-looking statements. All forward-looking statements in this
Memorandum speak only as of the date of this Memorandum. The Fund, the General Partner
and their affiliates expressly disclaim any obligation or undertaking to disseminate any updates
71
CONTROL NUMBER 257 - CONFIDENTIAL
or revisions to any forward-looking statement contained herein to reflect any change in its
expectation with regard thereto or any change in events, conditions or circumstances on which
any such statement is based. Due to various risks and uncertainties, actual events or results or
the actual performance of the Fund may differ materially from those reflected or contemplated
in such forward-looking statements. Limited Partners are cautioned not to place undue reliance
on such statements.
THE FOREGOING LIST OF RISK FACTORS AND CONFLICTS OF INTEREST DOES NOT
PURPORT TO BE A COMPLETE EXPLANATION OF THE RISKS INVOLVED IN THIS
OFFERING. PROSPECTIVE INVESTORS ARE URGED TO READ THIS ENTIRE
MEMORANDUM BEFORE DETERMINING TO INVEST IN THE FUND.
72
CONTROL NUMBER 257 - CONFIDENTIAL
X. CERTAIN TAX AND ERISA CONSIDERATIONS
IN ACCORDANCE WITH U.S. TREASURY REGULATIONS GOVERNING PRACTICE
BEFORE THE INTERNAL REVENUE SERVICE (CIRCULAR 230), LEGAL COUNSEL TO
THE FUND HEREBY INFORMS INVESTORS THAT (A) THE INFORMATION BELOW
(OR OTHERWISE CONTAINED IN THIS DOCUMENT) IS NOT INTENDED OR
WRITTEN TO BE USED, AND CANNOT BE USED, BY THE INVESTORS FOR THE
PURPOSE OF AVOIDING PENALTIES THAT THE INTERNAL REVENUE SERVICE (THE
“IRS”) MAY ATTEMPT TO IMPOSE ON AN INVESTOR, (B) THE INFORMATION WAS
WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTION
OR MATTERS ADDRESSED BY THE WRITTEN INFORMATION, AND (C) INVESTORS
SHOULD SEEK TAX ADVICE BASED ON THEIR PARTICULAR CIRCUMSTANCES
FROM AN INDEPENDENT TAX ADVISOR.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a brief summary of certain U.S. federal income tax considerations that may be
relevant to an investment in the Fund. This summary does not contain a comprehensive
discussion of all U.S. federal income tax consequences that may be relevant to a Partner in view
of that Partner’s particular circumstances or (unless otherwise indicated) to certain Partners
subject to special treatment under U.S. federal income tax laws — such as regulated investment
companies, personal holding companies, brokers or dealers in securities, banks and certain
other financial institutions, tax-exempt organizations, trusts, and insurance companies — nor
does it address any state, estate, local, foreign, or other tax consequences of an investment in the
Fund, except as otherwise provided herein. This summary is based on the assumptions that (i)
each Partner (and each of its beneficial owners, as necessary under U.S. federal income tax
withholding and backup withholding rules) will provide all appropriate certifications to the
Fund in a timely fashion to minimize withholding (or backup withholding) on each Partner’s
distributive share of the Fund’s gross income and (ii) each Partner will hold its Limited Partner
Interest in the Fund as a capital asset for U.S. federal income tax purposes. Each prospective
investor should also note that, except as otherwise provided herein, this summary does not
address the interaction of U.S. federal tax laws and any income or estate tax treaties between the
U.S. and any other jurisdiction.
No assurance can be given that the IRS will concur with the tax consequences set forth below.
Each prospective investor is advised to consult its own tax counsel as to the specific U.S.
federal income tax consequences of an investment in the Fund and as to applicable foreign,
state, estate, and local taxes.
General Matters
Classification of the Fund - Pursuant to applicable U.S. Treasury Regulations, the Fund will be
treated as a partnership, rather than a corporation, for U.S. federal income tax purposes unless
the Fund affirmatively elects to be treated as a corporation for such purposes. The General
Partner has no intention of making such an election on behalf of the Fund and does not
anticipate any circumstances under which such an election would be made. In certain cases
under Section 7704 of the Internal Revenue Code of 1986, as amended (the “Code”), a
partnership that is classified as a “publicly traded partnership” may be taxed as a corporation
73
CONTROL NUMBER 257 - CONFIDENTIAL
for U.S. federal income tax purposes. The following discussion is based on the assumption that
the Fund will not be treated as a “publicly traded partnership.”
Treatment of U.S. Partners and Non-U.S. Partners - The discussion below addresses separately
certain U.S. federal income tax matters relevant to U.S. Partners and Non-U.S. Partners. For
purposes of this discussion, the term “U.S. person” generally means any U.S. citizen or resident
individual, any corporation, limited liability company, or partnership organized under U.S. law,
any estate (other than an estate the income of which, from sources outside the U.S. that is not
effectively connected with a trade or business within the U.S., is not includible in its gross
income for U.S. federal income tax purposes), and any trust if a court within the U.S. is able to
exercise primary supervision over the administration of the trust and one or more U.S. persons
have the authority to control all substantial decisions of the trust. The term “U.S. Partner”
means any partner that is a U.S. person and, unless the context otherwise requires, includes any
U.S. person that holds an equity interest in the Fund through one or more partnerships or other
entities treated as transparent for U.S. federal income tax purposes. The term “Non-U.S.
Partner” means a Partner that is not a U.S. person.
Taxation of Fund Operations Generally - As a partnership, the Fund will not pay U.S. federal
income taxes, but each U.S. Partner will be required to report that Partner’s distributive share
(whether or not distributed) of the Fund’s income, gains, losses, deductions and credits of the
character specified in Section 702 of the Code. It is possible that the U.S. Partners could incur
U.S. federal income tax liabilities without receiving from the Fund sufficient distributions to
defray such tax liabilities. The Fund’s taxable year will be the calendar year, or such other
period as required by the Code. Tax information will be delivered to all Partners on an annual
basis to enable the Partners to complete their tax returns.
Election to Adjust Basis of Fund Assets - Under the principal agreements relating to the Fund
and Section 754 of the Code, the General Partner will have the authority to elect to adjust the
basis of the Fund’s assets (commonly referred to as “Section 754 adjustments”) in connection
with certain distributions made by the Fund to Partners or certain transfers of Limited Partner
Interests in the Fund. Although the General Partner has no present intention of making an
election on behalf of the Fund under Section 754 of the Code, Section 754 adjustments may
nevertheless be mandatory under certain circumstances and could affect the amount of a
Partner’s allocations (for U.S. federal income tax purposes) of gain or loss recognized by the
Fund on a disposition of its assets.
The General Partner also will have the authority under the principal agreements relating to the
Fund to elect to treat the Fund as an “electing investment partnership” and, as a result,
potentially avoid making Section 754 adjustments that otherwise would be mandatory with
respect to certain transfers of Limited Partner Interests in the Fund. Such election, however,
may result in the disallowance (for U.S. federal income tax purposes) of certain losses allocated
by the Fund to transferees of Limited Partner Interests in the Fund. It is possible, however, that
the Fund will not be able to qualify as an electing investment partnership.
The General Partner will have the authority to require any Partner engaging in a transaction
that requires a Section 754 adjustment (for example, a transfer of the Partner’s Limited Partner
Interest) to bear the ongoing administrative and other costs incurred by the Fund or its Partners
in connection with these basis adjustment rules. These costs, which could be significant, may be
74
CONTROL NUMBER 257 - CONFIDENTIAL
charged to a Partner without regard to whether the General Partner made either of the elections
described above on behalf of the Fund. Furthermore, each Partner will be required to provide
the Fund with any information necessary to allow the Fund to comply with its obligations to
make Section 754 adjustments and/or its obligations as an electing investment partnership.
Tax-Exempt U.S. Partners
Unrelated Business Taxable Income - Under the terms of the principal agreements relating to
the Fund, the General Partner will be required to use reasonable best efforts to conduct the
affairs of the Fund in a manner that does not cause any tax-exempt U.S. Partner to recognize
any “unrelated business taxable income” within the meaning of Section 512 of the Code;
provided, however, that the General Partner may cause the Fund to borrow on a short-term
basis and may guarantee the indebtedness of any portfolio company. The General Partner’s
undertaking will be deemed satisfied with respect to the making, holding or disposing of any
portfolio investment if the tax-exempt U.S. Partners are given the opportunity to (or if all
Limited Partners are otherwise required to) hold their proportionate shares of such portfolio
investment directly or indirectly through an alternative investment vehicle treated as a
corporation for U.S. federal income tax purposes. Notwithstanding this undertaking, it is
possible that the Fund could realize income which would constitute unrelated business taxable
income, and in that event each tax-exempt U.S. Partner would be subject to U.S. federal income
tax on its share of such income and may be required to file a U.S. federal income tax return with
respect to such income.
Taxable U.S. Partners
Limitations on Allowable Deductions - Under Section 67 of the Code, U.S. taxpayers who are
individuals may deduct certain miscellaneous expenses (e.g., investment advisory fees, tax
preparation fees, and unreimbursed employee expenses such as the cost of subscriptions to
professional journals) only to the extent that these deductions exceed, in the aggregate, 2% of
the taxpayer’s adjusted gross income. Further, Section 68 of the Code disallows certain
deductions otherwise allowable to taxpayers who are individuals; the amount disallowed varies
based on the taxpayer’s adjusted gross income. Part or all of the Fund’s expenses allocated to
any U.S. Partner who is an individual (including that Partner’s share of the management fee
payable to the Fund’s Management Company) may be disallowed under these provisions,
although tax-exempt U.S. Partners will generally not be affected. Finally, certain expenses
(including the fees and expenses of placement agents, if any) incurred in connection with the
offer and sale of the Limited Partner Interests are not deductible by any U.S. Partner. If the
Management Company or an affiliate pays the fees or expenses of any placement agent, a
corresponding portion of the Fund’s expenses attributable to payments or accruals of the
management fee is likely to constitute a nondeductible syndication expense.
Surtax on Unearned Income - Section 1411 of the Code generally imposes a 3.8% surtax on the
“net investment income” of certain U.S. Partners who are citizens or resident aliens, and on the
undistributed “net investment income” of certain U.S. estates and trusts. Among other items,
“net investment income” generally would include a U.S. Partner’s allocable share of the Fund’s
net gains and certain other income such as interest and dividends, less deductions allocable to
such income. In addition, “net investment income” may include gain from the sale, exchange or
other taxable disposition of an interest in the Fund, less certain deductions. U.S. Partners
75
CONTROL NUMBER 257 - CONFIDENTIAL
potentially subject to the surtax should consult their own advisors concerning its potential
applicability to their individual circumstances.
Passive Foreign Investment Companies - A portfolio investment by the Fund in a non-U.S.
corporation that is classified as a “passive foreign investment company” (“PFIC”) will cause
taxable U.S. Partners to be subject to taxation under Sections 1291 through 1298 of the Code. In
general, a non-U.S. corporation will be classified as a PFIC if 75% or more of its gross income
constitutes “passive income” — generally, interest, dividends, royalties, rent and similar
income, and gains on the disposition of assets that generate such income — or 50% or more of
its assets (by value or, in certain situations, by adjusted tax bases) produce passive income or
are held for the production of such income. Under the PFIC rules, gain attributable to a
disposition of PFIC stock, as well as income attributable to certain “excess distributions” with
respect to that PFIC stock, is allocated ratably over the shareholder’s holding period for the
stock. Gain allocated under this rule to (i) the year in which the shareholder disposes of the
PFIC stock and (ii) any year prior to the time the foreign corporation first satisfied the PFIC
income or assets test, as well as income attributable to any excess distribution on PFIC stock
allocated to those years, is subject to tax (as ordinary income) at the U.S. federal income tax
rates applicable to the shareholder for the year in which the disposition occurs. Disposition
gain attributable to years included in the shareholder’s holding period — other than those
described in the preceding clauses (i) and (ii) — and income attributable to excess distributions
allocated to each such other year is subject to tax (as ordinary income) at the maximum U.S.
federal income tax rate applicable to the shareholder for the year in which the income is treated
as realized, and also to an interest-like charge on the shareholder’s “deferred” payment of this
tax liability that accrues generally from the year of deemed realization through the due date of
the shareholder’s U.S. federal income tax return for the year of disposition or distribution
(determined without regard to extensions). A U.S. Partner effectively will be treated as a U.S.
shareholder with respect to its proportionate share of any PFIC stock owned by the Fund. If,
however, that PFIC is also a “controlled foreign corporation” in which the Fund is a “United
States Shareholder” (as defined below), the PFIC rules generally will be superseded by the rules
discussed below dealing with controlled foreign corporations. The PFIC rules generally should
not affect tax-exempt U.S. Partners.
