Israel approves plan to draw institutional investors to tech scene

Program will provide state guarantees of 40% to protect the return on investments in mature Israeli tech firms

Shoshanna Solomon was The Times of Israel's Startups and Business reporter

Illustrative image of a man using a laptop computer. (iStock by Getty Images/ Suradech14)
Illustrative image of a man using a laptop computer. (iStock by Getty Images/ Suradech14)

The government has approved a plan to encourage institutional investors to invest in mature tech companies that have already raised tens of millions of shekels in funding.

The program, set up jointly by the Finance Ministry, the Economy and Industry Ministry, the Israel Innovation Authority, the Capital Market, Insurance and Saving Authority and the Israel Securities Authority, has two main aims: to help Israeli companies survive the economic crisis created by the coronavirus pandemic and to encourage institutional investors to invest in Israeli tech, a field they have been largely absent from, because of the high risk involved in financing startups.

The program is part of incentives the government is providing to help businesses during the current and is central to the government’s effort to provide aid to the tech industry, the Finance Ministry said in a statement.

Israel’s thriving tech industry, seen as the growth engine of the economy, saw firms raise a record $8.3 billion in 2019 from investors, largely VC funds and corporations, and a total of $39.1 billion for the period 2010-2019. Tech exits last year, defined as merger and acquisition deals or initial public offerings of shares, jumped 72% to a record almost $22 billion, according to data compiled by IVC Research Center, which tracks the industry.

The Israel Innovation Authority, in charge of setting out the nation’s tech policies, has forecast that the industry will see a drop of some 25% in private capital investments, and about a quarter in total revenues due to the coronavirus. The  industry, which was not directly impacted by the virus because its employees could largely work from home, still had 7% of its workforce (Hebrew) on unpaid leave, data provided by the Central Bureau of statistics showed in a survey undertaken on May 5 and 7.

The government in April approved a NIS 650 million stimulus plan to boost the tech industry, and the funds will be distributed by the Israel Innovation Authority.

The new guarantees program, which will be overseen by the Israel Innovation Authority, is expected to infuse the tech sector with an additional NIS 2 billion ($570 million) from investments, Economy Minister Amir Peretz said in the statement.

The new plan will grant approved institutional investors a government investment-yield guarantee of 40% on investments in Israeli tech firms, in the event the  portfolio depreciates. The guarantee will be provided for investments made within 18 months after the introduction of the program.

The tech portfolio will be managed for a period of 8.5 years — 18 months of investment injections and seven years of holding the stock in the firms, the statement said.

Should the value of the portfolio have risen by the the end of the program, then the investor will transfer to the Innovation Authority 10% of the difference between the return on the portfolio and the return on government bonds in the duration period of the portfolio, the statement said.

Finance Minister Israel Katz said that “it is critical to strengthen the growth engines of the Israeli economy – especially now,” as the coronavirus pandemic is savaging economies globally and in Israel.

According to the Bank of Israel, gross domestic product (GDP) is expected to contract by 4.5% in 2020.

The state guarantees will provide a “significant level of risk protection” to institutional investors, who are in charge of investing the savings plans and pensions of Israeli citizens, said Moshe Bareket, the supervisor of the Capital Market, Insurance and Saving Authority at the Finance Ministry.

“All citizens with savings deserve to benefit from the success of Israeli high-tech, provided that investments are made in a judicious, sensible manner,” he said. “The significant level of risk-protection provided by the state to savings investments as part of the program, coupled with the program’s extensive screening process, provide ample protection against the risks and a potentially significant upside from the success of high-tech investments.”

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