The highly respected name of Sir Ronald Cohen and his title of chairman of Apax Partners & Co., which manages $4.4 billion in capital, can be misleading at first glance. It could make us think that behind the name lies the banal life of someone who went to school at Eton, attended university at Oxford, and later joined the City of London’s economic elite. This description, however, does not fit Ronald Cohen.
As his name indicates, this highly respected knight of the British empire is a Jew, who even speaks more than passable Hebrew without an accent. He claims that his Hebrew abilities are a result of studying a month at Ulpan Akiva. It appears probable, however, that his Israeli wife and his reading of Hebrew poetry have made at least an equal contribution. Cohen was born in Egypt; and his parents are descended from a Jewish family from the Syrian city of Halab. It is common knowledge that the Jews of Halab have produced more than a few tycoons who are well-known in Israel, and even around the world. The Safra family and Yitzah Shrem are only two outstanding examples.
In 1957, following the Sinai campaign, which fostered a wave of anti-Semitism in Egypt, Cohen’s family had to leave the country and make a new start in England. When you look at where Cohen is today, compared with his start as the son of immigrants, you realize that his is no banal biography. After his university studies, Cohen began his financial career. In the mid-1970s, he founded the Apax fund as a small investment fund. Hooking up with Alan Patricof, one of the initiators of the venture capital industry on the East Coast of the US in the 1980s, made his fund global and enabled him to double the quantity of capital managed every two or three years. Apax currently manages €4.6 billion around the globe, of which €674 million is designated for investment in Israel. Apax is one of the most active global private capital funds in the world.
In an industry that has become professional and prides itself on its local character - the familiar slogan of the Sequoia Capital fund from the US West Coast is they would only invest in a company if they could ride to its offices on a bicycle - Apax led the trend towards global activity. Apax Partners Ventures (Israel) director Oren Zeev frequently mentions the globalization process undergone by the investment banking industry (Goldman Sachs, for example) and the strategic consulting business (McKinsey, for example) as a model for Apax.
Cohen, of course, agrees with this attitude and even actively led its development. According to this system, partners from around the world decide on large investments, while a local investment committee decides on small investments, followed by an examination and consultation with experts on the sector from around the world.
”Globes”: Who needs such an enormous fund that does not focus on a local market or develop a close relationships with its entrepreneurs?
Cohen: ”We have a situation in which the IPO market is dead, while venture capital funds all over the world have raised over $200 billion. In the past three years, we have seen the venture capital industry become global on the one hand and more focused and professional vis-a-vis sectors on the other. In the future, we’ll see the venture capital market separate into small, locally focused venture capital firms on the one hand and large, international firms on the other. You can guess to which of these categories we belong. The international firms will manage capital on a scale comparable to the public capital markets. You’ll see, in another five-six years, the entire venture capital industry will polarize between these two extremes: the local and the global."
”I want Apax to be an alternative to the IPO market. With its deep pockets, it can provide large amounts of money to companies that cannot hold IPOs in bad years. Funds should consider the possibility that the IPO market could remain closed for another three-four years.”
Aren’t you going a little too far?
”No. Certainly not. Keep in mind that in the 1980s, after the PC boom, there were seven lean years, in which the window of public issues was very limited. I think that in this situation, an international fund shouldn’t invest solely in private companies at the early stages; it should move throughout the whole range between seed investments and acquisitions and leveraged buyouts (LBOs) in public companies. We want to have very deep pockets, so that we’ll be able to invest in private companies from the seed stage up to the most advanced stages - $40-50 million over four-five years, as well as private investments in public companies. That’s called PIPE (private investment in a public entity). Our recent LBO transaction in acquiring Yellow Pages in England from British Telecom is an example.”
”Another example is joint ventures that we’re starting to develop in the biotechnology and oncology fields. Deep pockets are a basic requirement for all these things; only a large, international firm can offer all these services.”
What public companies are you looking for?
I think that these days, large companies are selling their divisions, whose activities are not in their core business. Acquiring these divisions is very worthwhile, since this business is valid and profitable, while its valuation has been deeply eroded, due to the market situation. Many large equipment companies have simply expanded beyond what is stipulated in their business plans, and they’re now getting rid of the excess. For us, it’s a period with golden opportunities. Our importance in such a period is obvious, because along with the decline in valuations, the risk premium taken by the banks for leveraged deals has risen. Caution is the name of the game in this business, and our capabilities and capital therefore enable us to be a factor that can be relied on in such deals, which involve large amounts of capital.”
In the coming years, will your investment strategy lean more towards LBOs or investments in private companies? Where do you think the opportunities are greater?
”To tell you the truth, with the quantity of capital that we have, I don’t have to decide. I think there are many good opportunities at both ends and we examine each deal individually. Where acquisitions of public companies are concerned, we are careful to acquire only profitable companies with cash flows. Actually, when I said before that we can be a substitute for public capital, I meant that we can replace the public market for private companies that ordinarily would have had an IPO, but cannot do so now because of the market situation, and also meet the requirement of operational profitability. We will invest money in them and acquire them in a way that will enable them to continue operating.”
How does that differ from the activity of a regular venture capital fund?
