Venture lending in Israel matures

Plenus co-founder and managing partner Ruth Simcha: Companies can still get loans.

In the US, venture lending to high-tech companies accounts for 15% of all investment in high-tech companies at all stages. The proportion of venture lending is much lower in Israel, but has been steadily rising for years.

Venture lending funds operate in two main ways. Some funds raise money and roll over funds raised for two years, in the same way as venture capital funds. Other venture lending funds and based on leveraged capital - i.e. they borrowed the money they then lend to high-tech companies - and therefore have much less flexibility in changing the repayment and other terms of the loans.

Israel has just one venture lending firm, Plenus Venture Lending Fund. European fund Kreos Capital has an Israeli office, and US fund Silicon Valley Bank (Nasdaq: SIVB), which collaborates with Kreos, and other foreign funds also operate in the Israeli market.

In addition, boutique investment firm Magnolia Capital Partners represents Lighthouse Venture Group LLC of the US. US fund Western Technology Investment (WTI) was until recently also active in Israel, and Costella Kirsch Inc. was also present in the more distant past.

Several venture lending firms that recently extended loans to Israeli companies, such as Triple Point Investment Management LLP of the UK and Hercules Technology Growth Capital Inc. (Nasdaq: HTGC), have not been heard from in months.

Plenus has $320 million under management and provides loans and credit lines to late-stage technology companies. Plenus co-founder and managing partner Ruth Simcha says that, especially in times of crisis and hardship, it is important for start-ups "to choose a suitable venture capital investor that is right for the company. This is no less true when picking a lender."

"Globes": Which companies are candidates for receiving venture loans?

Simcha: "Our strategy isn't to invest in companies between the first and second financing rounds. The company has to have assets."

Simcha is referring to a slew of early-stage Israeli companies that took venture loans in the past two years before they had revenue, sometimes even before they had a working product. These companies are now heavily indebted and are without the means to raise new capital or generate revenue.

What happened to the foreign venture lenders in Israel?

"As in the previous crisis, when there's trouble at home, they prefer to stay nearby. In addition, a lot of the funds operating here were leveraged, and they must reduce their activity during the crisis."

What's the competition like now?

"A year or more ago, there were deals in Israel whose logic we couldn’t fathom. Lenders came to Israel offering low-cost loans, and we often preferred to forego a deal rather than match their terms. The market was hyper, a kind of bubble, but there are now a lot fewer such players. In general, there's a freeze that everyone is feeling. We're aware of the fact that funds are reviewing their portfolios and deciding whom to support and how. We're part of the market, but we're still doing business, and suitable companies can get loans."

Simcha believes that the crisis brings some advantages. "We're seeing a return to normalcy. Companies understand the situation, understand that valuations are more modest than before, and are adapting accordingly," she said.

The second largest venture lender in the Israeli market is Kreos Capital, which manages €650 million in three funds. It raised its €200 million third fund in 2007. Kreos general partner Raoul Stein is responsible for deal in Israel. The firm is expected to extend 15 loans to Israeli companies in 2009.

Are you still doing business, or are you hunkering down?

Stein: "We're definitely still doing business, even in these times, but the change is visible. Company valuations have fallen, and there's a lot less competition for deals in Israel."

Kreos considers itself as a partner to its portfolio companies. Stein says, "In many ways, debt is like equity. Quite a few contracts are based on personal relationships. We won't pull the rug out from under a troubled company. We've had quite a few cases in which we agreed to defer interest payments, when the company had a chance, which is the difference between the various venture lending funds. Partnerships are tested in hard times."

Published by Globes [online], Israel business news - www.globes-online.com - on January 8, 2009

© Copyright of Globes Publisher Itonut (1983) Ltd. 2009

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018