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Catalio Capital Management, an emerging manager specializing in the biomedical sector, has raised $85 million for a new strategy to fund cash-hungry biomedical technology companies, offering a financing product tailored to the current tough fundraising market.

Catalio, which was spun out from Camden Partners in 2020, closed its debut credit opportunities fund above the $50 million target, according to George Petrocheilos, the firm's co-founder.

The new vehicle is dubbed Catalio Credit Opportunities Fund I and will be dedicated to providing structured equity and debt financing to companies based in North America. 

The closing of the fund comes amid a growing demand for this type of financing in the life sciences sector, where the declines in public markets earlier this year have undermined private valuations.

"The challenge in the equity capital market has created a funding gap," said John Henry Iucker,  head of credit at Catalio. "Because equity is challenging to come by and traditional lenders are more rigid in their structure, there is a tremendous opportunity for us to come in and creatively fill that gap."

Structured equity—which includes convertible debt, structured preferred equity and other debt and equity hybrid products—has become a more popular form of financing in recent months as many startups hope to access liquidity while avoiding raising equity funding at a lower valuation than previous rounds.  

A number of asset managers, including Coatue, Viking Global Partners, JP Morgan and fintech company Portage, have been raising or have closed funds targeting structured deals.

Because Catalio's new strategy is tailored to capitalize on these opportunities rising from recent market dislocations, it gives the young firm an edge in today's competitive fundraising landscape, according to Petrocheilos.

"The timing now for everybody who is raising funds—whether they are an established manager or an emerging manager—is quite difficult, especially when launching a new strategy," he said. "If we were raising a first-time fund on a private equity or venture capital fund, or even a traditional credit fund, I think we would be having a very hard time."

He said LPs, concerned about current market conditions, have slowed the pace of their commitments while also setting the bar higher for emerging managers and first-time funds.

Catalio last year considered raising a traditional private credit fund targeting $200 million. However, as the market environment changed rapidly over the last nine months, Petrocheilos said the firm decided to focus on structured equity and credit investments, which typically have the potential to gain higher equity participation than a plain vanilla venture debt investment. Catalio also scaled down its fundraising target for the new strategy. 

Catalio, in time, was able to enlist investors in previous flagship funds to participate in the debut credit opportunities fund. Over 80% of commitments in this fund were made by a base of existing LPs, which include family offices, endowments, registered investment advisers and wealthy individual investors. The remainder came from new investors, such as multifamily offices, insurance companies and other institutional investors. 

The firm has deployed about half of the fund. Its portfolio includes an early-stage liquid biopsy company focused on minimal residual disease; a late-stage neurosurgical startup that treats essential tremors and Parkinson's disease; and a neurotech company, which has raised a Series C, dedicated to developing brain-computer interface technologies. 

Completed deals have been as small as $5 million, and Catalio also collaborated with other credit investors to participate in transactions above $100 million, the firm said. 

Catalio, which manages more than $1 billion in assets, closed its third venture fund, Catalio Nexus Fund III, at around $381 million in May. 

Featured image by PopTika/Shutterstock

This article originally appeared on PitchBook News