The PFIC rules are highly technical and it is possible that a non-U.S. corporation in which the
Fund makes an investment will be classified as a PFIC. If the Fund invests in the stock of a
portfolio company classified as a PFIC, and that company agrees to provide the Fund and, if
necessary, the IRS with certain financial information, the Fund may elect to treat that company
as a “qualified electing fund” (“QEF”). If the Fund holds stock of a non-U.S. corporation with
respect to which a QEF election has been made for the first taxable year in the Fund’s holding
period for which the non U.S. corporation is a PFIC, each U.S. Partner will be subject to tax
currently on its proportionate share of certain earnings and net capital gain of that non-U.S.
corporation — regardless of whether that corporation actually distributes cash or other property
to the Fund — but generally will not be subject to the tax regime described in the preceding
paragraph with respect to its investment in that corporation. Although the maximum rate of
tax imposed on certain dividends is currently 20%, this rate does not apply to dividends paid or
deemed paid by PFICs. A QEF election generally will not result in current inclusion of the
PFIC’s earnings for any year in which the PFIC has no net ordinary earnings and no net capital
gain. Alternatively, if such PFIC stock is publicly traded, the Fund may be eligible to value the
76
CONTROL NUMBER 257 - CONFIDENTIAL
stock annually on a “mark-to-market” basis so that the Fund may treat any resulting gain or
loss as ordinary income or loss to avoid the PFIC tax.
As noted above, the PFIC rules (including the rules pertaining to QEF elections) generally
should not affect tax-exempt U.S. Partners.
The Fund cannot predict with any certainty at this time whether any non-U.S. portfolio
company in which the Fund invests may be subject to the PFIC regime, whether a timely QEF
election can or will be made, or the effect or availability of any applicable elections made by the
Fund. The rules applicable to PFICs are complex, and the foregoing summary of U.S. federal
income taxation of U.S. Partners indirectly owning an interest in a PFIC is general in nature. It
is possible that U.S. Partners may be subject to tax currently under the PFIC regime on their
proportionate shares of certain earnings of a non-U.S. corporation in which the Fund holds an
interest and/or may incur nondeductible interest-like charges on tax liability deferred under the
PFIC regime without receiving from the Fund distributions sufficient to satisfy any such
obligations.
In addition to the PFIC rules discussed above, a U.S. person that is a shareholder of a PFIC may
be required to file an annual information report and/or applicable tax forms with the IRS.
Controlled Foreign Corporations - Under Sections 951 through 957 of the Code, special rules
apply to U.S. persons who own, directly or indirectly and applying certain attribution rules,
10% or more of the total combined voting power of all classes of stock of a non-U.S. corporation
(each, a “United States Shareholder”) that is a “controlled foreign corporation” (“CFC”). For
this purpose, the Fund will be treated as a United States Shareholder of any foreign corporation
in which the Fund’s share ownership reaches this 10% threshold. A non-U.S. corporation
generally will be a CFC for a taxable year if United States Shareholders collectively own more
than 50% of the total combined voting power or total value of the corporation’s stock on any
day during such taxable year. United States Shareholders of a CFC generally must include in
their gross income for U.S. federal income tax purposes their pro rata shares of certain earnings
and profits of the CFC. Further, under Section 1248 of the Code, if a U.S. person sells or
exchanges stock of a non-U.S. corporation and that person is or was a United States Shareholder
at any time during the five-year period ending on the date of such sale or exchange during
which that non-U.S. corporation was a CFC, that U.S. person generally will be required to treat
a portion of the gain recognized upon such sale or exchange as a dividend to the extent of the
earnings and profits of the CFC attributable to such stock. Under U.S. federal income tax rules,
the Fund itself is a U.S. person and, if the Fund becomes a United States Shareholder of a CFC,
taxable U.S. Partners (i) will be required to report and pay tax currently on their shares of the
CFC’s earnings and profits attributable to the Fund that are taxable to its United States
Shareholders under the CFC rules, and (ii) will be subject to the Section 1248 recharacterization
rule described above. In addition, if the Fund is a United States Shareholder of a CFC and a
U.S. Partner disposes of its Limited Partner Interest, that Partner generally will recognize
income under Section 751 of the Code equal to its distributive share of the Section 1248 income
that would have been triggered if the Fund had sold its interest in the CFC at fair market value.
The maximum rate of tax imposed on certain dividend income and certain long-term capital
gains attributable to dispositions of securities generally is 20%, so that a recharacterization of
gain under Section 1248 might not increase that U.S. Partner’s U.S. federal income tax liability.
In addition, income of a CFC subject to income tax in a country other than the U.S. at an
77
CONTROL NUMBER 257 - CONFIDENTIAL
effective rate greater than 90% of the maximum U.S. corporate income tax rate is not taxable to a
United States Shareholder under the CFC rules if the United States Shareholder so elects.
The rules applicable to CFCs are complex, and the foregoing summary of the U.S. federal
income taxation of U.S. Partners indirectly owning an interest in a CFC is general in nature. The
General Partner cannot provide any assurance that the Fund’s portfolio companies will not be
CFCs. The CFC rules, however, generally should not affect tax-exempt U.S. Partners.
U.S. Foreign Tax Credits - The Fund may make investments in entities that are formed and
operating under the laws of countries other than the United States. The countries in which these
entities are organized and operate may impose taxes on the income of, and distributions or
other payments made by, these entities. In addition, the Fund and/or the Partners may be
required to file tax or information returns in such non-U.S. jurisdictions. U.S. Partners may be
entitled, under certain circumstances, to a reduced rate of non-U.S. tax on their shares of such
income or distributions under tax treaties between the United States and the non-U.S.
jurisdictions imposing such tax, or may, in certain circumstances, be entitled under such treaties
to file tax returns in such jurisdictions and claim refunds of any amounts of non-U.S. tax overwithheld.
Subject to applicable limitations on foreign tax credits, a U.S. Partner that is subject to U.S.
federal income taxation generally should be entitled to elect to treat foreign taxes withheld from
such Partner’s share of the Fund’s dividend and interest income as foreign income taxes eligible
for credit against such Partner’s U.S. federal income tax liability. Similarly, each U.S. Partner’s
share of any foreign taxes which may be imposed on capital gains or other income realized by
the Fund generally should be treated as creditable foreign income taxes. Capital gains realized
by the Fund, however, may be considered to be from sources within the U.S., which may
effectively limit the amount of foreign tax credit allowed to the U.S. Partner. Other complex tax
rules may also limit the availability or use of foreign tax credits, depending on each U.S.
Partner’s particular circumstances. Because of these limitations, U.S. Partners may be unable to
claim a credit for the full amount of their proportionate shares of any foreign taxes paid by the
Fund. U.S. Partners that do not elect to treat their shares of foreign taxes as creditable generally
may claim a deduction against U.S. taxable income for such taxes (subject to applicable
limitations on losses and deductions). Foreign tax credits or deductions generally will not
provide any benefit to tax-exempt U.S. Partners unless such Partners’ distributive shares of the
income or gains on which the related foreign income taxes are imposed constitute “unrelated
business taxable income” and certain other conditions are satisfied. However, since the
availability of a credit or deduction depends on the particular circumstances of each U.S.
Partner, Partners are advised to consult their own tax advisors.
Foreign Currency Issues - A U.S. Partner’s distributive share of profits or losses realized by the
Fund on the conversion of U.S. dollars into non-U.S. currency, or of non-U.S. currency into U.S.
dollars, generally will be treated as ordinary income or loss rather than capital gain or loss.
Further, if the Fund acquires, or becomes the obligor under, a debt instrument or enters into
certain other transactions, any of which is denominated in terms of a currency other than the
U.S. dollar, fluctuations in the value of that currency relative to the U.S. dollar generally will
result in foreign currency gain or loss realized by the Fund and will be included in the U.S.
Partners’ distributive shares of Fund profits or losses as U.S.-source ordinary income or loss
rather than capital gain or loss.
78
CONTROL NUMBER 257 - CONFIDENTIAL
U.S. Reporting by U.S. Partners That Are Owners of Non-U.S. Entities - U.S. tax rules impose
information reporting requirements on U.S. persons that own, either directly or indirectly under
stock attribution rules, more than certain threshold amounts of stock in a foreign corporation;
these persons must disclose, among other things, various transactions between themselves and
those foreign corporations. For purposes of these information reporting requirements, stock
ownership is determined with regard to certain stock attribution rules, and each U.S. Partner is
treated as owning part or all of the stock owned directly or indirectly by the Fund. Similar
reporting requirements apply to United States persons that (i) own, directly or indirectly, more
than certain threshold amounts of certain foreign financial assets including, but not limited to
stocks, securities and partnership interests in non-U.S. entities or (ii) contribute, in their capacity
as Partners, more than a certain threshold amount to a non-U.S. partnership during a 12-month
period. In certain circumstances, these rules may require U.S. Partners to file reports annually.
U.S. Partners generally will be responsible for satisfying these information reporting
requirements.
Non-U.S. Partners
U.S. Trade or Business Issues - Under the terms of the principal agreements relating to the
Fund, the General Partner will be required to use commercially reasonable efforts to conduct
the affairs of the Fund in a manner that limits the Fund’s operations to investing and other
related activities which, in the aggregate, would not cause the Fund to be treated as engaged in
the conduct of a trade or business in the U.S. The General Partner’s undertaking will be
deemed satisfied with respect to the making, holding or disposing of any portfolio investment if
the Non-U.S. Partners are given the opportunity to (or if all Limited Partners are otherwise
required to) hold their proportionate shares of such portfolio investment directly or indirectly
through an alternative investment vehicle treated as a corporation for U.S. federal income tax
purposes. Notwithstanding this undertaking, it is possible that the activities of the Fund and
the contractual arrangements into which it enters could cause the Fund to be treated as engaged
in the conduct of a trade or business in the U.S.
Provided that the Fund is not engaged in the conduct of a U.S. trade or business, the U.S.
federal income tax liability of a Non-U.S. Partner with respect to that Partner’s Limited Partner
Interest generally will be limited to withholding tax on certain gross income from U.S. sources
generated by the Fund as long as the Non-U.S. Partner undertakes no activities in the U.S.
(determined without regard to its investment in the Fund) that would cause that Partner to be
engaged in the conduct of a U.S. trade or business, and, unless otherwise indicated, the
following discussion of the U.S. federal income tax treatment of Non-U.S. Partners is based on
that assumption.
Further, if the Fund withholds and remits the proper amounts to the U.S. government, Non-U.S.
Partners that are individuals or corporations will not be required to file U.S. federal income tax
returns or pay additional U.S. federal income taxes solely as a result of their investment in the
Fund (though Non-U.S. Partners treated as trusts for U.S. federal income tax purposes are
subject to special rules). If the Fund is not engaged in the conduct of a U.S. trade or business,
Non-U.S. Partners’ shares of income and gains from sources other than the U.S. (e.g., interest or
dividends paid by non-U.S. portfolio companies and gains realized on the disposition of
securities of those companies) will not be subject to U.S. federal income tax.
79
CONTROL NUMBER 257 - CONFIDENTIAL
If it were ultimately established that the Fund is engaged in a U.S. trade or business, the Fund
generally would be required to withhold and remit to the U.S. government a percentage of the
Fund’s net income and gains that are both effectively connected with that trade or business and
allocated to Non-U.S. Partners, and would be liable for interest and penalties with respect to
amounts which were not so withheld. The relevant withholding percentage is the maximum
U.S. federal income tax rate for individuals or corporations, as applicable. In addition, Non-U.S.
Partners generally would be required to file U.S. federal income tax returns and pay tax in
respect of their shares of the Fund’s effectively connected income including capital gains, but
would be allowed a credit against U.S. federal income tax liability for amounts withheld by the
Fund on their behalf. Non-U.S. Partners which are non-U.S. corporations might also be subject
to a “branch profits” tax on certain earnings of the Fund deemed to have been repatriated to
those Partners.
Treatment of Interest and Dividends from U.S. Sources - Certain categories of investment
income from U.S. sources realized by the Fund, such as dividends and interest, generally will be
subject to U.S. income tax withholding, at a 30% rate on the gross amount of that income, when
included in the distributive shares of Non-U.S. Partners. A Non-U.S. Partner whose distributive
share of such income is subject to U.S. withholding tax may be able to claim an exemption or a
reduced rate of withholding under a tax treaty or convention between the U.S. and that
Partner’s country of residence by providing appropriate documentation regarding that
Partner’s residence for tax purposes and its satisfaction of any conditions imposed by the treaty.
A Non-U.S. Partner resident in a jurisdiction with which the U.S. has a tax treaty, however, will
not be entitled to the benefits of that treaty with respect to that Non-U.S. Partner’s distributive
share of the Fund’s income and gains unless the Fund is treated as fiscally transparent under
the law of that non-U.S. jurisdiction and certain other conditions are satisfied. Finally, in order
to claim the benefits of a tax treaty to reduce U.S. withholding tax on U.S.-source interest and
dividends paid by corporations that are not actively traded, a Non-U.S. Partner — and any
direct or indirect equity owner of a Non-U.S. Partner seeking treaty benefits for itself because
the Non-U.S. Partner is considered fiscally transparent in that equity owner’s jurisdiction —
generally will be required to obtain a U.S. taxpayer identification number from the IRS and may
be required to provide that number and certain other documentation to the Fund. Other
exemptions may be available for certain types of interest income.
Treatment of the Fund’s Capital Gains from U.S. Sources - Under current U.S. law, in general,
capital gains attributable to sales by the Fund of the securities of U.S. corporations will not be
subject to U.S. federal income taxation or tax withholding when allocated to a Non-U.S. Partner
unless that Partner is an individual who is present in the U.S. for 183 days or more during the
taxable year in which such gains are realized and certain other conditions are satisfied.
