After the dismal recent news from Markstone Capital Partners, the headlines in the business sections of some newspapers have given the impression that at least by selling its holding in Psagot, the fund will finally enjoy a substantial profit, such as will restore some color to the gloomy faces of Ron Lubash and Amir Kess. A decent profit would bring some cheer after the bribery scandal involving fund chairman Elliott Broidy.
One newspaper mentioned “a profit of hundreds of millions of shekels” that the fund will rake in from the sale of its 24% stake in the investment house. Another cited an internal Markstone document as stating: “We will make a gain of NIS 620 million from the sale of the Psagot holding.”
However, an investigation by “Globes” shows that, if Psagot is sold to Apax or to Hellman and Friedman at a value of NIS 3.2 billion, Markstone will be able to narrow its loss on its investment in Prisma, or at best get its original investment back, perhaps with a small surplus. At any rate, there will be no substantial profit here.
Profit, as far as we are aware, is the difference between income and expense. Therefore, in Markstone’s case, the profit is not the hundreds of millions of shekels that it will receive from the sale of its Psagot stake, but the difference between the amount it invested in setting up the late lamented Prisma and the amount it receives from the Psagot sale. There’s a small bug here: Markstone has a debt in the hundreds of millions of shekels arising from the purchase of the Prisma provident funds, and debts, as is well known, have to be repaid.
The figures are as follows: Lubash and Kess invested NIS 1.9 billion in setting up Prisma and buying the banks’ assets (provident and mutual funds). About half the investment was the fund’s money, which, incidentally, came from widows and orphans in New York and Sacramento, and which we now know was obtained illicitly.
The other half, about NIS 1 billion, is debt taken in 2005 from banks in Israel to finance the purchase, and NIS 106 million in bonds, mainly held by insurance companies Phoenix, Menorah, and Israel Land Development, and Bank Otzar Hahayal. This debt financed the purchase by Markstone of broker A. Solomon, Bank Hapoalim’s mutual funds, and Bank Hapoalim and Bank Leumi’s provident funds, on the way to setting up Prisma, which, for a short moment, was Israel’s largest investment house.
Of the total amount invested in setting up Prisma, Markstone invested NIS 873 million in buying the provident funds from Bank Hapoalim and Bank Leumi. About half this sum was Markstone’s own money. The rest came from a loan from Hapoalim and Israel Discount Bank (to finance the purchase of the Leumi funds), and from Discount, Mizrahi-Tefahot, and First International (to finance the purchase of the Hapoalim funds).To that should be added the money raised from the bond issue.
In January 2009, in realizing the assets of Prisma after a series of disasters there, Markstone transferred the provident funds to Psagot in return for 24% of Psagot’s shares and NIS 170 million cash, most of which went to the banks, while NIS21 million went to the bondholders.
Today, Markstone is left with debts to the banks and the bondholders totaling NIS 400 million on account of the funds it bought. Assuming that the sale of Psagot is accried out at a value of NIS 3.2 billion, Markstone will receive NIS 768 million, so that, after repaying the debts, it will be left with NIS 370 million, or 95% of the equity it invested in buying the funds. This means that, in practice, Markstone makes nothing.
Incidentally, Markstone received an option on a further 6% of Psagot but, contrary to what has been claimed, the option is not exercisable. The agreement with Psagot states that Markstone can exercise the option at a value of NIS 3.9 billion, which it would seem will not be apply to Psagot in the near future.
In retrospect, the move led by Kess a year ago to break Prisma up into its component parts was successful. Roy Vermus of Psagot enhanced the value of the funds, halted the flight of fund members, and, within a few months, managed to fix what Markstone had ruined over three years. Transferring management of the provident funds to the competitors at Psagot saved Markstone from losing most of its investment in Prisma, and enabled it to recoup some of its losses. But it looks as though there will be no profit, certainly not the kind of handsome return expected of a private equity fund.
Optimistic valuations
The second stage of outsourcing whereby Markstone transferred its financial holdings to be managed by its competitors was the transfer of the rest of Prisma’s financial activity to Excellence in exchange for a 45% stake in Excellence Nessuah Mutual Funds. Thus Markstone became a financial holding company, and through two deals, Prisma was dismantled.
Here too, although Markstome succeeded in minimizing the damage, it could not prevent a fall in value. In its financials at the end of September, Markstone reported that it invested in Prisma (now known as AMFIC) $198 million, and that the current value of the investment was $155 million. In other words, even according to Lubash and Kess’s optimistic valuations, Prisma is down $43 million, giving a 22% negative return. However, thanks to Vermus, after the sale of Psagot, Prisma’s value on Markstone’s boks will rise.
At the moment, optimism is the name of the game for Lubash and Kess. A prominent example is Markstone’s valuation of drip irrigation equipment company Netafim - $88 million in the fund’s third quarter financials, representing a $7 million rise since the second quarter. The Tene Capital fund, which also holds a stake in Netafim, values its holding on a considerably lower basis.
The few rays of light at Markstone so far have been the realizations of its investments in Zeraim Gedera and Golden Pages. It bought these two companies for $102 million, and sold them for $196 million, a nice return of 91%.
A nine-month time window
In any case, time is running out for Markstone. Since chairman Elliott Broidy admitted this week to having committed bribery, voices have grown louder among Israeli institutions invested in the firm for it to be wound up, for its management to be changed, or at least for it to cease making any new investments.
Lubash and Kess have so far invested $562 million out of the $800 million in commitments from investors, to which can be added another $80 million in management fees taken by the fund’s managers since it started operating.
Unfortunately for the Israeli institutions, they have no real ability to influence Markstone’s activity. The decision will not be made in Israel, but in the US, by the big investors that hold the lion’s share of the fund. This is because, to stop the fund investing the remainder of the money to which its investors are committed, or to make other changes, requires a more than two-thirds majority of the investors.
The escape hatch for the institutions lies in another section of the fund’s articles. This stipulates that the investment period during which the fund can make an initial investment is up to the end of September 2010. In other words, Lubash and Kess have another nine months in which to dispose of the remainder of the money ($238 million).
That looks like a difficult mission: to identify good companies (though there may be some candidates in the pipeline), to conduct negotiations, due diligence, and closing, and all that within a few months. At present it looks as though Markstone’s sand timer for investments is running out, and the Israeli institutions, which can have no real impact on events, can expect not to have to inject more money into the fund.
Published by Globes [online], Israel business news - www.globes-online.com - on December 9, 2009
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