KCPS & Co. is planning to raise $120-150 million for its second private equity fund in 2012, five years after raising $80 million its first fund in late 2006. David Steinhardt, the son of hedge fund tycoon Michael Steinhardt founded the investment house.
KCPS manages a private equity fund, hedge funds, and the Manof Fund, each with its own investment mandate and no overlap. KCPS Private Equity's general partners are Gilead Halevy (son of former Mossad chief Ephraim Halevy), Gilead Shavit (former Israel Corporation (TASE: ILCO) deputy CEO), and Uri Einan (son of Azrieli Group Ltd. (TASE: AZRG) vice chairman Menachem Keinan) who sit on both funds' investment committees, which they claim is the limit of their involvement.
KCPS Private Equity has made five investments and had one exit: the sale of its 53..35% stake in Danel (Adir Yeoshua) Ltd. (TASE:DANE) to DBSI Investments Ltd. in June for NIS 115 million, reflecting a company value of NIS 200 million, for a three-fold return on investment.
In an interview with "Globes", the general partners talked about their activity to date and their plans for the future.
"Globes": How do you manage the fund in these uncertain times? Are there good opportunities now?
Uri Einan: "Private equity is a long-term investment field. Two weeks of uncertainty doesn’t change the picture. Complicated times requires in-depth review. Hard times usually create good opportunities."
Do you wait for companies to become troubled before seeking them out?
"Not at all. We don’t invest in distressed companies; we acquire the majority interest and control of the companies we invest in. We invest after a thorough review, which tells us what it's possible to do with the company. That's very different from buying shares."
Will you make new investments through the first fund?
"We've invested 75% of the $80 million fund. We have available capital for one or two more investments. We've invested in five companies to date: Danel, Brand Industries Ltd. (TASE:BRND), FIS Solutions (now merged with IDIT Technologies and Sapiens International NV (Nasdaq: SPNS; TASE: SPNS)), mushroom and spices grower Marina Galil Ltd., and quality assurance and testing company Qualitest Ltd. We don’t invest in real estate or start-ups. We only invest in non-financial Israeli companies with growth potential."
You're one of the first private equity funds to operate in Israel. You raised your first fund before the credit crunch. Is it harder to raise capital now?
Shavit: "The market looked better then, but it wasn’t easy to raise a fund. Today, it's harder for new partners to raise a first fund. Investors definitely prefer teams with experience and joint successes."
The Danel exit will undoubtedly help KCPS Private Equity raise a new fund, as Einan notes that its yield is above the market average, at 3.5 times the money.
Halevy is proud that this yield is considered unusual, given the times. "We met the asset managers of American universities' funds who said that the cash flows of the best funds in our harvest were 1.7 times the money. It should be remembered that funds raised in 2007 stopped investing in companies before the crisis."
Commenting on the FIS investment, Einan said, "This is a veteran company which we invested because we saw the great potential in the US market. Before then, the company most operated in Europe. It went through a difficult period during the crisis in 2009, but overcame it, and a substantial part of its revenue now comes from the American market. We organized the three-way merger with IDIT Technologies and Sapiens, which we believe has created a leading player in the software development market." The merger in July was carried out at an estimated company value of NIS 270 million, mostly in shares.
Your investments are very diversified. What expertise do you bring to such a diversity of companies?
Shavit: "The expertise is our ability to manage companies and help them make a qualitative jump in growth. That's why we always invest in companies for a substantial stake. We don’t invest so that we turn up for a quarterly meeting of management to eat bourekas. We devote at least one day a week at each company to help its management. That's also why we made six investments, not twelve. Each investment was substantial."
What companies are you looking for?
Einan: "Mature companies that the banks want to lend money to; companies with a turnover of at least NIS 100 million."
How many such companies like that exist in Israel?
Halevy: "We met with a bank manager who estimated that there are hundreds of such companies in Israel, mostly private family firms.
Shavit: "Even if they are public companies, they are family controlled."
How do you achieve deal flow?
Halevy: "In high tech, it's simple. The entrepreneurs know how to raise capital and from whom. In our world, there's a lot more leg work among investment bankers, lawyers, accountants who are the intersection of information in the field."
Einan: "The case of Danel is interesting, because we first identified a market segment that looked good to us - the third age market - and then we looked for a suitable company. We actively sought Danel out, they took a banker to represent them, and there was a competitive process."
Einan says that KCPS invested in Brand, a manufacturer of steel components for the energy industry, after identifying the growth in the renewable energy market. "Although 2010 was a difficult year, we're seeing recovery and projects are back on line, and even more strongly. The company has a very large orders backlog. We made three acquisitions after the investment, and we believe that they will boost the potential. One of the acquisitions through Brand was armored kit and firefighting equipment maker Hatehof Ltd. (TASE:THF)."
"Hatehof was in trouble when you acquired it, so why did you go for it?
Einan: "We bought Hatehof from the courts as part of a debt settlement. We invested in the company in order to finance some of the payments to creditors. We're rehabilitating the company, which is now a subsidiary of Brand. It will take time, but we're optimistic."
Published by Globes [online], Israel business news - www.globes-online.com - on October 25, 2011
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