This general rule does not apply to gains attributable to a U.S. trade or business or gains
attributable to dispositions of securities of any “United States real property holding
corporation” (“USRPHC”), defined in Section 897 of the Code as, in general, a company with
50% or more of the fair market value of its business assets consisting of interests in U.S. real
estate and related assets. Capital gains attributable to sales by the Fund of the securities of a
U.S. corporation that is a USRPHC (other than debt securities with no equity component) may
be subject to U.S. income tax, collected initially by withholding, to the extent allocated to any
Non-U.S. Partner. Non-U.S. Partners would also be required to file U.S. federal income tax
80
CONTROL NUMBER 257 - CONFIDENTIAL
returns, and might be liable for U.S. tax in excess of the amount collected by withholding.
Similarly, Non-U.S. Partners could become subject to U.S. federal income tax and tax return
filing obligations, as a result of transfers of their Limited Partner Interests at a time when the
Fund owned stock of any U.S. corporation that is a USRPHC, although certain exceptions may
apply. Even if a company in which the Fund invests is not a USRPHC at the time of such
investment, such company subsequently may become a USRPHC.
Currency Conversion Issues - Non-U.S. Partners (like other Partners) will be required to make
their capital contributions to the Fund in U.S. dollars, and any cash distributions made by the
Fund will be made in U.S. dollars. Profits or losses realized by Non-U.S. Partners on the
conversion of other currencies into U.S. dollars, or of U.S. dollars into other currencies, will
neither be reflected in the capital accounts of the Partners nor affect the amounts distributable
by the Fund to its Non-U.S. Partners.
Withholding on Payments to Certain Foreign Entities - Sections 1471 through 1474 of the Code
would generally impose a withholding tax of 30% on certain gross amounts of income not
effectively connected with a U.S. trade or business paid to certain foreign entities, unless certain
requirements are satisfied. Amounts subject to withholding tax under these rules generally
include gross U.S.-source dividend and interest income paid on or after July 1, 2014, as well as
gross proceeds from the sale of property that produces U.S.-source dividend or interest income
paid on or after January 1, 2017. To avoid withholding under these rules, Non-U.S. Partners
that are subject to these rules will generally be obligated to comply with certain information
reporting and disclosure requirements, including, in certain cases, entering into an agreement
with the IRS. Non-U.S. Partners are encouraged to consult their own tax advisors regarding the
possible application of Sections 1471 through 1474 of the Code to their investment in the Fund.
Other Tax Matters
Certain State and Local Tax Consequences - State and local taxing jurisdictions may impose
income taxes and estate, inheritance and intangible property taxes on income from, or an
investment in, the Fund. These tax laws may differ substantially from the U.S. federal tax laws.
As a result of participating in the Fund, a Partner may be required to file tax returns with, and
pay taxes to, any state or local jurisdiction in which the Fund does business (or is deemed to do
business from investing a portion of its commitments in operating businesses treated as tax
transparent for U.S. federal income tax purposes). A Partner’s distributive share of the Fund’s
taxable income, gain, loss, deduction and credit is normally included in the income reported to
the state and local jurisdiction(s) in which the Partner is a resident or does business. Investors
should consult their own tax advisors about state and local taxes.
Basis for Description of Tax Consequences - The description of U.S. tax consequences set forth
above is based on the provisions of the principal agreements relating to the Fund that the
General Partner expects will be adopted, existing provisions of the Code, existing and proposed
U.S. Treasury Regulations, existing administrative interpretations and court decisions, and
certain assumptions. Future legislation, U.S. Treasury Regulations, administrative
interpretations or court decisions could significantly change these authorities. Any such change
could have retroactive application and therefore could apply to transactions that have taken
place before such change occurs. In addition, some of the issues discussed above have not been
addressed by administrative authorities or resolved by the courts. Accordingly, no assurance
81
CONTROL NUMBER 257 - CONFIDENTIAL
can be given that the IRS will agree with the description of the U.S. federal income tax
consequences described above. No rulings have been or will be requested from the IRS.
Furthermore, any changes in the principal agreements relating to the Fund or the operations of
the Fund could affect the tax consequences described above.
Consultation with Tax Advisors - The description of U.S. tax matters set forth above is not
intended as a substitute for careful tax planning. It does not address all of the U.S. federal
income tax consequences to investors in the Fund, and does not address any of the foreign,
state, local, estate or other tax consequences of such investment to any investor, except as
otherwise specifically provided. Each prospective investor in the Fund is solely responsible for
all tax consequences to that person or entity of an investment in the Fund. Each prospective
investor is advised to consult its own tax counsel as to the U.S. federal income tax consequences
attributable to acquiring, holding and disposing of an Limited Partner Interest and as to
applicable foreign, state, local, estate or other taxes. The effect of existing U.S. income tax laws
and treaties, the tax laws of other jurisdictions to which an investor may be subject, and possible
changes in such laws and treaties (including proposed changes which have not yet been
adopted) will vary with the particular circumstances of each investor.
CERTAIN ERISA CONSIDERATIONS
ERISA governs the investment of assets of ERISA Plans that may be investors, directly or
indirectly, in the Fund. ERISA, the regulations under ERISA issued by the United States
Department of Labor (the “DOL”) and opinions and other authority issued by the DOL and the
courts provide guidance that should be considered by fiduciaries of ERISA Plans prior to
investing in the Fund.
The following discussion of certain ERISA considerations is based on statutory authority and
judicial and administrative interpretations as of the date hereof and is designed only to provide
a general understanding of the basic issues. Accordingly, this discussion should not be
considered legal advice and the trustees and other fiduciaries of each ERISA Plan are
encouraged to consult their own legal advisors on these matters.
Fiduciary Duty of Investing Plans
A fiduciary considering investing assets of an Employee Plan (“plan assets”) in the Fund should
consult its legal adviser before making such an investment. Before authorizing an investment in
the Fund, any such fiduciary should, after considering the Employee Plan’s particular
circumstances, be satisfied that the investment of such plan assets in the Fund is appropriate
under the fiduciary standards of ERISA, including standards with respect to prudence,
diversification and compliance with the governing documents of the Employee Plan and its
related trust and the prohibited transaction provisions of ERISA and the Code.
Plan Assets
ERISA and the regulation issued by the DOL at 29 C.F.R. § 2510.3-101, as modified or deemed to
be modified by ERISA (the “Plan Assets Regulation”), define the term “plan assets” as applied
to entities in which a plan invests, directly or indirectly, such as the Fund. The Plan Assets
Regulation provides that when an ERISA Plan acquires an equity interest in an entity, and such
82
CONTROL NUMBER 257 - CONFIDENTIAL
equity interest is neither a publicly offered security nor a security issued by an investment
company registered under the Investment Company Act, the assets of the ERISA Plan include
not only the equity interest, but also include an undivided interest in the underlying assets of
the entity, unless an exception to this general rule applies.
Exceptions Under the Plan Assets Regulation
The Plan Assets Regulation provides several exceptions to the general rule of plan asset
treatment. Pursuant to one such exception, the assets of certain entities, such as the Fund, will
not be treated as plan assets if the entity is operated as a “venture capital operating company”
within the meaning of the Plan Assets Regulation (“VCOC”). Generally, for an entity to qualify
as a VCOC, at least fifty percent (50%) of its assets (excluding short-term investments made
pending long-term commitments or distribution to investors) valued at cost must be invested in
(a) “operating companies” with respect to which the entity has the direct contractual right to
participate substantially in, or to substantially influence the conduct of, the management of the
operating company and the entity must actually exercise such management rights with respect
to one or more such operating companies in the ordinary course of its business, or (b)
“derivative investments” (as defined in the Plan Assets Regulation) (the “Asset Test”). For the
purposes of qualifying as a VCOC, an “operating company” is defined as an entity that is
primarily engaged, directly or through a majority owned subsidiary or subsidiaries, in the
production or sale of a product or service other than the investment of capital, and includes a
“real estate operating company” as defined in the Plan Assets Regulation (but does not include
another VCOC). Determination as to whether an entity qualifies as a VCOC is made at the time
when the entity makes its first long-term investment (other than short-term investments made
pending long-term commitments) and thereafter during a ninety-day annual valuation period
each year, the first day of which shall begin no later than the anniversary of the entity’s first
long-term investment. In order for an entity to continue to qualify as a VCOC, the entity must
meet the Asset Test on at least one day during each such ninety-day annual valuation period.
Special rules apply to any wind-up of a VCOC when it enters its “distribution period” as
defined in the Plan Assets Regulation.
An additional exception applies when equity participation in the entity by benefit plan
investors is not “significant.” Equity participation in an entity by “benefit plan investors” (as
defined in Section 3(42) of ERISA) is “significant” on any date if, immediately after the most
recent acquisition or disposition of any equity interest in the entity, 25% or more of the value (in
the aggregate) of any class of equity interests in the entity is held by “benefit plan investors.”
For purposes of the 25% test, the term “benefit plan investors” includes ERISA Plans, certain
other retirement plans defined in and subject to Section 4975 of the Code (such as individual
retirement accounts), and entities or accounts deemed to hold “plan assets” due to an
investment in such entity or account by ERISA Plans or such other retirement plans (such as
insurance company general accounts). For the purposes of calculating the 25% threshold under
the Plan Assets Regulation, the value of any equity interest held by a person (other than a
“benefit plan investor”) who has discretionary authority or control with respect to the assets of
the entity or that provides investment advice for a fee (direct or indirect) with respect to such
assets (or an affiliate of such person) is disregarded.
The General Partner will use reasonable best efforts to conduct the affairs and operations of the
Fund in such a manner so that the assets of the Fund will not be treated as “plan assets” of any
83
CONTROL NUMBER 257 - CONFIDENTIAL
ERISA Plan for purposes of ERISA. In particular, the General Partner will use reasonable best
efforts to either (i) limit investment in the Fund by “benefit plan investors” to a level that would
not be considered “significant” under ERISA, or (ii) operate the Fund as a VCOC, or (iii) operate
the Fund in compliance with any other then-available exception to the general rule of plan asset
treatment. The General Partner has the authority to require a Limited Partner to withdraw from
the Fund (in whole or in part) where the General Partner determines that such withdrawal is
necessary to avoid having the Fund’s assets deemed to be “plan assets” subject to ERISA or
Section 4975 of the Code. Accordingly, the Fund is not expected to be deemed to be holding
“plan assets” subject to ERISA at any time.
Reporting
Benefit plan investors may be required to report certain compensation paid by the Fund (or by
third parties) to the Fund’s service providers as “reportable indirect compensation” on Schedule
C to the Form 5500 Annual Return (the “Form 5500”). To the extent any compensation
arrangements described herein constitute reportable indirect compensation, any such
descriptions are intended to satisfy the disclosure requirements for the alternative reporting
option for “eligible indirect compensation,” as defined for purposes of Schedule C to the Form
5500.
Additional Information
ERISA and its accompanying regulations are complex and, to a great extent, have not yet been
interpreted by the courts or the administrative agencies. This discussion does not purport to
constitute a thorough analysis of ERISA. Each prospective investor subject to ERISA should
consult with its own legal counsel concerning the implications under ERISA of an investment in
the Fund, and to confirm that such an investment will not constitute or result in a non-exempt
prohibited transaction or any other violation of an applicable requirement under ERISA.
“Governmental plans” and certain “church plans”, while not subject to the fiduciary
responsibility and prohibited transaction provisions of ERISA, may nevertheless be subject to
state or other federal laws that are substantially similar to the foregoing provisions of ERISA.
Decision-makers for any such plans should consult with their counsel before making an
investment in the Fund.
84
CONTROL NUMBER 257 - CONFIDENTIAL
XI. CERTAIN LEGAL & REGULATORY CONSIDERATIONS
Securities Act of 1933
The Limited Partner Interests described herein will not be registered under the Securities Act in
reliance upon the exemptions for transactions not involving a public offering. Each investor
will be required to make certain representations to the Fund, including that such investor is an
“accredited investor” within the meaning of Rule 501(a) under the Securities Act, that it is
acquiring a Limited Partner Interest in the Fund for its own account, for investment purposes
only and not with a view to resale or distribution, that it has received or has had access to all
information it deems relevant to evaluate the merits and risks of an investment in the Fund and
that it has the ability to bear the economic risk of an investment in the Fund. The Limited
Partner Interests described herein will constitute “restricted securities” under the Securities Act
and as such will be subject to certain restrictions on transferability. The Limited Partner
Interests may not be transferred or sold unless the Limited Partner Interests have been
registered under the Securities Act or an exemption from registration is available. It is not
contemplated that registration under the Securities Act or other securities laws will ever be
effected. The Limited Partner Interests are subject to further restrictions on transfer as
described in the Partnership Agreement.
This Memorandum is not a public offering “prospectus” and does not purport to describe or
otherwise address all material considerations relating to an investment in the Fund. Prior to
making an investment, prospective investors and their advisors are invited to ask questions of,
and obtain additional information from, the General Partner concerning the Limited Partner
Interests described herein, the terms and conditions of the offering and any other relevant
matters. Such information will be provided to the extent the General Partner possesses such
information or can acquire it without unreasonable effort or expense.
Any subscription is subject to a determination by counsel to the Fund that the subscription is in
compliance with applicable federal and state laws and regulations.
