Israel is looking to give its citizens a bigger bite in the success of the startup nation as it launches four high tech investment funds that will be traded on the stock exchange and given state protection for losses. The initiative is making waves in both the tech and the investment worlds, with some welcoming the move but others skeptical about its significance.
Israel’s Ministry of Finance and the Israel Securities Authority (ISA) announced on Sunday that the Israeli high tech industry would be getting “an shot of energy” with the issue of a tender for the setting up of the four new investment funds, each of which would total a minimum of NIS 400 million ($112 million).
For each fund, the government will provide guarantees of up to NIS 50 million. In addition, these funds will be able to raise credit backed by the state of up to NIS 100 million per fund, the statement said.
The new funds will combine investments in technology companies that have their shares traded on the stock exchange but also “significant investment” of at least 30 percent in privately held startups, the ministry said. This investment could go up to as much as 50% or even 75% with a special permit from the ISA, a senior Finance Ministry official told The Times of Israel.
The Finance Ministry and the ISA said they had issued a tender to appoint the managers of the fund, and potential candidates have a month to submit their comments to the terms of the tender.
Most capital invested in Israeli startups derives from foreign funds and many of these companies get snapped up by foreign firms at a relatively early stage, the ministry and the ISA said in a joint statement. The new funds will help Israeli investors, including institutional investors, enjoy the returns of the Israeli tech industry, in a relatively secure framework, with the State participating in any eventual losses, the statement said.
“The new funds combine two important aims,” Finance Minister Moshe Kahlon said in a statement. “Opening a new investment avenue for pension savers alongside a new source of capital for the Israeli high-tech, that depends today mainly on foreign sources.”
Israelis missing out on startup boom
The purpose of the initiative is actually two-fold: to enable Israeli households, through their pension funds, and local institutional investors to partake in Israel’s high tech fest from which they are largely absent, and also inject more action into the flagging trading volumes of Tel Aviv Stock Exchange through the launch of the new traded funds.
The absence of Israeli institutional investors in the Israeli tech scene was highlighted most recently in the Mobileye sale to Intel Corp. for $15 billion, where the lion’s share of the proceeds are expected to go to the foreign institutional investors and funds that were invested in the company. There are no Israeli institutional investors listed among the major shareholders, meaning that Israeli pensioners will be largely excluded from the bonanza.
Earlier this year, representatives of Israel Advanced Technology Industries, an umbrella organization of tech players in Israel and a lobbyist for the industry, met with the Finance Ministry to find new ways to induce local institutions to invest in Israeli technology by removing regulatory hurdles.
An IATI report presented at the meeting highlighted the fact that there is a “very low ratio of investments” in the Israeli venture capital industry by Israeli investors, compared to the much higher ratio of US and European investors in American and European VC funds. The local VCs are “over-reliant” on international investment capital, with “close to zero domestic investment,” the report said, adding that the model is unsustainable and Israeli institutional funds “earn almost nothing from the Israeli start-up industry success.”
The setting up of publicly traded VC funds was also one of the recommendations published in 2014 by a committee set up by the ISA to breathe new life into the flagging trading volumes of the Tel Aviv bourse.
The new funds initiative has incurred some harsh criticism already, with the TheMarker financial website on Monday citing unnamed sources from the venture capital industry that said the funds were unnecessary, as the Israeli high tech scene is already awash with money — Israeli startups raised a record $4.8 billion in 2016 — and the chances of the funds making good returns are very low, as they would be managed by people with less experience that VC fund managers.
But Eldad Tamir, the founder and CEO of Tamir Fishman, an Israeli investment house with $3 billion under management, welcomed the initiative and said his firm is planning to take part in the tender and was studying its terms.
“There are zero public tools to invest in Israeli high tech at the moment, as opposed to other industries, like the energy and the real estate markets in which most of the funding comes from the capital markets,” he said in an interview with The Times of Israel. Today “there is nothing that connects the capital market to one of Israel’s biggest strengths.”
Just as in the past the government supported the setting up of Israel’s first VC funds and its first technology incubators, so too “this tool can change reality” and bring a whole group of new local investors to the arena, allowing them to invest as much or as little as they want, Fishman said.
A key to the funds’ success will be the managers they attract, said Jonathan Irom, a partner at the International and High Tech Department at the GKH Law Offices in Tel Aviv.
“If it will be professional managers that do a good job and have good access, then they’ll get the better deals,” Irom said. “One of the added values of VCs is that they have partners, good connections and can help in terms of business and not just bringing money. If these funds can attract good managers and also added value, then they will also succeed.”
These funds, which could also be seen as a new kind of crowdfunding platform for the public, Irom said, could also help bring funding to areas that are today overlooked by VC funds, he added, such as early, Series A funding.
Most of the investment deals in 2016 were in later stage companies, data compiled by Israel’s IVC Research Center shows.
Jonathan Medved, the founder and CEO of the crowdfunding VC fund OurCrowd, said that OurCrowd’s funds and investments are open only to accredited investors, those who have a net worth of some $2 million. The new funds, proposed by the finance ministry.and the ISA, will enable any household member to go to their bank or broker and invest in Israeli startups, he said.
“This is not about competition, the more the merrier,” Medved said. The total amount that the new funds will invest in Israeli startups is not huge, he pointed out, considering the size of the local tech market. The initiative “is more of a sign-post or a milestone rather than a game changer,” he said. “It is an indication of a direction that the government would like the industry to take.” If, in general, the government is going to be positive about encouraging domestic investors to invest in Israeli startups, then “that is a good thing”, whether or not the actual details of the initiative work out, he said.
The timing for the setting up of the funds may be problematic, said Yaniv Pagot, an economist and head of strategy for the Ayalon Group, an Israeli institutional investor, who had just started studying the details outlined in the ministry documents. The prices of tech shares and valuations are already very high globally, he said, and this could mean that the funds are almost doomed fail, “due to investments made at uncomfortable pricing levels,” Pagot said.
He added that because of the relatively small size of the funds, they could potentially attract lower quality invesmtments, and the managers could be keen to invest in them anyway, to ensure they get management fees from the deal flow.
“It is clear that the good companies will continue to go to VC funds who have deep pockets, experience and a track record. The concern here is that these funds will get the lower vintage startups.” Pagot said. “So, people may think that their investment will get them the next Mobileye, but actually they could be buying into the less attractive part of the industry.”
The Finance Ministry envisions the managers of the new funds to be ideally a combination of experts, a joint venture between specialists of the high tech world and investment experts with a track record of managing mutual funds, the senior official said in the interview with The Times of Israel.
The funds will be profitable, he added, and will not likely have to resort to the government protections, because the mangers will be chosen according to their proven abilities with these kinds of investments, the official said.
The tender details how valuations of startups should be calculated, he added, and a system of check and balances will be in place to make sure assets in the portfolio are not over or undervalued. The government protections will kick in only if the funds show a loss, after eight years from their inception, the official said.
“We believe these funds will make a lot of money” and the government protections will not have to be used, he said. And even if the government will have to step in with its aid, it will be a price that is “worth it” for the Israeli economy, he said.
“The funds will provide an incentive to invest,” he added. Many people know how to value technology in Israel, but the connection between people that understand high tech and institutional investors is “not always clear cut. We know the connections will be made because of this tender.”
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