Israeli investment firm turns unwanted start-up options into gold

Israeli investment firm turns unwanted start-up options into gold

A secondary stock market – where shares that cannot be sold publicly go to be traded – embarks on a $100m fund

(L to R) ISF Founding Partner  Shmuel Shilo; Dror Glass, Founding Managing Partner; Nir Linchevski, Managing Partner (Courtesy)
(L to R) ISF Founding Partner Shmuel Shilo; Dror Glass, Founding Managing Partner; Nir Linchevski, Managing Partner (Courtesy)

In the start-up world, companies attempt to recruit top talent by offering a plethora of benefits in lieu of the cash they do not have available. One favored enticement is stock options, which give workers not only a stake in the firm, but also motivation to work harder and make the company successful enough so that their shares in it are worth something.

While companies, even profitable ones, are still private, those options are not tradable, but not everyone can afford to wait. For those who need money more quickly, there’s the Israel Secondary Fund (ISF), a group that has made a successful business out of buying up those shares and waiting for them to be tradable.

As a completely private operation, the ISF does not disclose its balance sheet publicly, but that the company is making money is clear from the fact that it is now well into the advanced stages of raising $100 million for its second fund, ISF II.

According to Dror Glass, one of three partners (along with Nir Linchevski and Shmuel Shilo) in ISF, “the secondary fund business is becoming an important investment channel. As one of the veterans in this field, in Israel or anywhere else, we have become very good at searching out the investments that will pay off for our investors.”

Along with acquiring individual shares and options from tech workers and executives who want to sell out for whatever reason, ISF also engages in acquiring minority stakes in companies from venture capital funds or angels who want out of an investment, becoming limited partners in venture capital and private equity funds, and developing structured deals providing capital to existing funds.

That a vice president at an up-and-coming tech start-up wants to sell their stake does not in any way mean that the company is having problems, said Glass. “There are a million reasons why people would rather have cash than shares, most of them personal.”

Obviously, before snapping up shares or options, ISF does its due diligence to ensure that it is spending its money wisely and that effort is paying off, said Glass.

“ISF II is our second fund, following up on the success of ISF I, which held direct and indirect stakes in more than 100 private companies, and has already realized 30 exits.”

Among the exits ISF had a stake in (some of those stakes substantial) were Waze, acquired by Google; the IPO of SolarEdge Technologies; the acquisition of SuperDimension by Covidien Ltd.; the acquisition of PrimeSense by Apple; the sale of WorkLight to IBM; and the recent acquisition of Altair Semiconductor by Sony Corporation.

According to Glass, “the secondary market has been developing rapidly in the recent years in Israel, and it continues to grow at an accelerated pace. Investments of over $30 billion in Israeli funds and technology companies in the past decade have created an Israeli secondary market potentially worth hundreds of millions of dollars. Today, companies are staying private for longer, and build very significant business activity before going public or being acquired. As a consequence, there has been a growing need by entrepreneurs and investors for liquidity in the years preceding an exit.

“ISF aims to become the preferred liquidity provider for entrepreneurs, executives and investors in the years preceding an exit,” added Glass, “and to be a long-term financial partner for the companies and funds in which ISF invests.”

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