Investment Company Act of 1940
The Fund will not be registered as an investment company under the Investment Company Act
pursuant to an exemption set forth in Section 3(c)(1) and/or Section 3(c)(7) of the Investment
Company Act. The Fund will obtain appropriate representations and undertakings from all
purchasers of Limited Partner Interests, including restrictions on transfer, to ensure that such
purchasers meet the conditions of the exemption. Section 3(c)(7) of the Investment Company
Act requires that each prospective purchaser be a “qualified purchaser” within the meaning of
Section 2(a)(51) of the Investment Company Act. Information with respect to such requirements
for “qualified purchaser” status will be included in the Fund’s Subscription Agreement. The
General Partner is not registered as a broker-dealer under the Exchange Act, or with the NASD,
and is consequently not subject to certain record keeping and specific business practice
provisions of the Exchange Act and the rules of the NASD.
85
CONTROL NUMBER 257 - CONFIDENTIAL
Investment Advisers Act of 1940
Neither the Management Company nor the General Partner is currently registered as an
investment adviser under the Advisers Act. By virtue of being exempt from the registration
requirements of the Advisers Act, the Management Company and the General Partner are not
subject to the performance fee restrictions and certain other restrictions contained in the
Advisers Act, and the investors in the Fund will not be afforded the protections provided under
the Advisers Act to clients of advisors that are registered under the Advisers Act. The General
Partner, the Management Company or an affiliate thereof may in the future register as an
investment adviser under the Advisers Act to the extent required under the Advisers Act.
To the maximum extent permitted by applicable law, the General Partner and the Partnership
(together with their respective related persons) hereby disclaim any duties, obligations, or
status as an advisor, finder, agent, broker or dealer on behalf or in respect of any person in
connection with such person’s actual or proposed investment in the Partnership.
Compliance With Anti-Money Laundering Requirements
In response to increased regulatory requirements with respect to the sources of funds used in
investments and other activities, the General Partner may require prospective investors to
provide documentation verifying, among other things, such investor’s (and any of its beneficial
owners’) identities and source of funds used to purchase its Limited Partner Interest in the
Fund. The General Partner may decline to accept a subscription if this information is not
provided or on the basis of such information that is provided.
Each prospective investor and Limited Partner will be required to make representations that
such prospective investor or Limited Partner is not a prohibited country, territory, individual or
entity listed on the U.S. Department of Treasury Office of Foreign Assets Control (“OFAC”)
website and that it is not directly or indirectly affiliated with any country, territory, individual
or entity named on an OFAC list or prohibited by any OFAC sanctions programs. Such
prospective investor or Limited Partner will also represent that amounts contributed by it to the
Fund were not directly or indirectly derived from activities that may contravene U.S. Federal,
state or international laws and regulations, including, without limitation, anti-money
laundering laws and regulations.
Requests for documentation and additional information may be made at any time during which
an investor holds a Limited Partner Interest in the Fund. The General Partner will take such
steps as it determines are necessary to comply with applicable law, regulations, orders,
directives or special measures to implement anti-money laundering laws, which steps may
include the forced sale or withdrawal of an Interest. In addition, the Fund could be required to
disclose information pertaining to prospective investors subscribing for an interest to
governmental, regulatory or other authorities or to financial intermediaries or engage in due
diligence or take other related actions in the future.
Pay-to-Play Laws, Regulations and Policies
In light of recent scandals involving money managers, a number of states and municipal
pension plans have adopted so-called “pay-to-play” laws, regulations or policies which
86
CONTROL NUMBER 257 - CONFIDENTIAL
prohibit, restrict or require disclosure of payments to (and/or certain contacts with) state
officials by individuals and entities seeking to do business with state entities, including
investments by public retirement funds. The SEC also has recently adopted rules that, among
other things, prohibit an investment adviser from providing advisory services for compensation
with respect to a government plan investor for two years after the adviser or certain of its
executives or employees make a contribution to certain elected officials or candidates. If the
Management Company, the General Partner, their employees or affiliates fail to comply with
such pay-to-play laws, regulations or policies, such non-compliance could have an adverse
effect on the Fund by, for example, providing the basis for the withdrawal of the affected
government plan investor.
87
CONTROL NUMBER 257 - CONFIDENTIAL
XII. ADDITIONAL INFORMATION
Legal Counsel
Proskauer Rose LLP (“Proskauer Rose”) acts as counsel to the Fund, the General Partner and
the Management Company in connection with the organization of the Fund and the offering of
Limited Partner Interests therein. Proskauer Rose also acts as counsel to the Fund, the General
Partner, the Management Company and their affiliates in connection with investments and
ongoing operations of the Fund and other matters. In connection with the offering of Limited
Partner Interests and subsequent advice to the Fund, the General Partner, the Management
Company and their affiliates, Proskauer Rose will not be representing the Limited Partners of
the Fund. No independent counsel has been retained to represent the Limited Partners of the
Fund. Investors are advised to seek their own counsel in connection with a prospective
investment in the Fund.
Accounting and Reporting
KPMG LLP, independent certified public accountants, will report upon the financial statements
of the Fund for each fiscal year.
Availability of Principal Agreements
Prior to the consummation of the offering, the Fund will provide to each prospective investor
and such investors’ representatives and advisers, the opportunity to ask questions regarding the
terms and conditions of this offering and to obtain any additional information required. Any
questions or requests for information should be directed to Ron Hunt, New Leaf Venture
Partners, L.L.C., Times Square Tower, 7 Times Square, Suite 3502, New York, New York 10036
(T: 646-871-6400).
No other persons have been authorized to give information or to make any representations
concerning this offering, and if given or made, such other information or representations must
not be relied upon as having been authorized by the Fund.
Copies of the Partnership Agreement and Subscription Agreement for the purchase of Limited
Partner Interests will be made available upon request.
Prospective investors are urged to request any additional information they may consider
necessary in making an informed investment decision. During the course of the transaction and
prior to sale, each purchaser of a Limited Partner Interest is invited to ask questions of the Fund
Managers concerning the terms and conditions of the offering and to obtain any additional
information necessary or to verify the accuracy of the information furnished in the
Memorandum.
88
CONTROL NUMBER 257 - CONFIDENTIAL
XIII. APPENDICES
Appendix 1
Listing of Investments by Fund
New Leaf Ventures II, L.P.
$ amounts in millions, as of March 31, 2014
Please refer to Endnotes I,J,K,L,M and N in this Appendix.
Gross
Multiple
(Realized
Portion)
Gross
Multiple
(Total)
Vintage
Year Total Cost
Realized
Value
Unrealized
Value
Total
Value
Company
Sector
Gross IRR
Realized or Partially Realized Investments
Acadia Phamaceuticals, Inc. Therapeutics 2012 $ 7.7 $ 19.4 $ - $ 19.4 2.51 2.51 581.9%
Ambit Biosciences, Inc. Therapeutics 2013 $ 10.4 $ 11.1 $ - $ 11.1 1.06 1.06 13.1%
Array Biopharma Inc. Therapeutics 2012 $ 9.0 $ 20.3 $ - $ 20.3 2.25 2.25 74.0%
Audax Health Solutions, Inc. Convergence 2011 $ 3.8 $ 12.5 $ 1.6 $ 14.1 - 3.68 105.6%
Chimerix, Inc. Therapeutics 2011 $ 20.6 $ 27.0 $ 44.9 $ 71.9 3.07 3.50 57.7%
Epizyme, Inc. Therapeutics 2013 $ 3.4 $ 6.8 $ - $ 6.8 2.03 2.03 1583.0%
Glumetrics, Inc. Diagnostics & Infrastructure 2008 $ 10.7 $ - $ - $ -
- - NM
Intercept Pharmaceuticals, Inc. Therapeutics 2012 $ 10.5 $ 34.1 $ - $ 34.1 3.24 3.24 323.6%
Kalidex Pharmaceuticals, Inc. Therapeutics 2011 $ 2.4 $ 0.2 $ - $ 0.2 0.07 0.07 -91.6%
MEI Pharma, Inc. Therapeutics 2012 $ 9.0 $ 10.2 $ 35.8 $ 46.0 2.94 5.12 423.2%
Presidio Pharmaceuticals, Inc. Therapeutics 2009 $ 11.0 $ - $ - $ -
- - NM
Synageva BioPharma Therapeutics 2009 $ 10.4 $ 75.7 $ - $ 75.7 7.30 7.30 103.3%
Worldheart, Inc. Healthcare Devices 2008 $ 17.0 $ 1.8 $ - $ 1.8 0.11 0.11 NM
Total Realized or Partially Realized Investments $ 125.9 $ 219.2 $ 82.3 $ 301.5 2.01 2.39 40.6%
Advanced Cell Diagnostics, Inc. Diagnostics & Infrastructure 2012 $ 9.0 $ - $ 9.0 $ 9.0 - 1.00 -0.4%
Afferent Pharmaceuticals, Inc. Therapeutics 2009 $ 11.2 $ - $ 11.2 $ 11.2 - 1.00 0.0%
Altura Medical, Inc. Healthcare Devices 2010 $ 10.7 $ - $ 8.3 $ 8.3 - 0.77 -12.3%
AwarePoint Corporation Convergence 2011 $ 12.8 $ - $ 14.1 $ 14.1 - 1.10 5.7%
Calchan Holdings LTD Therapeutics 2011 $ 5.2 $ - $ - $ -
- - NM
CardioKinetix, Inc. Healthcare Devices 2011 $ 12.0 $ - $ 12.0 $ 12.0 - 1.00 0.0%
Convergence Pharmaceuticals, Ltd Therapeutics 2010 $ 7.4 $ - $ 7.6 $ 7.6 - 1.03 1.0%
Durata Therapeutics, Inc. Therapeutics 2009 $ 25.0 $ - $ 40.8 $ 40.8 - 1.63 21.2%
iRhythm Technologies, Inc. Convergence 2011 $ 11.1 $ - $ 11.6 $ 11.6 - 1.04 1.6%
Karos Pharmaceuticals, Inc. Therapeutics 2010 $ 7.6 $ 0.1 $ 7.5 $ 7.6 - 1.00 0.0%
Karus Therapeutics Ltd Therapeutics 2012 $ 5.8 $ - $ 5.8 $ 5.8 - 1.00 0.0%
Karyopharm Therapeutics, Inc. Therapeutics 2013 $ 1.0 $ - $ 4.2 $ 4.2 - 4.17 1638.7%
Kitcheck, Inc. Convergence 2013 $ 3.7 $ - $ 3.7 $ 3.7 - 1.00 0.0%
Neuronetics, Inc. Healthcare Devices 2009 $ 20.3 $ - $ 21.9 $ 21.9 - 1.08 2.0%
NY Digital Health, LLC Convergence 2012 $ 0.4 $ - $ 0.4 $ 0.4 - 1.00 0.1%
Oxford Immunotec Diagnostics & Infrastructure 2009 $ 11.3 $ - $ 27.1 $ 27.1 - 2.41 28.3%
Principia BioPharma, Inc. Therapeutics 2011 $ 9.7 $ - $ 9.7 $ 9.7 - 1.00 0.0%
Spiracur, Inc Healthcare Devices 2009 $ 12.0 $ - $ 8.5 $ 8.5 - 0.70 -8.4%
TigerText, Inc. Convergence 2012 $ 4.6 $ 0.0 $ 5.6 $ 5.7 - 1.25 22.6%
Treato Pharma Convergence 2013 $ 3.0 $ - $ 3.0 $ 3.0 - 1.00 0.0%
Truveris, Inc. Convergence 2012 $ 6.5 $ - $ 6.5 $ 6.5 - 1.00 0.0%
Versartis, Inc. Therapeutics 2011 $ 21.2 $ - $ 93.6 $ 93.6 - 4.41 129.4%
Public Investments Therapeutics 2011 $ 20.6 $ 13.1 $ 29.5 $ 42.6 - 2.07 42.5%
Total Unrealized Investments $ 232.1 $ 13.2 $ 341.4 $ 354.6 - 1.53 20.4%
Total New Leaf Ventures II, L.P. Investments $ 358.0 $ 232.4 $ 423.7 $ 656.1 2.01 1.83 29.6%
89
CONTROL NUMBER 257 - CONFIDENTIAL
New Leaf Ventures I, L.P.
$ amounts in millions, as of March 31, 2014
Please refer to Endnotes I,J,K,L,M and N in this Appendix.
