First of a two-part series In a climate when most venture capital firms have been spending the bulk of their time providing life support to portfolio companies, A.M. Pappas has been hiring top guns, moving into new digs, investing in companies and raising cash to create the Triangle’s largest life sciences fund. So when the venture capital and consulting firm heard that biotech expert and advisory board member Ken Lee was planning on taking an early retirement from Ernst & Young, where he most recently served as managing director of the accounting firm’s health sciences finance group, it jumped at the chance to bring him on board as president.

Founded by Arthur M. Pappas in 1994, A.M. Pappas now has 25 employees and more than $150 million under management. To top it off, it’s now raising $25 million for its emerging life sciences fund and contemplating a special strategic fund focused on leveraged buyouts or companies in need of a turnaround. Two weeks after Lee, 53, officially joined A.M. Pappas, Local Tech Wire sat down and talked with him about his decision, the funding climate and the future of the firm.

You were set to take an early retirement after 29 years at Ernst & Young. What made you change your mind?

My wife and I always talked about retiring in North Carolina, so in mid-2000 I came back here [after 28 years in California] to run the health sciences investment-banking business for Ernst & Young. I loved my job and the firm was great, but I got to the point where I wanted to spend more time with my family. In a parallel track, Art Pappas and I had known each other for a long time, and in 1998 he invited me to join his advisory board and I accepted. After moving back to the Triangle, he suggested that we think about a deeper business relationship. I didn’t come back here thinking I’d find another job. I was mentally moving towards retirement, where I’d sit on some boards, consult with some biotech companies for myself, be less scheduled and travel a lot less. Art got me excited about this, so I’m going to develop the skills to do those things but under the banner of an interesting, focused enterprise. Another part of the appeal was that it looked like I could be successful in making a difference inside the firm. My contribution would be a bigger percentage of the total effort here than ever at EY.

Can you give us a quick overview of A.M. Pappas’ three different types of investment funds: TechAMP, Emerging Life Science Equities and Strategic Equities?

The strategic work is really an offshoot, sort of a one-at-a-time type of a transaction. What we actively pursue everyday are the first two. The first TechAMP fund was $41 million, and the second was $102 million, which is just for venture capital investments. With emerging life science equities … we will only invest in publicly traded life sciences companies that are micro-cap, under $1 billion. We’re raising the third emerging life sciences fund right now, and it’ll be somewhere between $10 and $25 million.

One of the things we’re talking about is whether there’s a good opportunity to raise a special strategic fund for life sciences, like an LBO (leveraged buyout) fund or a turnaround fund where you’d invest in companies that were severely undervalued and under a lot of stress-companies that you could get at a great price, with technology that has value, and think you could remodel.

As you mentioned, A.M. Pappas recently closed on TechAMP II, a $102 million fund. What type of company is that fund focused on?

We like early-stage life sciences companies. The typical company is a biotech therapeutics firm. Medical device companies also would be somewhat attractive. It’s hard to figure out what the successful business model is for e-health companies, but we’re interested in keeping up with that space. There are other interesting business models out there, like companies outsourcing to pharmaceuticals, the CRO (contract research organization) group, specialty pharmaceutical companies which are formed just to buy small products from big pharma and get launched in a hurry. With this fund, the earlier stage, the better. I would say we’re not very interested in provider-type companies, such as hospitals, HMOs, or payer-type companies.

Is there a particular “hot spot” within life sciences right now?

I personally think the industry is in a phase where it’s become a little less enamored with sexy technology platforms and more interested in something that’s product-focused. My first cut if somebody gave me a business plan would be “Is this going to be a near-term product development opportunity or not?” That’s the one guideline I think is back.

How is the phrase “near term” defined in the biotech industry?

A couple years. One or two years to get a compound that you could actually have in FDA trials is what I’d call near term.

Editor’s Note: Come back tomorrow to find out what’s ahead for A.M. Pappas and why Lee thinks 2002 will be an IPO window for the biotech industry.