Sustainability, Life Sciences Investor 3x5 Doubles Team Amid Fundraising
David Yeh, formerly with the Obama administration, joined to lead sustainability investing, while Joe Biller from SightLine Partners will focus on life sciences
Excerpts from the Sep 4, 2019 Wall Street Journal article by Yuliya Chernova
After years of quietly building a well-performing portfolio of sustainability and life sciences companies, 3x5 Partners is expanding through new fundraising and a larger team.
The Portland, Ore.-based firm is aiming to raise about $125 million for its third fund, a person familiar with the situation said. The firm has already held a first close on the fund, 3x5 Partners Fund III LP, the person said.
Founded in 2011, with Anthony (”Tony”) Arnerich and Nicholas Walrod as managing directors, 3x5 has built a portfolio of about a dozen companies, such as water company Zero Mass Water Inc. and recently public drug company Allakos, Inc. The firm has deployed about $300 million to date, through special purpose vehicles and two funds.
Earlier this year, 3x5 doubled its managing director team by bringing on David Yeh to focus on sustainability deals and Joe Biller for life sciences.
Mr. Yeh helped lead infrastructure and energy policy at the Obama administration as a senior adviser, first at the Energy Department and then at the White House, according to his LinkedIn profile. Before that, he was a venture investor at Al Gore ’s Generation Investment Management. At 3x5, Mr. Yeh will invest in companies that help decrease usage of natural resources such as water and energy.
Mr. Biller, meanwhile, came from Minneapolis-based SightLine Partners, a medical technology-focused private-equity firm.
3x5 is a rare sustainability-focused firm with strong returns. The firm’s net internal rate of return for its first two funds, which it raised together with RiverVest Venture Partners as co-general partners, places it in the top quartile of venture-capital funds, the person said. The firm’s debut vehicle was an $80 million fund, raised in 2011, followed by a $92 million fund in 2015, according to Mr. Walrod’s LinkedIn profile.
Top-quartile venture funds of 2011 vintage showed net IRR starting at 25.1% and 2015 vintage at 23.5%, according to Cambridge Associates data as of March 31.
Cleantech and impact funds generally show worse performance. Top-quartile impact private-equity and venture funds had returns of 11% for funds raised between 2005 and 2017, as of March 31, according to Cambridge data. Cleantech returns have been worse, with cleantech companies backed by venture-capital firms yielding an aggregate gross IRR of 5.9% as of the end of last year, according to Cambridge data.
At 3x5, the larger team will expand on a formula that has been working well for the firm, Mr. Walrod said. The firm backs just six to eight companies out of each fund, putting about $10 million to $50 million in each deal, and typically serves as a lead investor. It focuses on Series A and B rounds for sustainability companies and comes in a bit later for life sciences.
3x5’s sustainability portfolio includes companies such as Rubicon Global Holdings LLC, a waste and recycling company that has raised some $330 million in funding, according to PitchBook Data Inc., and transmission grid company Smart Wires Inc., which 3x5 says is backed by $180 million.
The firm also led the Series A and B rounds for Zero Mass Water, a maker of solar-powered devices to extract pure water, which attracted Bill Gates-founded Breakthrough Energy Ventures last year to lead its Series C round.
Mr. Walrod declined to discuss fundraising.
Last year, 3x5 scored a win when biotechnology portfolio company Allakos, also backed by New Enterprise Associates and others, went public. The company’s share price has nearly quintupled since its July 2018 initial public offering.
In another 3x5 biotech exit, portfolio company ZS Pharma Inc. went public in 2014 and later was acquired by AstraZeneca PLC for $2.7 billion.
3x5 grew out of earlier work by Mr. Arnerich and Mr. Walrod. In 1991, Mr. Arnerich founded investment advisory firm Arnerich Massena, which had about $11 billion in assets under management as of the end of 2018, according to a regulatory filing. Mr. Walrod was an analyst at the firm. Mr. Arnerich began making private-equity and venture investments through special purpose vehicles for Arnerich Massena’s clients back around 2000. The efforts were later formalized into 3x5.