”Venture capital funds have invested in everything in recent years, including companies that did not and will never make a profit, under the assumption that they would always be able to realize their investments through a quick IPO. As a result, their capital drained away and they cannot commit themselves to large, $50-100 million investments in companies approaching their IPO. We acted fairly reasonably in this period, because we were skeptical and because as a large investment firm, we operated according to the usual standards for the field and spread our investments around as much as possible. Consequently, only 6% of our portfolio consists of Internet companies, while some of the most recognized US funds invested a considerable proportion of their capital in Internet companies that went bankrupt.”
How can a venture capital investor today make seed investments in a way that will minimize his risk?
”He just has to face reality, that’s all. Nothing is different than it was three-four years ago. Companies take six to eight years to go from their seed round to their IPO, in contrast to the two-three years that we have seen in recent years. A company operating in a good field with leading technology and a strong management team can do it. The proof lies in the simple fact that over the past 15 years, 70-80% of the public companies made a profit. I think this figure shows something about what has happened in recent years. The moment we understand that an unprofitable company cannot hold an issue, the entire investment horizon will be different. Only three out of the 92 PC companies that began the 1990s are still around today.”
How can you make sure that the companies in which you invest in a given sector will be among the three that survive?
”The answer isn’t written in any book; there is no simple answer. I think, however, that the combination of our deep pockets, our global reach, and the operational capacities of our 180 global investment managers provide a big success coefficient to companies in which we invest. First of all, we can turn the whole world upside down to find the right team. Afterwards, we can help the team with capital until the advanced stages and contribute our global capacities to the company’s success.”
What will the venture capital industry look like in the medium range of three years from now?
”Not very good. The return on many funds is liable to be low; they might even lose money. We’re in a period similar to the mid-1980s, when the PC craze created a bubble. After it was deflated, many funds were left without capital or the ability to raise it, due to their poor performance. Funds that invested a large proportion, over 50%, in the Internet are extremely likely to have no return at all. Half of the funds that raised money in 1999 and 2000 will now be fighting for their lives. We are about to enter a very stormy period in the venture capital industry. Many new funds that sprung up in the wake of the boom will be unable to raise more money. Institutional investors, who saw their public portfolio fall substantially, will also have to restrict their venture capital investments, which have grown from the usual 3-4% of their portfolio to 7-8%.”
In a period like this, shouldn’t a global fund with your supply of capital try to recruit leading partners in the venture capital industry?
”We would be glad to do so. If we can find high quality experts for sectors to add to the 180 we already have, we will be delighted. We are especially looking for people like Sachi Gerlitz with extensive experience in the industry.”
Do you think such people will be tempted to leave solidly based companies at a time like this?
”I think so. The more competitive the venture capital industry becomes, the more their value will rise and the greater the reward for leaving their fields in favor of venture capital will be. In the coming years, experience and added value that can bring the entrepreneur to the brink of success will count in the venture capital field, not money.”
How do you see the Israel venture capital market in the medium term?
”I think it will be in a fairly good state, because in the final analysis, every partner and entrepreneur is an industry man. You can see that the growth rate in technology has accelerated. It is a good time for funds that can get their hands on technologies with a true competitive advantage. The combination of rising quality and falling valuations will be very attractive. I think Israel has very high quality.”
Even in management?
You’d be surprised, but yes, definitely. My impression is that Israeli companies are managed as well as US ones.”
It appears that some Israeli fund managers are handicapped by an emotional involvement with their portfolio companies and have a hard time closing them. What do you think is the right thing to do? Close them or struggle on?
”I can only tell you what we do. If a company needs money and it has no chance of achieving profits or producing a leading intellectual property, it must reduce its cash burn rate. If it cannot do so, it must be closed. It is human nature to hope that a solution for the company will be found soon, but natural selection teaches us that only the strong survive in the end, however unfortunate that may be. Of course, which fund supports the company is a key factor in its survival chances.”
It looks like the European venture capital industry has gone to sleep. Will it wake up soon?
”I certainly think that Europe will become a more central factor in the industry. In that context, Israel has a good opportunity to strengthen its link to Europe and become the European Silicon Valley. Israel has features that set it above the other technology centers in Europe, so it can definitely obtain the desired attention. The leading factor in the European market will be the Easdaq European stock exchange, which in my opinion will raise the public technology capital market several degrees above what the Neumarkt Stock Exchange in Frankfurt has done.”
In view of Europe’s cultural diversity and its ambivalent, even distant, attitude towards Israel so far, can Israel become an integral part of, let alone a leader in, the European technology industry?
”Just as Israel is part of the Eurovision song contest and European soccer, it can be part of the European technology industry. This is the right place to mention that Israeli regulation plays a significant role in Israel’s growth potential. Solving taxation problems in the quickest and clearest way possible is important. I can tell you that seven years ago, Apax Israel had to refrain from a $35 million investment in a fund, simply because institutional investors were not tax-exempt. The Minister of Finance is headed in the right direction, but there are still problems that make Israel less attractive than the US, France, or Germany. Until they are solved, Israel will not receive the attention it deserves. I can tell you that the negative impression left by the taxation problems following the Chromatis deal was not good public relations for investment in Israel.”
Published by Israel's Business Arena on October 29, 2001
Moran Bar Kochva