Israel's bubbling private equity investment market made a number of transactions worth hundreds of millions of dollars altogether in the past two weeks. A new study by Globes Research and Kesselman and Kesselman - PricewaterhouseCoopers Israel analyzed private equity and the reciprocal relationships between the funds, companies, and institutional investors. The study also outlined the lines of development of Israel's private equity funds in recent years and different scenarios of investment by institutional investors in them.
The aggregate private equity portfolios of Israeli institutional investors totals NIS 11.5 billion as of May 2008: NIS 5.5 billion invested by insurance companies, NIS 4 billion invested by provident funds, and NIS 2 billion invested by pension funds. The top-end scenario predicts that the aggregate investment will top NIS 40 billion by 2015.
In the past few days, private equity funds have made a number of deals, which shed light on a number of their features. US private equity firm Leeds Equity Partners acquired Jerusalem-based Ex Libris Group for a reported $150-200 million from another US private equity company, Francisco Partners. Viola Partners unit Viola Private Equity held its initial close on $150 million, of its first financing round totaling $250-300 million. Investors include Bank Leumi (TASE: LUMI) and Goldman Sachs Group Inc. (NYSE: GS).
In a third deal, Plenus Mezzanine Fund lent Soda Club Group NIS 33 million. Soda Club is controlled by private equity fund Fortissimo Capital.
These three transactions alone amount to around $350 million, at a time when the Tel Aviv Stock Exchange (TASE) has not been welcoming to companies seeking to raise capital or debt. It is important to note in this context that similar to public offerings, the raising of capital from private equity indirectly exposes the public to risk through the investments by institutional investors. The question is how much of the public is fully aware of this activity, which is sometimes concealed.
The aggregate investment in private equity funds by Israeli institutional investors could exceed NIS 40 billion by 2015, according to Globes Research's top-end scenario. This figure amounts to 5% of the Israeli institutional investors' total investment portfolio, compared with 8% by their international peers. The low-end scenario predicts that 3% of the institutional investors' investment portfolio will be in private equity funds by 2015, double the current proportion.
Private equity funds have raised $5 billion globally for investment in North America and the Middle East, including Israel. Private equity funds have raised $28 billion globally for investment in Asian emerging markets.
An investor in private equity funds can expect an average return on investment of 17.5% a year, based on performance of the past 30 years. Despite higher cost involved in private equity investment, this is a better return than investments in stocks or corporate bonds, let alone government bonds.
The workforce of companies acquired by private equity funds fell by an average of 10.3% following the takeover, compared with companies not acquired. Especially massive layoffs occurred in the financial services, insurance, and real estate industries. This is the source of the intense public criticism of takeovers by a private equity fund, which usually streamlines the activities of the companies acquired.
The main point of this study is that the activity of private equity funds, especially buy-out funds, is about to take a great leap forward. A long list of family or kibbutz-owned small and mid-sized companies - not corporations on the scale of Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) or Israel Chemicals Ltd. (TASE: ICL) - are potential takeover targets by Israeli and foreign private equity funds, which will provide a rich source of financing.
Israeli institutional investment in private equity - May 2008
- Insurance companies - total private equity investment - NIS 5.58 billion: private investment funds - NIS 1.43 billion; real estate funds - NIS 340 million; hedge funds - NIS 3.46 billion; venture capital funds - NIS 342.9 million.
- Provident funds - total private equity investment - NIS 4.04 billion: private investment funds - NIS 893.8 billion; real estate funds - NIS 307 million; hedge funds - NIS 1.86 billion; venture capital funds - NIS 984.5 million.
- Pension funds - total private equity investment - NIS 2.06 billion: private investment funds - NIS 971.2 million; real estate funds - NIS 145 million; hedge funds -NIS 820.6 million; venture capital funds - NIS 119.7 million.
Published by Globes [online], Israel business news - www.globes-online.com - on August 12, 2008
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