1. Venture Capital Funds
The venture capital market serves a crucial function in the Israeli
economy by providing funds to start-up and emerging growth companies. In
particular, companies in high-technology are heavily dependent upon
venture capital as most have been established by private entrepreneurs
who lack the equity needed to finance their companies.
Within the venture capital funds industry there are four distinct
segments: Yozma funds, Inbal public funds, other public funds and
private funds. The entire venture capital market now boasts 32 funds
with about $508 million in capital. Currently, one new venture capital
fund is planned with targeted capital of about $50 million.. Based on
information supplied by many of the funds and on Giza estimates,
approximately 52% of the total amount raised by venture capital funds
has already been invested.
Appendix lists all venture capital and other investment funds
currently operating in Israel. It shows the establishment date, the
total amount raised, the percentage of assets already invested and the
initiators and managers.
2. Yozma Funds
The Yozma program is credited with doing more to create a venture
capital industry than any other act. The establishment of nine
flourishing venture capital funds are directly attributable to the Yozma
program which was established in 1991 specifically to encourage foreign
investment in the nascent Israeli venture capital market.
The Government of Israel established wholly owned Yozma Venture
Capital Ltd., with a total capital of $100 million, to join as a partner
with investors in new venture capital firms. Yozma Venture Capital has
in each case taken a minority investment of up to 40% of the total
capital of each fund up to a maximum of $8 million. Yozma funds are
mandated to invest in export-oriented high-technology firms with strong
growth potential.
The Yozma program offers another incentive as the private partners
have a buyout option under which they may purchase Yozma's interest in
the fund anytime during the first five years under pre-set terms. A
successful fund therefore would further capitalize from the program by
buying out Yozma's interest, thereby further improving its
performance.
Yozma Venture Capital started actual operations in January 1993. By
September 1995, the program had already encouraged the creation of nine
funds with about $200 million in capital.
Many large global
investment firms and venture capital groups are partners in Yozma funds.
These include Advent International Corp; the Van Leer Group of the
Netherlands; the Walden venture capital group; Oxton International
Corp.; TVM - Techno Venture Management of Germany; AVX, a subsidiary of
Kyocera of Japan; Oxford Partners; Daimler-Benz; DEG of Germany; and MPV
Capital.
Foreign investors have contributed slightly less than 45% of the
capital raised by Yozma funds. Yozma funds are typically the largest
funds in the venture capital sector, averaging just over $20 million.
The biggest fund in the group, Gemini Israel Fund, was established in
early 1993 with $36 million and is followed by The Walden-Israel Fund
with $33 million.
Table I - Yozma Funds
The focus of Yozma has most recently shifted from participation in
the establishment of new funds to direct investment. Yozma is currently
investing in start-up companies in conjunction with foreign firms which
serve as strategic partners and help the young companies to penetrate
the international marketplace. Yozma'a direct investment portfolio
currently consists of 12 companies.
3. Inbal Public Funds
Inbal funds are publicly-listed venture capital funds insured by the
Government of Israel. Investors in Inbal funds are insured on 80% of
their original nominal investment after 7 to 9 years. These funds invest
primarily in small, emerging growth companies in which the Inbal funds
can obtain up to 50% of voting rights. Inbal was created in 1991 as part
of a government initiative to encourage domestic public investment in
the venture capital industry.
There are currently only two Inbal funds, both of which trade on the
Tel Aviv Stock Exchange. The largest Inbal fund, Teuza, raised $22
million. The second, Marathon Fund, raised $20 million. While these
funds have proved popular with the public, tight government regulations
coupled with an annual Inbal premium of 0.2% have generally dissuaded
many investment managers from establishing Inbal funds. These
constraints led management of the Poraz Fund, with $7 million in
capital, to drop its Inbal affiliation in April 1994.
The Inbal program is no longer available for new funds.
3. Other Public Funds
Publicly traded venture capital funds are traded on the Tel Aviv
Stock Exchange. These funds generally invest in small emerging growth,
high-tech companies in which they can obtain a 10%-50% stake.
The three existing publicly traded venture capital funds, Mofet,
Poraz and Danbar Technologies have total assets of $38 million. Mofet
and Poraz operate as dedicated venture capital funds. Danbar
Technologies has invested in public technology companies and in
companies that are past the initial major R&D stage. Mofet, the largest
fund in the group, has assets of $17 million.
Table 2 - Shareholders' Equity and Market Capitalization of
TASE-listed Venture Capital Funds ($ millions)
4. Private Venture Capital Funds
Private venture capital funds, which are not affiliated with any
Government program, are a major segment of the venture capital market,
with 18 existing funds totaling $227 million. The average private
venture capital fund is about $12 million. Some notable funds in this
group are the $29 million Athena fund, which was established in 1985 by
Dan Tolkowsky, Fred Adler and Uzia Galil of Elron and was the first
venture capital fund in Israel. The Sta group of funds, managed by Star
Ventures Management of Germany and headed by Dr. Meir Barel, can also be
regarded as a pioneer of the venture capital industry in Israel. Star
funds may also invest in European and U.S. companies. However, it is
estimated that more than 50% of their assets has been invested in
Israeli or Israeli-related companies.
5. Private Diversified Funds
Private diversified funds invest in a wide range of sectors including
high-technology, public infrastructure, real estate, tourism and
communications. Investments are made in both public and private
companies at various stages of development. These funds sometimes invest
in technology companies which have an established product or technology
and need funds for further R&D activity or marketing. It is estimated
that up to a third of private diversified fund assets are invested in
technology companies.
Private diversified funds represent the largest sector of the Israeli
investment fund market with 25 funds and approximately $548 million in
capital. While the average fund size in the private diversified group is
$22 million, the funds range widely in size. The largest if the
Renaissance Fund with $160 million in capital, managed by Stockton
Partners and Claridge. Currently, there are about 9 new funds in various
planning stages with total targeted capital of about $400 million. Based
on data supplied by several funds and on Giza estimates, approximately
45% of the total amount raised by private diversified funds has already
been invested.
Two major funds established in 1995 are Challenge Fund ("Etgar") and
Israel Growth Fund. Challenge, which is managed by Joseph Ciechanover
and Yair Shamir, raised $100 million. The major investors in Challenge
are Dwayne Andreas (Archer Daniels Midland) and Edgar Bronfman, each
reportedly having invested about $20 million, and Arie Genger. Israel
Growth Fund, which was initiated by Apax Partners, A. Patrocof, Leumi &
Co. and OPIC, is managed by Ronald Cohen and Oded Axelrod. It raised $40
million and is seeking further funds. The major investors in Israel
Growth Fund are Archer Daniels Midland, Bank Leumi and several U.S.
institutional investors. Israeli firms active in the management of
several diversified funds are Dovrat, Shrem and Evergreen.
Private diversified funds are flexible in their investment approach
and can make large investments in a variety of industries. For example,
the Renaissance Fund made substantial investments in Paz Oil Company,
Israel's largest fuel marketing company, and in the former government
real-estate company Housing & Development Ltd. The Renaissance group
(including co-investors) hold 33% of Paz and 25% of Housing &
Development Ltd. Currently, a group organized by Renaissance is bidding
for Bank Hapoalim, Israel's largest bank, which has substantial holdings
in several Israeli conglomerates and investment companies.
Table 3 - Summary Data on Investment Funds
Table 4 - Investment Funds - Amounts Raised and Invested (Estimates)