Gross
Multiple
Gross
Vintage
Realized
Unrealized
Total
(Realized
Multiple
Company
Sector
Year Total Cost
Value
Value
Value
Portion)
(Total)
Gross IRR
Realized or Partially Realized Investments
Aesthetic Sciences Corporation Healthcare Devices 2006 $ 4.1 $ - $ - $ -
- - NM
Artisan Pharma, Inc. Therapeutics 2006 $ 10.8 $ - $ - $ -
- - NM
Aviir, Inc. Diagnostics & Infrastructure 2007 $ 16.3 $ 0.9 $ - $ 0.9 0.05 0.05 NM
Barrier Therapeutics, Inc. Therapeutics 2006 $ 8.2 $ 6.4 $ - $ 6.4 0.78 0.78 -11.8%
BioRelix, Inc. Therapeutics 2007 $ 6.3 $ - $ - $ -
- - NM
Cerexa, Inc. Therapeutics 2005 $ 8.0 $ 43.4 $ - $ 43.4 5.42 5.42 197.3%
CN Therapeutics, Inc. Therapeutics 2006 $ 0.1 $ - $ - $ -
- - NM
Interlace Medical, Inc. Healthcare Devices 2005 $ 7.8 $ 67.3 $ 0.1 $ 67.4 8.62 8.64 84.4%
Oriel Therapeutics, Inc. Therapeutics 2007 $ 11.1 $ 18.8 $ 12.2 $ 31.0 1.70 2.80 49.9%
Pearl Therapeutics, Inc. Therapeutics 2007 $ 28.9 $ 72.3 $ 17.3 $ 89.6 2.50 3.10 33.1%
Proteogenix, Inc. Diagnostics & Infrastructure 2007 $ 9.4 $ 0.8 $ - $ 0.8 0.08 0.08 NM
Stromedix, Inc. Therapeutics 2008 $ 10.7 $ 19.2 $ 22.5 $ 41.7 1.79 3.89 42.0%
Transcept Pharmaceuticals, Inc Therapeutics 2005 $ 15.6 $ 7.1 $ - $ 7.1 0.46 0.46 -11.5%
Total Realized or Partially Realized Investments $ 13.7 $ 236.2 $ 52.1 $ 288.3 1.72 2.10 27.5%
Unrealized Investments
Access Closure, Inc. Healthcare Devices 2006 $ 24.7 $ - $ 35.4 $ 35.4 - 1.43 6.1%
Concert Pharmaceuticals, Inc. Therapeutics 2006 $ 6.2 $ - $ 6.8 $ 6.8 - 1.11 1.5%
Direct Flow Medical, Inc. Healthcare Devices 2005 $ 13.0 $ - $ 20.2 $ 20.2 - 1.56 7.1%
IlluminOss Medical, Inc. Healthcare Devices 2008 $ 10.1 $ - $ 9.7 $ 9.7 - 0.97 -0.8%
Intarcia Therapeutics, Inc. Therapeutics 2007 $ 36.9 $ - $ 186.9 $ 186.9 - 5.06 39.9%
Relypsa, Inc. Therapeutics 2007 $ 23.7 $ - $ 61.8 $ 61.8 - 2.60 27.5%
ReShape Medical Healthcare Devices 2006 $ 13.6 $ - $ 13.7 $ 13.7 - 1.01 0.2%
Tioga Pharmaceuticals, Inc. Therapeutics 2005 $ 19.6 $ - $ 7.2 $ 7.2 - 0.37 -14.6%
VaxInnate, Inc. Therapeutics 2006 $ 19.4 $ - $ 19.6 $ 19.6 - 1.01 0.2%
Total Unrealized Investments $ 167.2 $ - $ 361.4 $ 361.4 - 2.16 15.2%
Total New Leaf Ventures I, L.P. Investments $ 304.5 $ 236.2 $ 413.5 $ 649.7 1.72 2.13 19.1%
90
CONTROL NUMBER 257 - CONFIDENTIAL
Sprout Capital IX, L.P. (Healthcare Technology Portfolio)
$ amounts in millions, as of March 31, 2014
Please refer to Endnotes I,J,K,L,M and N in this Appendix.
Gross
Multiple
(Realized
Portion)
Gross
Multiple
(Total)
Vintage
Year
Total
Cost
Realized
Value
Unrealized
Value
Total
Value
Company
Sector
Gross IRR
Realized or Partially Realized Investments
Adolor Corporation Therapeutics 2000 $ 29.3 $ 23.5 $ - $ 23.5 0.80 0.80 -4.2%
Affymax, Inc. Therapeutics 2001 $ 37.2 $ 17.9 $ - $ 17.9 0.48 0.48 -11.3%
Aspire Medical Healthcare Devices 2004 $ 7.4 $ 0.6 $ - $ 0.6 0.07 0.07 NM
Aspreva Pharmaceuticals Therapeutics 2004 $ 23.2 $ 151.7 $ - $ 151.7 6.54 6.54 95.4%
Aureon Biosciences, Inc. Diagnostics & Infrastructure 2001 $ 34.1 $ 0.8 $ - $ 0.8 0.02 0.02 NM
Auxilium Pharmaceuticals, Inc. Therapeutics 2003 $ 23.1 $ 106.3 $ - $ 106.3 4.60 4.60 37.4%
Corixa Corporation Therapeutics 2003 $ 42.7 $ 31.1 $ - $ 31.1 0.73 0.73 -13.2%
eHealth, Inc. Convergence 2001 $ 12.1 $ 58.4 $ - $ 58.4 4.83 4.83 26.8%
Epicor Medical, Inc. Healthcare Devices 2001 $ 9.3 $ 41.8 $ - $ 41.8 4.49 4.49 78.7%
ePocrates, Inc. Convergence 2000 $ 17.2 $ 53.2 $ - $ 53.2 3.10 3.10 10.8%
Focus Technologies, Inc. Diagnostics & Infrastructure 2000 $ 32.3 $ 84.1 $ - $ 84.1 2.61 2.61 17.8%
Gryphon Therapeutics Therapeutics 2002 $ 13.3 $ 0.2 $ - $ 0.2 0.01 0.01 -60.7%
Ilypsa, Inc. (fka Symyx) Therapeutics 2003 $ 15.8 $ 109.4 $ - $ 109.4 6.91 6.91 78.0%
ISTA Pharmaceuticals, Inc. Therapeutics 2002 $ 42.9 $ 84.6 $ - $ 84.6 1.97 1.97 10.8%
Kalypsys Therapeutics 2002 $ 27.4 $ 1.1 $ - $ 1.1 0.05 0.04 -29.7%
Lathian Systems, Inc Convergence 2001 $ 7.1 $ 0.0 $ - $ 0.0 0.00 0.00 NM
Metabasis Therapeutics, Inc. Therapeutics 2001 $ 23.8 $ 1.1 $ - $ 1.1 0.05 0.05 NM
NeuroVista Corp. Healthcare Devices 2004 $ 8.8 $ - $ - $ -
- - NM
NxStage Medical, Inc. Healthcare Devices 2001 $ 21.6 $ 45.1 $ - $ 45.1 2.09 2.09 9.4%
Nyco Holdings ApS Therapeutics 2002 $ 47.0 $ 222.8 $ 2.7 $ 225.5 4.74 4.80 33.6%
Pharsight Corporation Convergence 2002 $ 2.8 $ 6.4 $ - $ 6.4 2.31 2.31 16.2%
Phylos, Inc. Therapeutics 2000 $ 10.2 $ - $ - $ -
- - NM
Progen PharmaInc. (Cellgate) Therapeutics 2003 $ 21.4 $ 0.4 $ - $ 0.4 0.02 0.02 -49.9%
Protedyne Corporation Diagnostics & Infrastructure 2001 $ 21.9 $ 3.7 $ - $ 3.7 0.17 0.17 NM
Radiant Medical, Inc. Healthcare Devices 2000 $ 18.6 $ 0.5 $ - $ 0.5 0.02 0.02 NM
Sirna Therapeutics, Inc. Therapeutics 2003 $ 27.2 $ 219.3 $ - $ 219.3 8.06 8.06 91.0%
Spiration, Inc. Healthcare Devices 2002 $ 17.4 $ 14.5 $ - $ 14.5 0.84 0.84 -2.4%
Tolerx, Inc. Therapeutics 2002 $ 11.0 $ 1.5 $ - $ 1.5 0.14 0.14 -23.0%
Triple Point Healthcare Devices 2004 $ 0.3 $ 0.1 $ - $ 0.1 0.28 0.28 -48.3%
VascA, Inc. Healthcare Devices 2001 $ 12.8 $ 0.4 $ - $ 0.4 0.03 0.03 NM
Visiogen, Inc. Healthcare Devices 2001 $ 17.9 $ 90.0 $ - $ 90.0 5.04 5.04 35.4%
VNUS Medical Technologies, Inc. Healthcare Devices 2001 $ 8.0 $ 22.1 $ - $ 22.1 2.76 2.76 15.4%
Total Realized or Partially Realized Investments $ 645.0 $ 1,392.4 $ 2.7 $ 1,395.1 2.18 2.16 16.8%
Unrealized Investments
Expression Diagnostics (XDx) Diagnostics & Infrastructure 2004 $ 16.6 $ 0.0 $ 3.8 $ 3.8 NA 0.23 -19.4%
Intrinsic Therapeutics, Inc. Healthcare Devices 2002 $ 26.6 $ 0.0 $ - $ 0.0 NA 0.00 NM
Labcyte, Inc. (fka Picoliter) Diagnostics & Infrastructure 2002 $ 10.0 $ - $ 10.6 $ 10.6 NA 1.06 0.5%
Relypsa, Inc. Therapeutics 2007 $ 20.3 $ 0.0 $ 50.4 $ 50.4 NA 2.49 23.9%
Sopherion Therapeutics, Inc. Therapeutics 2004 $ 15.1 $ - $ 0.0 $ 0.0 NA 0.00 NM
Spinewave Healthcare Devices 2004 $ 10.5 $ - $ 3.7 $ 3.7 NA 0.35 -11.9%
Total Unrealized Investments $ 99.1 $ 0.0 $ 68.4 $ 68.4 - 0.69 -5.0%
Total Sprout Capital IX, L.P. (HCT) Investments $ 744.1 $ 1,392.4 $ 71.1 $ 1,463.6 2.18 1.97 14.8%
91
CONTROL NUMBER 257 - CONFIDENTIAL
Sprout Capital VIII, L.P. (Healthcare Technology Portfolio)
$ amounts in millions, as of March 31, 2014
Please refer to Endnotes I,J,K,L,M and N in this Appendix.
Company
Sector
Vintage
Year
Total
Cost
Realized
Value
Unrealize
d Value
Total
Value
Gross
Multiple
(Realized
Portion)
Gross
Multiple
(Total)
Gross IRR
All Investments
Allos Therapeutics, Inc. Therapeutics 1998 $ 3.5 $ 9.8 $ - $ 9.8 2.83 2.83 47.6%
AviaHealth, Inc. (fka GoToMyDoc) Convergence 2000 $ 2.0 $ 0.0 $ - $ 0.0 0.02 0.02 -92.8%
Cephalon, Inc. Therapeutics 1999 $ 5.1 $ 25.6 $ - $ 25.6 5.01 5.01 293.2%
Charles River Laboratories Diagnostics & Infrastructure 1999 $ 4.3 $ 22.7 $ - $ 22.7 5.23 5.23 121.6%
Deltagen, Inc. Therapeutics 1998 $ 19.9 $ 4.1 $ - $ 4.1 0.20 0.20 -30.3%
eHealth, Inc. Convergence 1999 $ 11.3 $ 20.3 $ - $ 20.3 1.80 1.80 7.7%
Gantech International, Inc. Therapeutics 1999 $ 2.8 $ - $ - $ -
- - NM
Keravision Inc. Healthcare Devices 1998 $ 10.2 $ - $ - $ -
- - NM
Microban International, Ltd. Diagnostics & Infrastructure 1999 $ 14.8 $ 39.7 $ - $ 39.7 2.68 2.68 14.5%
Nuvelo, Inc. (fka Variagenics, Inc.) Therapeutics 1999 $ 11.8 $ 24.8 $ - $ 24.8 2.10 2.10 13.9%
NxStage Medical, Inc. Healthcare Devices 1999 $ 17.8 $ 50.3 $ - $ 50.3 2.83 2.83 14.2%
Phase Forward Incorporated Convergence 1998 $ 9.0 $ 38.6 $ - $ 38.6 4.31 4.31 22.4%
SGX, Inc. Therapeutics 2000 $ 15.0 $ 1.6 $ - $ 1.6 0.11 0.11 -35.3%
Skila, Inc. Convergence 1998 $ 9.0 $ 0.0 $ - $ 0.0 0.00 0.00 NM
Spotfire, Inc. Convergence 1999 $ 9.9 $ 24.8 $ - $ 24.8 2.50 2.50 12.7%
VascA, Inc. Healthcare Devices 1999 $ 7.3 $ 0.1 $ - $ 0.1 0.02 0.02 NM
VNUS Medical Technologies, Inc. Healthcare Devices 1999 $ 3.8 $ 11.1 $ - $ 11.1 2.90 2.90 12.7%
Total Sprout Capital VIII, L.P. (HCT) Investments $ 157.5 $ 273.7 $ - $ 273.7 1.74 1.74 10.1%
92
CONTROL NUMBER 257 - CONFIDENTIAL
Sprout Capital VII, L.P. (Healthcare Technology Portfolio)
$ amounts in millions, as of March 31, 2014
Please refer to Endnotes I,J,K,L,M and N in this Appendix.
