Private-equity investments tumble in first quarter — report

Private-equity investments tumble in first quarter — report

Investor blues and Chinese economic troubles conspired to shoot down private-equity investments — but experts believe that a corner has been turned

Chart shows recent private equity activity in Israel. (IVC)
Chart shows recent private equity activity in Israel. (IVC)

Private-equity investments in Israel took a nosedive in the first quarter of 2016. A report by the Israel Venture Capital (IVC) shows that PE investments — in which local or foreign funds buy up the total assets of a company — were nearly halved compared to the first quarter of 2015.

This year, $265 million invested in 15 private-equity deals during Q1 — a 46-percent decrease from the $488 million invested in 21 deals in Q1/2015; and a 69-percent drop from $855 million invested in 21 deals in the fourth quarter of 2015.

Those numbers don’t necessarily mean that the gold-plating has fallen off Israel’s high-tech economy. PE deals were down around the world in the first quarter: On Wall Street, banks got 38% less in PE tech-sector deal fees this year than last, the lowest amount banks earned on such deals since 2010.

In addition, a large part of the drop can be attributed to a falloff in foreign PE fund investments; foreign PE funds invested $151 million in the first quarter of the year, a 51-percent year-over-year decline over the first quarter of 2015, when they invested $307 million.

In recent years, “foreign investment” in Israel has in large part become synonymous with Chinese investments. In the second quarter of 2015, PE investments set a record, with 29 deals worth $1.67 billion, according to IVC figures. Most of that money — more than three-quarters — was from foreign PE funds, with the biggest deal in the quarter the $510-million buyout of medical device firm Lumenis by China’s XIO Group.

The IVC figures for the first quarter did not specify the origins of the foreign investment that did go into PE deals, but it’s a safe bet that with China dealing with its own economic malaise and struggling to maintain double-digit annual growth rates, Chinese investors are becoming a bit more cautious as well.

With that, experts expect that the second quarter will be better. Omer Ben-Zvi, a partner at Shibolet & Co., which worked with IVC on the report, said that it was too early to see the Q1 slowdown as a trend.

“The number of deals, and even more so — the total amount of Israeli private-equity transactions closed during Q1/2016 — demonstrates a substantial decrease compared to the quarterly volume we are used to seeing since mid-2014. However, there are positive signs: We have seen an improvement in financial markets in the first quarter, and there are already deals underway we are tracking in the second quarter,” said Ben-Zvi.

He added that “other signs include the $1.1-billion closing of FIMI VI in Q1/2016, and the attractive valuations achieved lately by mature Israeli tech companies.”

Indeed, investors in the US are also expecting a major revival of investment activity — including PE investments — in the coming months. Whereas experts were telling Bloomberg in January that “the financing markets are shutting down” because of fears that they were too thinly leveraged, the headlines in May declare that “the equity markets are back” and that “the good times are set to roll again.” The increased activity on Wall Street will likely raise investment boats as well, said Ben-Zvi.

As far as foreign investment is concerned, several major new investment funds announced recently could see more money available for PE deals. Last week, Chinese conglomerate KuangChi said it was setting up an investment fund that would seek to put $300 million into Israeli tech firms. Most of the tech they are interested in is likely to be in mid-stage, and enterprise firms — the kind of firms that tend to attract private-equity funds, as opposed to start-ups, generally preferred by venture capital funds.

Dr. Ruopeng Liu, the group’s chairman, said that “Israel has unparalleled capabilities to offer the world. It shares with KuangChi a special mindset and vision. We intend to invest in the best local companies in the fields of biometrics, communications, robotics, and augmented reality, and take them to the next level commercially and technologically.” Early-stage companies that the fund invests in will be invited to join an accelerator in China, where KuangChi will teach them “the Chinese way” in tech and business, preparing them to enter and thrive in the Far East.

According to Marianna Shapira, research manager at IVC: “The Israeli high-tech industry is currently faring better than other tech markets around the world, continually offering superb investment opportunities at relatively low valuations. This creates competition on potential technology deals, which challenges Israeli PE funds to adapt and find creative investment models. Richer foreign funds are targeting the higher-end deals, particularly buyouts, and Israeli growth-stage VCs target high-tech companies in particular.”

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