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Global institutions give more emphasis to Israel16/04/2008. Source: IVCJ (Israel Venture Capital & Private Equity Journal). Zeev Holtzman, Giza Venture Capital
 Zeev Holtzman, founder and chairman of Giza Venture Capital, is positive on prospects for greater interest in Israel from European institutions. In this IVCJ article he explains why.
While Israel has strong trade relations with the US, Europe and Asia, in the realm of investments, the dynamics vary substantially. US institutions have been at the forefront of VC investments in Israel, and leading US venture funds have been taking stakes in Israeli technology firms for many years, and they continue to do so. European investors have by no means ignored Israel but, compared to the US, investment from Europe has lagged sorely behind. Asia ranks a distant third, in both direct investment in the high-tech sectors and in investment via venture capital funds.
But the playing field is changing. I see these trends intensifying over the next few years, which will markedly impact investment in Israel:
- Europe is becoming increasingly interested in Israel. European institutions are open to making more investments in venture capital funds, viewing the Israel venture capital phenomenon as an attractive opportunity. And specifically when it comes to developing innovative technology, Israel is seen as competing effectively with the US, Europe and the rest of the world.
- European institutions are comparing Israeli VC funds to US funds with regard to performance. Several leading Israeli funds have performed well and are increasingly being seen favorably.
- There is a limited capacity for US funds – especially top quartile funds - to absorb capital from European institutions. The substantial competition among US institutions to invest in top quartile funds sometimes leaves European investors out in the cold.
- Israel is being seen as an attractive alternative to top tier US funds, presenting an investment opportunity where European investors can obtain high level performance.
- More and more capital is running to Asia, especially to India and China, but most of those Asia-bound investors are not looking for leapfrog technologies. Instead, they are entering these countries for the huge potential of their markets.
- Sophisticated investors are making the differentiation between the type of investments found in Israel and those available in India and China.
- Taiwan, China and India will have identified the need to have transfers of technology in order to feed their domestic manufacturing markets. The best way to make that transfer is to invest in high-tech and VC funds. Asian investors will, as a result, emulate Western investors and begin investing in Israel.
- Investors that are now directing massive flows of capital to China and India appear to be following the herd. At the end of the day, it is likely that most will be disappointed, and large sums will be lost there.
Europe-Israel connection will be strengthened
There are several factors that should ease the way for intensified European investment. Israel's geographical proximity makes it relatively simple for European investors to identify investments, capitalize on opportunities and monitor investments in Israel. Operating in the same or nearby time zone is part of that package as well. While some foreign investors are apprehensive due to geopolitical factors, most European investors are beginning to better understand and become adjusted to the geopolitical realities. They realize that the impact of Middle Eastern politics on the high-tech sector is limited and are taking their cue from leading global European companies – Siemens, Philips and Deutsche Telekom for example – that are already present in Israel, and from those institutions and funds of funds – especially funds from Switzerland, the UK and Germany – that have already invested in Israel.
Israel is becoming part of the normal VC asset class for European institutions. If their strategy allows them to invest in venture capital, then they will be here.
VCs can recapture their allure
In the last several years, private equity has had better returns than venture capital. Yet venture capital has become more experienced, sophisticated and mature. Despite the slowdown in 2000- 2003, a change in the market is at hand, partly due to the crisis in private equity from the impact of the sub prime mortgage situation. In the next five to seven years, it is expected that venture capital will again become an attractive class, and private equity will result in substantial disappointment to investors. Savvy investors are already increasing VC allocations – and this is of direct benefit to Israel.
Cooperation between European and Israeli VC funds
In general, Israeli venture firms still prefer to work with and co-invest with US funds. European venture funds are more focused on investments that are suitable for their domestic market and have an element of European-related activities. When spreading their wings beyond Europe, the tendency of VCs is to look to US and Asian markets – not Israel.
Foreign investment, which constitutes 60 percent of the investment in Israeli technology firms, comes predominantly from the US – not from Europe. Although few European VCs do co-invest, their numbers are limited. As I see it, there is definitely room to increase cooperation.
The level of investment by Israeli companies in Europe has risen substantially, primarily reflecting the extensive activities of Israeli entrepreneurs in real estate development throughout Eastern and Central Europe. There has been only marginal investment in the high-tech sector though. Israel does not have global funds, and its funds focus almost entirely on Israel. Although dedicated funds have arisen for Israel-China investments, this is the exception. Israel-Europe funds in the technology sector are unlikely to be of any consequence over the next few years.
This article first 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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