Gross
Multiple
Gross
Vintage
Total
Realized
Unrealize
Total
(Realized
Multiple
Company
Sector
Year
Cost
Value
d Value
Value
Portion)
(Total)
Gross IRR
All Investments
Adeza Biomedical Corporation Diagnostics & Infrastructure 1996 $ 4.8 $ 27.7 $ - $ 27.7 5.75 5.75 20.1%
Allos Therapeutics, Inc. Therapeutics 1998 $ 2.6 $ 7.5 $ - $ 7.5 2.87 2.87 38.8%
Aradigm Corporation Therapeutics 1994 $ 2.8 $ 15.3 $ - $ 15.3 5.45 5.45 39.3%
AtheroGenics, Inc. Therapeutics 1996 $ 3.8 $ 7.1 $ - $ 7.1 1.87 1.87 13.7%
AviaHealth, Inc. (fka GoToMyDoc) Convergence 2000 $ 1.6 $ 0.0 $ - $ 0.0 0.02 0.02 -92.8%
CombiChem, Inc. Therapeutics 1995 $ 3.9 $ 9.4 $ - $ 9.4 2.43 2.43 26.5%
Connetics Corp. (fka Connective) Therapeutics 1995 $ 6.3 $ 14.2 $ - $ 14.2 2.24 2.24 15.5%
FemRX Healthcare Devices 1995 $ 2.2 $ 3.2 $ - $ 3.2 1.47 1.47 11.6%
Healtheon/WebMD (Sapient) Convergence 1996 $ 3.0 $ 39.8 $ - $ 39.8 13.42 13.42 190.1%
Hearten Medical Healthcare Devices 1997 $ 1.7 $ - $ - $ -
- - NM
IntraBiotics Pharmaceuticals Therapeutics 1994 $ 3.9 $ 7.3 $ - $ 7.3 1.89 1.89 13.4%
Lynx Therapeutics, Inc. Diagnostics & Infrastructure 1995 $ 1.1 $ 2.9 $ - $ 2.9 2.72 2.72 25.4%
NxStage Medical, Inc. Healthcare Devices 2003 $ 3.3 $ 18.9 $ - $ 18.9 5.80 5.80 20.9%
Orquest, Inc. Healthcare Devices 1995 $ 5.5 $ 7.8 $ - $ 7.8 1.42 1.42 6.1%
Pathology Partners Diagnostics & Infrastructure 1997 $ 3.3 $ 22.4 $ - $ 22.4 6.82 6.82 38.2%
Pharsight Corporation Convergence 1997 $ 4.9 $ 7.3 $ - $ 7.3 1.48 1.48 6.0%
Point Biomedical Diagnostics & Infrastructure 1997 $ 9.2 $ 0.0 $ - $ 0.0 0.00 0.00 NM
Prometheus Laboratories, Inc. Therapeutics 1998 $ 7.8 $ 38.8 $ - $ 38.8 5.00 5.00 13.4%
Salient Interventional Systems Healthcare Devices 1998 $ 2.7 $ 0.0 $ - $ 0.0 0.00 0.00 NM
Skila, Inc. Convergence 1998 $ 5.2 $ 0.2 $ - $ 0.2 0.05 0.05 NM
TriPath Imaging, Inc. Diagnostics & Infrastructure 1996 $ 4.9 $ 13.9 $ - $ 13.9 2.83 2.83 17.2%
VascA, Inc. Healthcare Devices 1996 $ 6.5 $ 0.1 $ - $ 0.1 0.02 0.02 NM
VNUS Medical Technologies, Inc. Healthcare Devices 1997 $ 4.3 $ 15.7 $ - $ 15.7 3.66 3.66 12.1%
Xcyte Therapies, Inc. (CDR) Therapeutics 1996 $ 6.1 $ 0.5 $ - $ 0.5 0.08 0.08 -33.6%
Total Sprout Capital VII, L.P. (HCT) Investments $ 101.2 $ 260.0 $ - $ 260.0 2.57 2.57 18.6%
Sprout Growth II, L.P. (Healthcare Technology Portfolio)
$ amounts in millions, as of March 31, 2014
Please refer to Endnotes I,J,K,L,M and N in this Appendix.
Gross
Multiple
Gross
Vintage
Total
Realized
Unrealize
Total
(Realized
Multiple
Company
Sector
Year
Cost
Value
d Value
Value
Portion)
(Total)
Gross IRR
All Investments
Adeza Biomedical Corporation Diagnostics & Infrastructure 1996 $ 3.9 $ 22.7 $ - $ 22.7 5.75 5.75 20.1%
AviaHealth, Inc. (fka GoToMyDoc) Convergence 2000 $ 1.3 $ 0.0 $ - $ 0.0 0.02 0.02 -92.8%
Cephalon, Inc. Therapeutics 1999 $ 4.1 $ 20.5 $ - $ 20.5 5.01 5.01 293.2%
Connetics Corp. (fka Connective) Therapeutics 1997 $ 3.2 $ 6.5 $ - $ 6.5 2.05 2.05 16.7%
IVAC Holdings, Inc. Healthcare Devices 1995 $ 0.9 $ 3.0 $ - $ 3.0 3.31 3.31 121.9%
Pathology Partners Diagnostics & Infrastructure 1997 $ 2.7 $ 18.3 $ - $ 18.3 6.82 6.82 38.1%
Total Sprout Growth II, L.P. (HCT) Investments $ 16.1 $ 70.9 $ - $ 70.9 4.42 4.42 43.8%
93
CONTROL NUMBER 257 - CONFIDENTIAL
Appendix 2
All Funds Gross and Net Returns
$ amounts in millions, as of March 31, 2014
Gross Basis
Gross Cost and Value Gross Multiple Gross IRR
Total Cost Total Realized Unrealized Realized Overall Realized Overall
New Leaf Ventures II, L.P. (2008) $358.0 $656.1 $232.4 $423.7 2.01x 1.83x 33.3% 29.6%
New Leaf Ventures I, L.P. (2005) $304.5 $649.7 $236.2 $413.5 1.72x 2.13x 22.9% 19.1%
Sprout Capital IX, L.P. (2000) (Healthcare Technology) $744.1 $1,463.6 $1,392.4 $71.1 2.18x 1.97x 16.8% 14.8%
Sprout Capital VIII, L.P. (1998) (Healthcare Technology) $157.5 $273.7 $273.7 $0.0 1.74x 1.74x 10.1% 10.1%
Sprout Capital VII, L.P. (1995) (Healthcare Technology) $101.2 $260.0 $260.0 $0.0 2.57x 2.57x 18.6% 18.6%
Sprout Growth II, L.P. (1995) (Healthcare Technology) $16.1 $70.9 $70.9 $0.0 4.42x 4.42x 43.8% 43.8%
Net Basis
Net Cost and Value
Net Metrics Multiples
Fund Size
Paid-In
Capital
Distributed
Value
Equity In
Fund
Total
Value
Distributed /
Paid In
Total Value /
Paid In
Total Value
IRR
New Leaf Ventures II, L.P. (2008) $450.0 $407.3 $204.2 $386.9 $591.1 0.50x 1.45x 16.7%
New Leaf Ventures I, L.P. (2005) $310.0 $302.6 $154.7 $374.8 $529.5 0.51x 1.75x 12.0%
Sprout Capital IX, L.P. (2000) (Healthcare Technology) $690.0 $690.0 $1,071.5 $71.1 $1,142.7 1.55x 1.66x 9.3%
Sprout Capital VIII, L.P. (1998) (Healthcare Technology) $147.1 $147.1 $218.7 $0.0 $218.7 1.49x 1.49x 6.0%
Sprout Capital VII, L.P. (1995) (Healthcare Technology) $95.2 $95.2 $207.0 $0.0 $207.0 2.17x 2.17x 12.0%
Sprout Growth II, L.P. (1995) (Healthcare Technology) $15.3 $15.3 $56.3 $0.0 $56.3 3.69x 3.69x 28.9%
94
CONTROL NUMBER 257 - CONFIDENTIAL
Methodology Used to Calculate Net Returns Numbers for Sprout Healthcare Technology
Portfolios
Estimated net returns numbers for the managed healthcare portfolio of the Sprout funds are
based on New Leaf’s calculations of synthetic net returns. The synthetic net returns for the
healthcare technology investments in each Sprout Fund are an estimate of what the net returns
would have been for these investments, if they had been managed in a standalone healthcare
technology venture capital fund structure rather than one set of investments as part of a larger,
diversified venture capital fund. The synthetic net returns were computed assuming a fund
size required to fund 100% of the total cost of the healthcare investments in each of the Sprout
funds using both called and recycled capital, a management fee of 2% payable quarterly and a
carried interest. The net return reflects reinvestment of certain proceeds, gains and other
proceeds by the Sprout healthcare portfolio synthetic funds to the extent permitted under the
partnership governing documents. A detailed example of the calculation is below.
Sprout IX: Total actual HCT investments of $740M; 2% management fees,
resulting in $120M of management fees and expenses from inception-to-date;
25% carried interest; Standalone fund size of $690M ($735M investments with
cash recycling of 6%); Total realizations have been $1,375M and total remaining
value is $50M. Assumes $130M in total carried interest to GPs already paid out;
Yields Total Distributed to LPs of $1,075M ($1,375M - $120M fees - $130M carry -
$50M recycling) / $690M = 1.56x; Yields Total Remaining to LPs of $50M /
$690M = 0.07x
95
CONTROL NUMBER 257 - CONFIDENTIAL
Appendix 3
PME+ Methodology
Public Market Equivalent (“PME+”) is used to compare the net performance of each of the
Sprout HC synthetic funds and NLV funds to the performance of a same size, hypothetical
investment in a fund that tracked a public market index. The investments in the hypothetical
public market index funds have identical cash inflow schedules and proportionately
comparable cash outflow schedules. The cash outflow schedules are set so that the remaining
equity value of the public equivalent fund is exactly equal to the remaining equity value of the
benchmarked private equity fund at the end of the benchmarking period. The analysis is
presented to illustrate the comparative returns a limited partner would have generated by
investing in the hypothetical public market index fund at the same time and in the same
amounts as had been invested in each of the NLV or Sprout (HC portion only) synthetic funds.
The NLV or Sprout HC funds are presented as net, which includes the impact of management
fees, expenses, and carried interest. The public market index funds do not have any impact of
fees or carried interest. A more detailed description of the PME+ methodology used is available
in: Rouvinez, Christophe. “Asset Class: Beating the Public Market.” Private Equity
International. January 2003. 26-28
96
CONTROL NUMBER 257 - CONFIDENTIAL
Appendix 5
ENDNOTES
Except as otherwise expressly noted, all performance information contained herein, including
rates of return, is as of March 31, 2014 and is unaudited. The performance information is based
on the cumulative invested capital, cumulative cash dividends and realized and unrealized
sales proceeds in portfolio companies. Where designated as “gross”, the performance
information is presented on a gross basis with regard to expenses and does not reflect
deductions for any management fees, the general partner’s carried interest or other expenses.
Where designated as “net”, the performance information is presented on a net basis after giving
effect to management fees, the general partner’s carried interest and other expenses. Please
refer to Section III: “Summary of Historical Investment Performance” and the endnotes below
for a more detailed description of the performance of the NLV-I, NLV-II and the Sprout Funds.
An investment in the Fund does not represent an interest in any indicated investment or any
investment portfolio of any related or other investment fund, including any investment or fund
managed by the Fund Managers. Disclosure of past performance herein is for informational
purposes only and is not indicative of future results.
A The financial data contained herein relating to the valuations and investment performance of
NLV-I, NLV-II, the Sprout Funds and their investments (including the I.C. portfolio thereof)
are estimates prepared by NLV as of March 31, 2014, and have not been audited. The vintage
year of each fund represents the first year that an investment in a portfolio company was
either committed to or funded. While NLV’s valuations of unrealized investments are based
on assumptions that NLV believes are reasonable under the circumstances, the actual realized
returns on unrealized investments will depend on, among other factors, future operating
results, the value of the assets and market conditions at the time of disposition, any related
transaction costs and the timing and manner of the sale, all of which may differ from the
assumptions on which the valuations used in the prior performance data contained herein are
based. Accordingly, the actual realized returns on these unrealized investments may differ
materially and adversely from the (assumed) returns indicated herein. Past performance is
not indicative of future results. There can be no assurance that the Fund will achieve results
comparable to those shown herein, will be able to avoid losses or will be able to achieve its
investment objectives. Except as specifically noted, all performance information contained
herein is on a “gross” basis before giving effect to management fees, the general partner’s
carried interest, taxes and other expenses, the application of which would reduce such prior
performance and indicated rates of return. Except as otherwise indicated, performance
information is for NLV-I, NLV-II and the Fund Managers’ investments in the Sprout Funds.
While the Fund Managers initiated, led, co-led, managed or were otherwise instrumental in
the identification, negotiation, execution and/or management of these investments (as further
described herein), other individuals, including individuals from Sprout Group with respect to
the Sprout Funds, were involved in and assisted with these investments.
B Rates of return for public indices are provided for informational purposes only and do not
reflect a basis for comparison for venture capital interests, as the market volatility, liquidity
and other characteristics of venture capital investments are materially different from public
indices. The S&P 500 Stock Index is an unmanaged market capitalization of 500 U.S. equities
97
CONTROL NUMBER 257 - CONFIDENTIAL
generally considered to be representative of U.S. stock market activity. The NASDAQ
Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed
on the NASDAQ Stock Market. The NASDAQ Biotechnology Index includes securities of
NASDAQ-listed companies classified according to the Industry Classification Benchmark as
either Biotechnology or Pharmaceuticals which also meet other eligibility criteria. The Dow
Jones Industrial Average is an index that shows how 30 large, publicly owned companies
based in the U.S. have traded during a standard trading session in the stock market.
C Data provided by Cambridge Associates at no charge. Cambridge U.S. VC healthcare data as
of Q1’13. Where results on the Sprout Funds refer to net basis, it is the result of a
methodology that adjusts the gross results for the healthcare technology investments for
recycling, management fees, and carried interest so they can be compared to industry sources
(e.g., Cambridge Associates) on a directly comparable basis. The methodology and
assumptions used to adjust from gross to net basis is described in Appendix 2.
