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Israel’s private equity bandwagon heats up09/05/2007. Source: Israel Venture Capital Journal (IVCJ). Zeev Holtzman, Giza Venture Capital
 Private equity activity in Israel is reaching new heights. In this IVCJ article, Zeev Holtzman, chairman and founder of Giza Venture Capital, looks at the rapid emergence of the domestic private equity industry.
In the beginning there were VCs Historically, private equity developed in Israel on the venture capital side. The venture industry started in 1992 with the Yozma program, when 10 VC funds were established with government subsidies.
Factors favoring the development of a local industry included the coming of age of the communications sector, the civilian development of technology adapted from the military, a large number of well-trained engineers and the welldeveloped US venture industry, which provided an example of what could be accomplished.
Following successful technology exits, including acquisitions as well as impressive IPOs on Nasdaq, the venture capital industry earned an enviable reputation, leading to the establishment of many additional funds. In Israel, venture capital was the main source of private equity until 2000, having captured about 80 percent of private equity activity. In contrast, outside of Israel venture capital accounted for not more than 15 to 20 percent of total private equity activity. Traditional forms of private equity – buyout, expansion and turnaround situations – accounted for the bulk of total private equity volume.
The rise of PE
In pre-2000 Israel, traditional private equity activity was carried out by First Israel Mezzanine Investors (FIMI), Shamrock, as well as by some large, family-controlled investment firms. In recent years, though, there has been a dramatic shift in the private equity landscape in Israel.
A host of private equity funds have been formed. Markstone Fund is the largest in the new wave of funds, having raised $800 million. The new-found popularity of private equity funds within Israel reflects, in part, the strong IRR from the early private equity funds, the large amounts of capital available for investment from global institutional investors and the general overall success that private equity funds have had elsewhere in the world.
As private equity is on the ascent in Israel, VC is going down in terms of its share of capital raised. Currently, there is almost a 50/50 distribution between venture capital and private equity, where at one time it was 80/20 in favor of the VCs.
PE attracts Israeli institutions
Among the principal investors in private equity funds are Israeli institutions. This should not be surprising, despite the fact that Israeli institutions were only the most reluctant of investors in Israel’s venture capital industry, allocating a relative pittance to the local venture industry. The keen interest of Israeli banks, insurance companies and pension funds in private equity today is accounted for by several factors.
Israeli institutions see deployment of capital through private equity as a known, conservative method of investment. They understand it better than venture capital and prefer the lower risk associated with investment in long-established, revenue-generating firms. Institutional managers also know their counterparts in the private equity area and feel comfortable investing with them.
Institutions look abroad
New tax laws and capital market reforms have given Israeli institutions wide latitude in investing. Institutions can now invest outside of Israel and therefore are not only looking at the domestic private equity market, but overseas opportunities as well. Opportunities are being presented to Israeli institutions by major organizations and gatekeepers from outside Israel. Institutions considering overseas investment would do well to exercise caution and selectivity, as not all available products are investment-grade.
Local opportunities in Israeli private equity compare well with those from foreign sources, despite the relatively small domestic market. Many good buyout deals can be made as evidenced by the numerous leveraged buyouts conducted in the past by entrepreneurial family groups with support from Israeli banks.
Opportunities attract foreign funds
Foreign buyout funds are actively seeking investments in Israel. Targeted at the top of their list are Discount Bank and Bank Leumi as well as other opportunities among companies being privatized. Some believe that foreign interest means there is an overcapacity of capital allocated to the Israeli market with an accompanying upward influence on valuations, which makes achievement of higher returns more of a challenge. It should be stressed, though, that private equity, whether from abroad or local sources, is part of normal development in a flourishing capital market. Activity from all sources should therefore be encouraged.
PE investors leverage their investments
One of the aims of private equity investors is to make companies more efficient. This objective is not always achieved. New owners often take out dividends, making the company highly leveraged and riskier from a financial perspective. It should be pointed out that companies under control of government in Israel have done relatively well in the past, while those under private equity control still have to prove their worth. Overall, greater private equity activity seems destined to make a positive impact on Israel’s economy, helping to develop both technology and traditional industries alike.
This article appeared in the Israel Venture Capital & Private Equity Journal (IVCJ). IVC Research Center publishes the Israel Venture Capital & Private Equity Journal, a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry. For more information please visit www.ivc-online.com
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