Fannin Direct

Attractive Asset Class

Innovation in regulated health care products is non-correlated with the broader market, since the main value driver is technological disruption, which is independent of business cycles and general gains in productivity. The asset class benefits from long-term tailwinds that are resilient, such as i.rapid growth in our knowledge of biology and disease, ii. aging and wealthy populations (especially in the developed world) who want innovations that improve their quality of life and are willing to pay for them, and iii. continued risk aversion in these same populations which drive high regulatory barriers to entry. Long-term, this is an important asset class that many investors should want to exposure to.

Only Small Allocations are Rational for Most Investors

The asset class is naturally high risk/high return, mainly because products obtain near, protected, or natural monopolies through government support (e.g. patents, market exclusivity grants) or very high barriers to entry (e.g. FDA approval). This characteristic allows for high alpha investments without relying on financial leverage. However, the fundamental risks embedded in any early-stage bioscience project means that only a small allocation is justified for a passive investor.

Accessing Early Stage Innovation

Innovation is difficult for passive Investors. The expertise required to underwrite opportunities, as well as to actively manage the navigating of technical, regulatory, operational, and financial barriers is hard to find and expensive. Such expertise would only be justified in the context of a very large amount of pool of assets – for a team of 2-3 investment professionals, a minimum of $50 million in capital deployed (if cost is 2% of invested capital would be required, implying an asset base of $5 billion (if 1% of assets). Very few private investors control a pool of assets that large. Funds remain an option but have their own limitations: investors must give up discretion, management fees can create misaligned incentives, and accessing the best funds can be difficult. Moreover, the vast majority of funds are focused on late, not early innovation, and therefore very little of their overall capital is deployed potentially higher return early innovation.

Co-Investing in Fannin Direct Opportunities

Fannin Innovation Studio operates a biotech/medtech innovation studio in Houston. It licenses, invents, or acquires technologies and develops products with its 20 – person team with funds from both government grants and private investors. It plans to spin-out approximately 1-2 companies annually. Each of these spin-outs will be managed by studio leadership, and investors may co-invest. All investments are made through special-purpose vehicles managed by a Fannin Advisory, a Fannin affiliate, to simplify the investment process. Investors maintain full discretion for each investment, with no financial penalties for not investing in a particular deal. No ongoing investment fees are charged. Investors are regularly kept up to date on Studio’s pipeline via semi-annual reports and investor meetings.

Programmatic Co-Investing

Studio currently has a stable of investors who invest on a programmatic basis (including the founder of the Studio, Aquinas Companies, LLC). These investors have given an indication (although not a commitment) of the total amount of capital they want to deploy in Fannin co-investments over the next 4-5 years. Knowing the amount of capital permits estimate the investment size in each new issuance. Fannin Direct makes efforts to reserve this capacity for programmatic investors. All of Fannin investors have discretion over their allocations.