D The gross annual compound internal rate of return (“IRR”) and gross multiple of invested
capital as of March 31, 2014 are before giving effect to taxes, management fees, the general
partner’s carried interest and other expenses. The net IRR and net multiple of invested capital
as of March 31, 2014 are after giving effect to management fees, the general partner’s carried
interest and other expenses. All IRRs presented are annualized and calculated on the basis of
quarterly inflows and outflows of cash and unrealized values, assuming such inflows and
outflows occurred as of quarter end and all remaining investments were sold at the current
holding value through as of March 31, 2014. There can be no assurance that unrealized
investments will be realized at the valuations shown.
E The results for the Sprout Funds represent results from the healthcare technology portion of
the Sprout Funds, which represents between 8% and 65% of the cost basis of the investments
of the funds taken as a whole. Healthcare technology means, collectively, the
biopharmaceutical, medical device, and diagnostics and infrastructure sectors. See
Appendix 2 for the Methodology Used to Calculate Net Return Numbers for Sprout
Healthcare Technology Portfolios.
F Net Distributed to Paid-in Capital (“DPI”): Calculated based on (1) called capital of a fund
(based on individual called capital percentages and fund sizes across multiple funds) and
(2) distributed capital of a fund (based on aggregating individual funds distributed capital
amounts, as calculated using DPI and called individual fund called amounts). For the
purposes of this ratio for NLV-I and NLV-II, the “deemed contribution” of the general partner
is included in the total amount of capital contributions made by the fund’s partners.
G (Distributed + Public) to Paid-in Capital: Calculated based on (1) called capital of a fund
(based on individual called capital percentages and fund sizes across multiple funds) and
(2) distributed capital of a fund (based on aggregating individual funds distributed capital
amounts, as calculated using DPI and called individual fund called amounts) plus the
unrealized value of publicly traded securities based on the closing market price of the
security. For the purposes of this ratio for NLV-I and NLV-II, the “deemed contribution” of
the general partner is included in the total amount of capital contributions made by the fund’s
partners.
98
CONTROL NUMBER 257 - CONFIDENTIAL
H (Distributed + Liquid Public) to Paid-in Capital: Calculated based on (1) called capital of a
fund (based on individual called capital percentages and fund sizes across multiple funds)
and (2) distributed capital of a fund (based on aggregating individual funds distributed
capital amounts, as calculated using DPI and called individual fund called amounts) plus the
unrealized value of freely tradable publicly traded securities based on the closing market
price of the security. This is based on the assumption that NLV can trade out of 10% of daily
trading volume over next 30 days based on last 30 days ADTV.
For the purposes of this ratio for NLV-I and NLV-II, the “deemed contribution” of the general
partner is included in the total amount of capital contributions made by the fund’s partners.
I Realized Cost: Represents the cost of investment attributable to the realized portion of such
investment.
J Total Cost: Represents the overall cost of investment.
K Realized Value: Represents gross proceeds received from the sale of an underlying
investment or group of investments.
L Unrealized Value, Unrealized/(Public) or Unrealized/(Private): All private investments are
fair value as determined in good faith by the General Partner. Fair value is based on the best
information available and is determined by reference to information including, but not limited
to, the following: operating results, financial condition, public or private transactions,
valuations for publicly-traded compatible companies, recent purchases of the same or similar
securities, progress of clinical trials or other operational progress of an investment’s product,
and/or other measures, and consideration of any other pertinent information including the
types of securities held and restrictions on disposition. Public represents a portfolio company
whose securities are traded on a public exchange such as NASDAQ. The unrealized value of
publicly traded securities held shown in parenthesis is valued at the closing market price.
The unrealized value of warrants for any publicly traded companies is valued based on the
Black-Sholes Method.
M Total Value: Represents realized value plus Unrealized Value.
N Multiple: Represents the ratio of Total Value, Realized Value or Unrealized Value to the
corresponding amount of capital invested, expressed as a multiple.
99
CONTROL NUMBER 257 - CONFIDENTIAL
XIV. CERTAIN OFFERING NOTICES
NOTICE TO RESIDENTS OF FLORIDA
The Interests being offered have not been registered with the Florida Division of Securities. If sales are made to five
or more Florida purchasers, each sale is voidable by the purchaser within three days after the first tender of
consideration is made by such purchaser to the issuer, an agent of the issuer or within three days after availability of
that privilege is communicated to such purchaser, whichever occurs later.
NOTICE TO NON-U.S. RESIDENTS GENERALLY
No action has been or will be taken in any jurisdiction outside the U.S. that would permit an offering of these
securities, or possession or distribution of offering material in connection with the issue of these securities, in any
country or jurisdiction where action for that purpose is required. It is the responsibility of any person wishing to
subscribe for the Interests to inform themselves of and to observe all applicable laws and regulations of any relevant
jurisdictions. Prospective investors should inform themselves as to the legal requirements within the countries of
their citizenship, residence, domicile and place of business with respect to the acquisition, holding or disposal of the
Interests, and any foreign exchange restrictions that may be relevant thereto.
AUSTRALIA
The Fund is not a registered managed investment scheme, nor is it required to be registered as a managed investment
scheme, and this Memorandum is not a product disclosure document lodged or required to be lodged with the
Australian Securities and Investments Commission. Interests in the Fund will only be offered in Australia to persons
to whom such securities may be offered without a product disclosure statement under Part 7.9 of the Corporations
Act 2001 (Cth). Interests in the Fund subscribed for by investors in Australia must not be offered for resale in
Australia for 12 months from allotment except in circumstances where disclosure to investors under the Corporations
Act 2001 (Cth) would not be required or where a compliant product disclosure statement is produced. Prospective
investors in Australia should confer with their professional advisors if in any doubt about their position.
AUSTRIA
Interests in the Fund may only be offered in the Republic of Austria in compliance with the provisions of the
Austrian Capital Market Act, the Austrian Investment Funds Act and other laws applicable in the Republic of Austria
governing the offer, issue and sale of the interests in the Republic of Austria. Interests in the Fund are being offered
exclusively to a limited number of investors in Austria and are therefore not subject to the public offering
requirements of the Austrian Capital Market Act or the Austrian Investment Fund Act. Interests in the Fund are not
registered or otherwise authorized for public offer either under the Austrian Capital Market Act, the Austrian
Investment Fund Act or any other securities regulation in Austria. The recipients of this Memorandum and other
selling material in respect to interests in the Fund have been individually selected and are targeted exclusively on the
basis of a private placement. This offer may not be made to any other persons than the recipients to whom this
Memorandum is personally addressed. Any investor intending to offer and resell interests in the Fund in Austria is
solely responsible that any offer and resale takes place in compliance with the applicable provisions of the Austrian
Capital Market Act, the Austrian Investment Fund Act or any other applicable securities regulation.
BELGIUM
The Fund has not been and will not be registered with the Belgian Financial Services and Markets Authority
(Autoriteit voor financiële diensten en markten / Autorité des Services Financiers et des Marchés) (“FSMA”) as a
foreign collective investment institution referred to under Article 127 of the Belgian Act of July 20, 2004 relating to
certain forms of collective management of investment portfolios. This Memorandum and the offering of Limited
Partner Interests in the Fund have not been and will not be notified to, and have not been approved or disapproved
by, the FSMA. The public offering of Limited Partner Interests in the Fund in Belgium within the meaning of the
Belgian Act of July 20, 2004, and the Belgian Act of June 16, 2006 on the public offering of investment instruments and
the admission of investment instruments to listing on a regulated market has not been authorized by the Fund. The
offering may therefore not be advertised, and Limited Partner Interests in the Fund may not be offered, sold,
transferred or delivered to, or subscribed to by, and no memorandum, information circular, brochure or similar
document may be distributed to, directly or indirectly, any individual or legal entity in Belgium, except (i) to
“qualified investors” as referred to in Article 10, § 1 of the aforementioned Act of June 16, 2006, (ii) subject to the
restriction of a minimum investment of €100,000 per investor or (iii) in any other circumstances in which the present
offering does not qualify as a public offering in accordance with the aforementioned Act of June 16, 2006. This
Memorandum has been issued to the intended recipient for personal use only and exclusively for the purpose of the
offering. Therefore, it may not be used for any other purpose, nor passed on to any other person in Belgium.
100
CONTROL NUMBER 257 - CONFIDENTIAL
BRAZIL
The Fund is not listed with any stock exchange, organized over the counter market or electronic system of securities
trading. Interests in the Fund have not been and will not be registered with any securities exchange commission or
other similar authority, including the Brazilian Securities and Exchange Commission (Comissão de valores
Mobiliários - or the “CVM”). Interest in the Fund will not be directly or indirectly offered or sold within Brazil
through any public offering, as determined by Brazilian law and by the rules issued by the CVM, including Law No.
6,385 (Dec. 7, 1976) and CVM Rule No. 400 (Dec. 29, 2003), as amended from time to time, or any other law or rules
that may replace them in the future.
Acts involving a public offering in Brazil, as defined under Brazilian laws and regulations and by the rules issued by
the CVM, including Law No. 6,385 (Dec. 7, 1976) and CVM Rule No. 400 (Dec. 29, 2003), as amended from time to
time, or any other law or rules that may replace them in the future, must not be performed without such prior
registration. Persons in Brazil wishing to acquire interests in the Fund should consult with their own counsel as to the
applicability of these registration requirements or any exemption therefrom. Without prejudice to the above, the sale
and solicitation of interests in the Fund is limited to qualified investors as defined by CVM Rule No. 409 (Aug. 18,
2004), as amended from time to time or as defined by any other rule that may replace it in the future.
This Memorandum is confidential and intended solely for the use of the addressee and cannot be delivered or
disclosed in any manner whatsoever to any person or entity other than the addressee.
COLUMBIA
Neither this Memorandum nor the interests in the Fund have been reviewed or approved by the Financial
Superintendency of Colombia (the “FSC”) or any other governmental authority in Colombia, nor has the Fund or any
related person or entity received authorization or licensing from the FSC or any other governmental authority in the
Colombia to market or sell interests in the Fund within Colombia. No public offering of interests in the Fund is being
made in Colombia or to Colombian residents. By receiving this Memorandum, the recipient acknowledges that it
contacted New Leaf at its own initiative and not as a result of any promotion or publicity by New Leaf. This
Memorandum is strictly private and confidential and may not be reproduced, used for any other purpose or
provided to any person other than the intended recipient.
DENMARK
This Memorandum has not been and will not be filed with or approved by the Danish Financial Supervisory
Authority or any other regulatory authority in Denmark and Limited Partner Interests in the Fund have not been and
are not intended to be listed on a Danish regulated market. Limited Partner Interests in the Fund have not been and
will not be offered in Denmark under the E.U. Alternative Investment Fund Managers Directive (as implemented
into Danish law). Consequently, this Memorandum may not be made available and interests in the Fund may not be
marketed or offered for sale directly or indirectly to any natural or legal person in Denmark except as permitted
under applicable rules.
FINLAND
As the Fund is a closed end fund, the marketing of interests in the Fund is not interpreted to be subject to the
provisions of the Finnish Act on Mutual Funds (sijoitusrahastolaki, 29.1.1999, as amended, the “MFA”). Accordingly
prospective investors should acknowledge that this Memorandum is not a fund prospectus as meant in the MFA and
the marketing of interests in the Fund is not subject to a marketing permission from the Financial Supervisory
Authority (Finanssivalvonta; “FIN-FSA”). Furthermore, even if interests in the Fund were to be construed as
“securities” as defined in the Finnish Securities Markets Act (arvopaperimarkkinalaki, 14.12.2012/746, as amended
the “SMA”), based on the exemptions set forth in the SMA, the offering of interests in the Fund would be exempted
from the prospectus requirements of the SMA (based on the limited number of Finnish offerees and the minimum
investment and transfer restrictions specified herein). Accordingly prospective investors must acknowledge that this
Memorandum is not a prospectus within the meaning set forth in the SMA. Prospective investors should also note
that neither the General Partner or the Management Company is an investment firm (sijoituspalveluyritys) within the
meaning of the Finnish Investment Services Act ( sijoituspalvelulaki 747/2012) and they are not subject to the
supervision of the FFSA. Any prospective investors should acknowledge that they will not be treated as clients of
placement agents (if any) engaged by the Management Company in connection with the placement of interests in the
Fund and such placement agents may not be under any duty to safeguard the interests of prospective investors.
Furthermore, the Fund is not a property fund as meant in the Finnish Act on Property Funds (kiinteistörahastolaki,
1173/1997). The FIN-FSA has not authorized any offering for the subscription of interests in the Fund; accordingly,
interests in the Fund may not be offered or sold in Finland or to residents thereof except as permitted by Finnish law.
101
CONTROL NUMBER 257 - CONFIDENTIAL
This Memorandum has been prepared for private information purposes only and it may not be used for, and shall
not be deemed, a public offering of interests in the Fund. This Memorandum is strictly for private use by its holder
and may not be passed on to third parties or otherwise distributed publicly.
FRANCE
This Memorandum (including any amendment, supplement or replacement thereto) is not being distributed in the
context of a public offering in France within the meaning of Article L. 411-1 of the French Monetary and Financial
Code (Code monétaire et financier). This Memorandum has not been and will not be submitted to the French Autorité
des marchés financiers (“AMF”) for approval in France and accordingly may not and will not be distributed to the
public in France.
