The "Globes" campaign for increasing investments by Israeli investment institutions in Israeli high tech is having an effect. In summing up a meeting yesterday, Minister of Finance Moshe Kahlon instructed officials at his ministry to consider ways of eliminating tax distortions and removing other regulatory barriers that make it difficult for Israeli investment institutions to invest in Israeli high tech. One possibility under consideration by the Ministry of Finance is establishing a special team on the subject, but this may be unnecessary, with internal work at the Israel Tax Authority being sufficient.
Participants in the meeting included Ministry of Finance director general Shai Babad, Kahlon aide Nadav Shemesh, and a long list of senior managers in Israeli high tech and investment institutions. The high-tech participants included Jon Medved from crowd funding platform OurCrowd, Aaron Mankovski (Pitango Venture Capital), Dror Nahumi (Norwest fund), Arnon Dinur (83North Venture Capital), Alan Feld (Vintage Investment Partners), Arik Kleinstein (Glilot Capital Partners), Dr. Nissim Darvish (OrbiMed Advisors LLC and others), and Israel Advanced Technology Industries co-chairmen Yaky Yanay and Erez Tsur and CEO Karin Mayer Rubinstein. From the investment institutions, there were The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5) executive VP and chief investment manager Roy Yakir, Gilad Pension Fund general director Yoav Armoni, Harel Insurance Investments and Financial Services Ltd. (TASE: HARL) deputy CEO Sami Babkov, Meitav Dash Investments Ltd. (TASE:MTDS) CEO Ilan Raviv, Menorah Mivtachim Holdings Ltd. (TASE: MORA) executive deputy CEO Yoni Tal, and others.
The Ministry of Finance said that Kahlon had no intention of intervening in the investment policy of investment institutions, but he was unwilling to accept distortions and discrimination against Israeli money in favor of foreign money invested in high tech, especially through the venture capital funds. At the end of the meeting Kahlon said, "I believe in a free economy and a minimum of government intervention, but there are unfortunately places where Israeli money is discriminated against, in comparison with foreign money. These distortions are preventing investment by investment institutions in Israeli high tech. It is possible and necessary to correct these distortions, and that is what we will do - we will fix, remove barriers, and reduce regulation."
The Ministry of Finance was persuaded mainly by complaints by the investment institutions and venture capital funds about differences in taxation between Israeli and foreign investors in venture capital funds. For example, the state imposes VAT on the annual management fees paid to the venture capital funds by Israeli investors, while foreign investors are not required to pay VAT on their investments. Annual management fees of 2.5% of the investment are frequently charged, and are likely to amount to substantial sums if the investment is retained for many years.
There are also differences in taxation on success fees in a fund. US investors, for example, pay 25% capital gains tax, while higher tax rates are imposed on private investors and investment institutions investing nostro funds. Success fees obtained when a venture capital fund holding is sold are the investors' sole source of revenue. On the other hand, the institutions' request for a safety cushion from the state to insure their investments against loss will probably not be granted.
During the meeting some of the investment institution managers complained that the venture capital funds had poor records, and the proportion of their investments in venture capital was the same as overseas; the venture capital fund managers did not agree with this assertion. Figures revealed by "Globes" show that 96% of the funds entering the Israeli high-tech industry, amounting to nearly $5 billion last year, was foreign money, while only 4% was local money. In addition, of the NIS 1.5 trillion managed by investment institutions in Israel, including provident funds, new and old pension funds, and life insurance, only 0.2-0.3% was invested in the Israeli venture capital industry, a miniscule figure.
Dinur, whose 83North fund recent raised $250 million, surprised his colleagues in the venture capital industry by opposing funding for more Israeli venture capital funds. He argued that too much money was flowing into the Israeli high-tech market, and companies that were not good enough were being funded as a result. Dinur believes that there is no need to encourage investments in Israeli funds and no need to prefer them to foreign investments. His remarks aroused anger among his colleagues, who asserted that the foreign investors had not always been here, and in a dig at him, cited the fact that US fund Greylock Partners had not invested in Greylock Israeli Partners, which had therefore become 83North.
At the end of the meeting, Rubinstein said, "We have put an important issue on the government's agenda, and have urged a second meeting with the minister of finance on an unusual format that has not been done previously, because we believe that a joint direct dialogue between the relevant parties will achieve the desired result of increasing investment in high tech by investment institutions. The recommendation to appoint a joint work team constitutes an important step towards progress in this matter."
Tsur added, "The investment institutions want to invest in high tech, but are restricted by regulatory and legal requirements. There is no doubt that having the industry rely more on local capital, which will bolster stability and enable the industry to continue in the forefront of the global innovation and technology industry, is a healthy situation. A joint effort should therefore be made to keep high tech competitive, and a work plan including agreements acceptable to all the parties involved will mean that Israeli savers will benefit from the success of high tech."
Published by Globes [online], Israel Business News - www.globes-online.com - on April 27, 2017
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