Israeli venture capital funds made more heavy write offs in the fourth quarter of 2005. California State Teachers' Retirement System (CalPERS) published last week its quarterly report on the venture capital funds it is invested in. The report covers CalPERS’s investments in venture capital and private equity funds, and has been published for four consecutive years.
The report details the activity of approximately 200 venture capital funds through the end of 2005, and refer to CalPERS’s investments since 2000. CalPERS is the largest state pension fund in the US, managing $130 billion in various investment instruments. CalPERS invests both directly and through Grove Street Partners, a consultancy firm.
CalPERS is one of the most active investment institutions in Israeli venture capital. Largely thanks to Grove Street Advisors founder and managing partner Clinton P. Harris, CalPERS has very close ties with Israeli venture capital funds. It has invested in eight venture capital funds and one private equity fund in Israel: Apax Partners, Carmel Ventures, Gemini Israel Funds, Giza Venture Capital, Israel Seed Partners, Jerusalem Venture Partners (JVP), Pitango Venture Capital, and Markstone Capital Partners Group LLC.
More write offs than profits
CalPERS’s report shows that veteran venture capital funds (Apax II, Gemini III, Israel Seed, JVP, and Pintago III) wrote off on paper $425 million over the 5-7 years of their activity. The latest figure indicates the continued problematic performance shown by these funds in recent years; their aggregate write-offs totaled $385 million at the end of June 2005. In relation to the veteran funds, and even more so in relation to the new funds, it should be noted that the figures are for the end of 2005, and do not necessarily indicate what the funds will report at the end of their periods of activity, when they return money to investors.
This year, CalPERS added Giza IV Fund and Markstone to its investment portfolio. Both investments were made directly by CalPERS, and not through Grove Street Partners. The CalPERS’s report is based on reports the funds’ managers sent to Grove Street Partners, which manages the investments. This report includes capital transfers to various funds, including management fees.
Publication of CalPERS’s quarterly reports caused consternation to venture capital fund managers, because they reflect their activities, especially their losses and paper write-offs. The write-offs refer to capital raised on paper from the first day a fund began operating. Venture capital funds operate over 10-12 years. They make investments during the first years, and withdraw money only later. The returns on investment usually occur after the fund’s portfolio companies mature, between 5-7 years after being founded in the best case. In 2005, it appears that both Israeli and US venture capital funds made more-write-offs than profits.
8 investments in Israeli funds
One of CalPERS’s most interesting investments is in the private equity fund Markstone, run by chairman Elliott Broidy and managing directors Ron Lubash and Amir Kess. Markstone manages $800 million, and has committed $400 million in investments to date in a number of prominent deals. These include the acquisitions of Golden Pages Ltd. (Dapei Zahav), bookseller chain Steimatzky Group Ltd., and Pekan Plus Mutual Funds Ltd. (formerly Poalim Mutual Funds - PKN) from Bank Hapoalim (LSE: BKHD; TASE: POLI). CalPERS has committed to invest $50 million in Markstone, and its figures show that it has already transferred $11.5 million since the beginning of 2004. CalPERS undertook to invest half its commitment by the end of 2005.
CalPERS’s figures indicate that Markstone posted a negative internal rate of return (IRR) of 36.8% at the end of 2005, and the value of CalPERS’s investment in the fund was $9.45 million at the end of 2005 (before the Pekan acquisition was closed, and its financial holding Prisma Capital Markets Ltd. was established). It should be noted that Markstone is a new private equity fund, which has not yet made any exit by its portfolio companies, and has only drawn downm investors. Therefore, the fund’s figures have no bearing on its final performance in 9-10 years time.
According to CalPERS, Apax II Fund, managed by Zehavit Cohen, posted a negative IRR of 10.7% at the end of 2005. CalPERS committed $5 million to Apax II, which has called on 94% of the money - i.e. it has raised $94 million from investors, including $4.7 million from CalPERS. The value of CalPERS’s investment in Apax II was $3.3 million at the end of 2005. On the basis of this figure, Apax II has written off $28 million on paper of investments made in it.
Carmel II Fund, managed by general partner Avi Zeevi, is one of the newer funds in CalPERS’s portfolio of Israeli venture capital funds. CalPERS committed $5 million to the fund, founded in 2005, and has transferred $375,000 (7.5%). At the end of 2005, Carmel II Fund received $15 million of the $200 million it manages, and posted a negative IRR of 49.8%.
Gemini III fund, managed by managing partner Yossi Sela, manages $200 million. It received $172 million at the end of 2005, including $6.2 million from CalPERS of the $7.2 million pledged. The value of CalPERS’s investment in Gemeni III was $4.7 million at the end of 2005, after withdrawing $400,000 over the years. Altogether, Gemini III has written off on paper $42 million of the money received to date. It posted a negative IRR of 14.7% at the end of 2005.
CalPERS has committed $20 million to Gemini’s follow-on fund, Gemini IV. Launched in 2005, Gemini IV manages $200 million, and has called on 13% of the money, or $26 million. According to CalPERS, it transferred $2.6 million to Gemini IV by the end of 2005, and the fund posted a negative IRR of 42.1% by that date.
According to CalPERS, Israel Seed IV Fund posted a negative IRR of 15.8% at the end of 2005. Founded in 2000, the fund manages $226 million, and called on $160 million at the end of 2005. CalPERS committed$2.5 million for Israel Seed IV, and transferred $2 million by the end of 2005. The value of CalPERS’s investment in the fund was $1.2 million, after withdrawing $320,000. Altogether, Israel Seed IV has written off $64 million of the investment in it.
JVP IV Fund, managed by managing partner Erel Margalit, was founded in 2001, and manages $405 million. According to CalPERS, JVP IV called on $310 million by the end of 2005. CalPERS committed $7.5 million to the fund, and transferred $5.7 million by the end of 2005. JVP IV posted a negative IRR of 13.5% at the end of 2005. The value of CalPERS’s investment in the fund was $4 million. Altogether, JVP IV wrote off on paper $64 million of the investment in it as of the end of 2005.
Pitango III Fund, managed by managing general partner Nechemia (Chemi) Peres, is the largest Israeli venture capital fund CalPERS has invested in. Founded in 2000, it is also one of the oldest. According to CalPERS, Pitango III raised $445 million by the end of 2005 of the $500 million it manages. CalPERS committed $5 million to the fund, and transferred $4.45 million by the end of 2005. Pitango III wrote off $195 million of the investment in it by the end of 2005, and posted a negative IRR of 18.25.
Pitango launched its $300 million follow-on fund, Pitango IV, in 2004. CalPERS committed $20 million to this fund, and transferred $5.4 million by the end of 2005. This figure indicates that Pitango IV raised $81 million by the end of 2005, and posted a negative IRR of 18.9%.
Giza IV Fund, launched in 2005 and which manages $150 million, received $30 million by the end of 2005. CalPERS committed $10 million to this fund, which posted a negative IRR of 14.5% at the end of 2005.
Published by Globes [online], Israel business news - www.globes.co.il - on June 12, 2006
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