Pursuant to Article 211-3 of the AMF General Regulation, French residents are hereby informed that:
1. the transaction does not require a prospectus to be submitted for approval to the AMF;
2. persons or entities referred to in Point 2°, Section II of Article L.411-2 of the Monetary and
Financial Code may take part in the transaction solely for their own account, as provided in Articles D. 411-1, D. 734-
1, D. 744-1, D. 754-1 and D. 764-1 of the Monetary and Financial Code; and
3. the financial instruments thus acquired cannot be distributed directly or indirectly to the public
otherwise than in accordance with Articles L. 411-1, L. 411-2, L. 412-1 and L. 621-8 to L. 621-8-3 of the Monetary and
Financial Code.
This Memorandum is not to be further distributed or reproduced (in whole or in part) in France by the recipients of
this Memorandum. This Memorandum has been distributed on the understanding that such recipients will only
participate in the issue or sale of Limited Partner Interests in the Fund for their own account and undertake not to
transfer, directly or indirectly, Limited Partner Interests in the Fund to the public in France, other than in compliance
with all applicable laws and regulations and in particular with Articles L. 411-1 and L. 411-2 of the French Monetary
and Financial Code.
GERMANY
The Fund has been notified to the Bundesanstalt für Finanzdienstleistungsaufsicht (the German Federal Financial
Supervisory Authority or “BaFin”) for marketing to (vertrieben as this term is construed under the German Capital
Investment Code (Kapitalanlagegesetzbuch - KAGB) in the Federal Republic of Germany solely to professional
investors (as this term is construed under the KAGB). The Limited Partner Interests in the Fund may not be
distributed in the Federal Republic of Germany or used in connection with any offer for subscription of the Limited
Partner Interests in the Fund other than to professional investors. Neither this Memorandum nor any other document
relating to the Fund or the Limited Partner Interests in the Fund, as well as the information contained therein may be
supplied in Germany to persons other than professional investors.
HONG KONG
The contents of this Memorandum have not been reviewed or approved by any regulatory authority in Hong Kong.
This Memorandum does not constitute an offer or invitation to the public in Hong Kong to acquire interests in the
Fund. Accordingly, unless permitted by the securities laws of Hong Kong, no person may issue or have in its
possession for the purposes of issue, this Memorandum or any advertisement, invitation or document relating to
interests in the Fund, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to
be accessed or read by, the public in Hong Kong other than in relation to interests in the Fund which are intended to
be disposed of only to persons outside Hong Kong or only to “professional investors” (as such term is defined in the
Securities and Futures Ordinance of Hong Kong (Cap. 571) (the “SFO”) and the subsidiary legislation made
thereunder) or in circumstances which do not result in this Memorandum being a “prospectus” as defined in the
Companies Ordinances of Hong Kong (Cap. 32) (the “CO”) or which do not constitute an offer or an invitation to the
public for the purposes of the SFO or the CO. The offer of interests in the Fund is personal to the person to whom
this Memorandum has been delivered by or on behalf of the Fund, and a subscription for interests in the Fund will
only be accepted from such person. No person to whom a copy of this Memorandum is issued may issue, circulate or
distribute this Memorandum in Hong Kong or make or give a copy of this Memorandum to any other person. You
are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this
Memorandum, you should obtain independent professional advice.
ICELAND
This Memorandum has been issued to the recipient, for personal use only, exclusively in connection with a private
placement of interests in the Fund. Accordingly, this Memorandum may not be used by the recipient for any other
102
CONTROL NUMBER 257 - CONFIDENTIAL
purpose nor forwarded to any other person or entity in Iceland. The offering of interests in the Fund described in
this Memorandum is a private placement under Icelandic law and the interests in the Fund may only be offered and
sold (as well as resold) in Iceland to a person or entity that is a Qualified Investor as defined in Item No. 9 of Article
43 of the Icelandic Act on Securities Transactions. Also, any subsequent transfer or resale of interests in the Fund in
Iceland will need to comply with the applicable provisions of the Icelandic Act on Securities Transactions.
Prospective Icelandic investors should consult with their own tax advisors as to the tax consequences of an
investment in the Fund.
ITALY
The Fund is not a UCITS fund. The offering of interests in the Fund in Italy has not been nor will it be authorized by
the Bank of Italy and the Commissione Nazionale per la Società e la Borsa. Interests in the Fund are offered upon the
express request of the investor, who has directly contacted the Fund or its sponsor on the investor’s own initiative.
No active marketing of the Fund has been made nor will it be made in Italy, and this Memorandum has been sent to
the investor at the investor’s unsolicited request. The investor acknowledges and confirms the above and hereby
agrees not to sell or otherwise transfer any Interests in the Fund or to circulate this Memorandum in Italy unless
expressly permitted by, and in compliance with, applicable law.
JAPAN
Interests in the Fund are a security set forth in Article 2, Paragraph 2, Item 6 of the Financial Instruments and
Exchange Law of Japan (the “FIEL”). No public offering of interests in the Fund is being made to investors resident
in Japan and in accordance with Article 2, paragraph 3, Item 3, of the FIEL, no securities registration statement
pursuant to Article 4, paragraph 1, of the FIEL has been made or will be made in respect to the offering of interests in
the Fund in Japan. The offering of interests in the Fund in and investment management for the Fund in Japan is
made as “Special Exempted Business for Qualified Institutional Investors, Etc.” under Article 63, Paragraph 1, of the
FIEL. Thus, interests in the Fund are being offered only to a limited number of investors in Japan. Neither the Fund
nor any of its affiliates is or will be registered as a “financial instruments firm” pursuant to the FIEL. Neither the
Financial Services Agency of Japan nor the Kanto Local Finance Bureau has passed upon the accuracy or adequacy of
this Memorandum or otherwise approved or authorized the offering of interests in the Fund to investors resident in
Japan.
LUXEMBOURG
No public offering of interests in the Fund is being made to investors resident in Luxembourg. Interests in the Fund
are being offered only to a limited number of sophisticated and professional investors in Luxembourg. The
Commission de Surveillance du Secteur Financier of Luxembourg has not passed upon the accuracy or adequacy of
this Memorandum or otherwise approved or authorized the offering of interests in the Fund to investors resident in
Luxembourg.
NETHERLANDS
In the Netherlands, Limited Partner Interests in the Fund may only be offered, sold, transferred or assigned, as part
of their initial distribution or at any time thereafter, to natural persons who or legal entities which are Qualified
Investors as defined in Section 1:1 of the Financial Supervision Act (Wet op het financieel toezicht (the “FSA”)).
Limited Partner Interests in the Fund may not otherwise be offered, directly or directly, in the Netherlands. Where an
offer is made exclusively to Qualified Investors within the meaning of section 1:1 of the FSA, the General Partner is
not under an obligation to have the offering memorandum approved by the Dutch Authority for the Financial
Markets or by a competent authority of another member state of the European Economic Area in accordance with
Prospectus Directive 2003/71/EC and Prospectus Regulation 809/2004/EC.
NORWAY
This Memorandum does not constitute an invitation or a public offer of securities in the Kingdom of Norway. It is
intended only for the original recipient and is not for general circulation in the Kingdom of Norway. The offer herein
is not subject to the prospectus requirements laid down in the Norwegian Securities Trading Act. This Memorandum
has not been nor will it be registered with or authorized by any governmental body in Norway. Interests in the Fund
may only be solicited, acquired or offered in or from Norway to investors for a total face value of at least €100,000.
SAUDI ARABIA
Neither this Memorandum nor the interests in the Fund have been approved, disapproved or passed on in any way
by the Capital Market Authority or any other governmental authority in the Kingdom of Saudi Arabia, nor has the
Fund received authorization or licensing from the Capital Market Authority or any other governmental authority in
103
CONTROL NUMBER 257 - CONFIDENTIAL
the Kingdom of Saudi Arabia to market or sell interests in the Fund within the Kingdom of Saudi Arabia. This
Memorandum does not constitute and may not be used for the purpose of an offer or invitation. No services relating
to interests in the Fund, including the receipt of applications and the allotment or redemption of such interests, may
be rendered by the Fund within the Kingdom of Saudi Arabia.
SOUTH AFRICA
Neither this Memorandum nor the interests in the Fund have been approved, disapproved or passed on in any way
by the Financial Services Board or any other governmental authority in South Africa, nor has the Fund received
authorization or licensing from the Financial Services Board or any other governmental authority in South Africa to
market or sell interests in the Fund within South Africa. This Memorandum is strictly confidential and may not be
reproduced, used for any other purpose or provided to any person other than the intended recipient.
SOUTH KOREA
In South Korea, interests in the Fund are being offered only to persons prescribed by Article 301, Paragraph 2 of the
Enforcement Decree of the Financial Investment Services and Capital Markets Act (“Qualified Professional
Investors”). The Subscriber hereby represents and warrants to the Fund that the Subscriber (i) is a Qualified
Professional Investor as prescribed by the Financial Investment Services and Capital Markets Act and (ii) is fully
aware of the meaning, effect and ramifications of being an Qualified Professional Investor and fully agrees to be
treated in accordance therewith.
SPAIN
Interests in the Fund may not be offered or sold in Spain except in accordance with the requirements of the Spanish
Securities Market Act (Ley 24/1988, de 28 de Julio, del Mercado de Valores) as amended and restated, Royal Decree
1310/2005, on securities admission to trade on secondary official markets, public offerings or subscriptions, and
prospectus required to such effects, and/or subject and in compliance with the requirements contained in such
regulations (Real Decreto 1310/2005, de 4 de noviembre, por el que se desarrolla parcialmente la Ley 24/1988, de 28
de julio, del Mercado de Valores, en materia de admisión a negociación de valores en mercados secundarios oficiales,
de ofertas públicas de venta o suscripción y del folleto exigible a tales efectos), and subsequent legislation. This
Memorandum is neither verified nor registered with the Comisión Nacional del Mercado de Valores, and therefore a
public offer of interests in the Fund will not be carried out in Spain.
SWEDEN
This Memorandum has not been nor will it be registered with or approved by Finansinspektionen (the Swedish
Financial Supervisory Authority). Accordingly, this Memorandum may not be made available, nor may the interests
in the Fund offered hereunder be marketed and offered for sale in Sweden, other than under circumstances which are
deemed not to require a prospectus under the Swedish Financial Instruments Trading Act (1991:980) (Sw. lag
(1991:980) om handel med finansiella instrument). Accordingly, the offering of interests in the Fund will only be
directed to persons in Sweden who subscribe to interests in the Fund for a total consideration of at least €100,000 per
investor.
SWITZERLAND
Under the Collective Investment Schemes Act dated June 23, 2006 and revised on September 28, 2012 (the “CISA”),
the offering, sale and distribution to non-qualified investors of units in foreign collective investment schemes in or
from Switzerland are subject to authorization by the Swiss Financial Market Supervisory Authority (“FINMA”) and,
in addition, the distribution to certain qualified investors of interests in such collective investment schemes may be
subject to the appointment of a representative and a paying agent in Switzerland. The concept of “foreign collective
investment scheme” covers, inter alia, foreign companies and similar schemes (including those created on the basis of
a collective investment contract or a contract of another type with similar effect) created for the purpose of collective
investment, whether such companies or schemes are closed end or open end. There are reasonable grounds to believe
that the Fund would be characterized as a foreign collective investment scheme under Swiss law. As interests in the
Fund have not been and cannot be registered with or authorized by FINMA for distribution to non-qualified
investors, any offering of interests in the Fund, and any other form of solicitation of investors in relation to the Fund
(including by way of circulation of offering materials or information, including this Memorandum), must be
restricted to investors considered as qualified investors within the meaning of the CISA and its implementing
regulations. Failure to comply with the above-mentioned requirements may constitute a breach of the CISA.
104
CONTROL NUMBER 257 - CONFIDENTIAL
UNTIED ARAB EMIRATES
By receiving this Memorandum, the person or entity to whom it has been issued understands, acknowledges and
agrees that neither this Memorandum nor the interests in the Fund have been approved, disapproved or passed on in
any way by the Central Bank of the United Arab Emirates (“UAE”), the UAE Securities and Commodities Authority
(the “SCA”) or any other authority in the UAE, nor has the entity conducting the placement in the UAE received
authorization or licensing from the Central Bank of the UAE, the SCA or any other authority in the UAE to market or
sell interests in the Fund within the UAE. The SCA accepts no liability in relation to the Fund and is not making any
recommendation with respect to an investment in the Fund. No services relating to the interests in the Fund
including the receipt of applications and/or the allotment or redemption of such interests have been or will be
rendered within the UAE by the Fund. Nothing contained in this Memorandum is intended to constitute UAE
investment, legal, tax, accounting or other professional advice. This Memorandum is for the information of
prospective investors only and nothing in this Memorandum is intended to endorse or recommend a particular
course of action. Prospective investors should consult with an appropriate professional for specific advice rendered
on the basis of their situation. No offer or invitation to subscribe for interests or sale of interests in the Fund has been
or will be rendered in, or to any persons in, or from, the Dubai International Finance Centre.
UNITED KINGDOM
In the United Kingdom, this Memorandum is being distributed only to and is directed only at (i) persons who have
professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and
Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Order”), (ii) high-net-worth entities falling
within Article 49(2) of the Order, and (iii) any other persons to whom it may otherwise lawfully be communicated
(all such persons together being referred to as “relevant persons”). Persons who are not relevant persons must not
act on or rely on this Memorandum or any of its contents. Any investment or investment activity to which this
Memorandum relates is available only to relevant persons and will be engaged in only with relevant persons.
Recipients must not distribute, publish, reproduce, or disclose this Memorandum, in whole or in part, to any other
person.
105
CONTROL NUMBER 257 - CONFIDENTIAL