Apax Partners, which has already been operating in Israel for a decade, is a fund with a difference. Its two first funds, which were Israeli, were part of the Apax Partners International, which operated at a multinational fund, with independent branches around the world. Apax Partners Israel merged with Apax Partners Europe four years ago.
Apax Partners did not escape the global crisis. The company chose to sit on the fence in 2001, and made no investments at all in Israeli start-ups. The firm resumed its activity in 2002, and has since been one of the most active funds in the region. Apax Partners Israel is an integral part of Apax Partners’ two European funds, which gives the Israeli branch access to a large pile of cash.
Apax Partners Europe has earmarked $600 million for investment in Israel, but that is not the end of the story. If need be, Apax Partners Europe has more money that can be used for investment in Israel. Apax Partners chairman Sir Ronald Cohen confirmed this two months ago, when he said that European investors had changed their attitude towards investing in Israel, which was about to become the Silicon Valley of Europe.
Apax Partners is not solely a venture capital fund. It also specializes in private equity investment, especially in buyouts. This business is not so strong in Israel. Apax Partners was mentioned in the past as a possible buyer for part of Bezeq (TASE: BZEQ), Cellcom, and even Tnuva. For now, however, Apax Partners is concentrating on investment in high-tech companies. The fund expects to invest $100 million in Israeli in 2004. To date, Apax Partners has invested $37 million in Israeli technology companies.
Apax Partners Israel partner Allan (Hanoch) Barkat says that this year’s investments will be in companies at all growth stages, except for the earliest. “We’ll invest in companies, from the first financing round through mezzanine loans. 80% of our investment is in technology companies: software, components and systems, life sciences, equipment, medical services, and media,” he explains.
In recent months, Apax Partners has also been considering investments in the hot field of homeland security. Pinchas Barel Buchris, former commander of Unit 8-200 (the IDF signal intelligence gathering unit), has been appointed a venture partner in the fund.
Barkat says that Apax Partner’s added value as an investor in a technology company stands out, for a number of reasons: “Apax Partners is an international private equity and venture capital firm. We have a unique and unusual investment strategy, in contrast to local funds. Apax Partners’ portfolio is a result of its geographical dispersion throughout the world.
”We have the ability to help companies in forming connections and links with significant players in markets around the world, especially because some of the these companies are part of Apax Partners’ portfolio. We can bring companies together for fruitful cooperation. We won’t force companies to work together just because they appeal to the same markets, but the connections we can offer constitute an advantage.”
Size makes the difference
Barket says that Apax Partners’ size definitely affects its ability to contribute to companies’ growth. “There are 40 partners and 150 investment managers around the world in close weekly contact with their counterparts. The vast majority of the partners have operational experience,” he says. The partners around the world maintain close connections, and the international partners hold a weekly meeting. All the partners operating in its field anywhere in the world evaluate every new company. Apax Partners can choose the very best for itself.
Barkat says that companies are evaluated not just in various fields, but also at various stages: We look at companies at all stages, and try to build a global portfolio.”
Apax Partners is a particular believer in the life sciences, a field for which former AquaPharm Technologies manager Amos Goren is responsible.
”Globes”: Israel is not known for being a center for pharmaceutical companies. Are most investments made in other places?
Goren: ”As far as sums allocations are concerned, we invest $250 million in these companies annually at the European and US level. The location of companies changes according to the opportunities. We judge each company under consideration for investment according to its situation, in comparison with other companies, and the market forces.
”The medical field is cyclical, because it depends on the state of the public markets. About every four years, the stock exchanges become completely closed to new issues. That’s a good time to make investments in companies at the relatively early stages, so that when the markets open again, companies will be ready for an IPO.
”We have an enormous advantage when a market hasn't yet opened up. It’s easy for us to invest, because of the expertise we have. We don’t depend on the capital market letting us know where to invest. On the other hand, when a market opens up, it’s harder to invest in mature companies, because their price goes up. Another factor that changes the picture when a market opens up is that opportunistic investors invest in private companies, thereby pushing up prices. With pharmaceutical companies, you have to know what you’re doing.
Is the pharmaceutical industry different from IT?
”Definitely. It’s a field with different forces, which we use as a basis for investment. For example, in the current period, the dynamics in the drug industry create a serious problem for most large companies. In the coming years, all the drug companies are going to lose their protection for their patents. These drugs currently account for $60 billion in global sales. Right now, generic drug companies are putting cheaper products on the market, and companies that invested millions in developing patent-protected drugs are losing their profits on patent products.
Large companies merging
”The trend is pushing drug companies to develop new drugs with patent protection. In recent years, the large drug companies have investment huge sums in the development of new drugs, but failed to produce enough new drugs to offset the expected drop. They are therefore searching feverishly for small companies with unique developments in order to acquire their products, because the large companies can’t spend too much on R&D.
”Small private companies, on the other hand, can do it, because they aren’t expected to make a profit. Their value is derived from expectations of future profits, not current profits. Today, more than half of the drugs that the major pharma companies are putting on the market are from small companies. What we’re looking for now are companies in the advanced development: the clinical phase, or even the pre-clinical phase. There’s a huge demand for such companies among the large pharma companies.”
Goren says that the investment opportunities in the field are also due to the fact that the major pharmaceutical companies merged in the past decade in order to improve their growth and profits. “Among other things, the result was duplicate development and operations. All the major companies are therefore constantly restructuring, meaning that they’re taking their development groups out of the company.
”We’re taking advantage of this to found new companies that already have proven assets, sometimes even products for markets that aren’t big enough to interest the major companies, but which certainly are big enough to justify activity by the small companies. I’m referring to markets amounting to around $200 million. We’re establishing low-cost niche companies that can bring ready products to market.”
What’s happening in Israel in this field?
”The relative advantage of Israeli companies lies in medical equipment. We believe that Israel will become a leading international center. Israel has a combination of academic research and entrepreneurship on a high level. We’re looking for ways to exploit the fields in which Israel leads.
Separation fence
”In the longer term, we believe that Israel will become a leader in an emerging field that combines pharmaceuticals and medical equipment, such as drug-coated stents, which became a $2 billion market within a few months, shunting aside the conventional stents and grabbing a 70% market share. We’re definitely looking for companies that have already reached the clinical trials phases, or which even have sales. One of our advantages is that we can write very big checks.”
Apax Partners also differs slightly in its attitude towards its investors. Unlike other funds, which utilize their investors rather intensively in helping their portfolio companies, Apax Partners maintains a clear separation. Apax Partners partner Sachi Gerlitz says, “The two factors operate separately. It’s true that more than once, in buyouts, we can offer the partners in the fund the chance to become partners in an investment, but in venture capital, we deal in investments; our job is to create a return for the investors.” Gerlitz addes that the investors in Apax Partners are the conventional variety: leading pension funds and insurance companies around the world. “I’m referring to the biggest and weightiest names the IBM pension fund in New York and California. They aren’t involved in the investment work, and I prefer it that way. Everyone should do what he understands,” Gerlitz explains. As far as Apax Partners is concerned, they have to make money for their investors.
There’s absolute separation?
Gerlitz: ”I think that every fund would prefer to do without interference. I think that separation is the professional way of doing things. I think there’s more hype than truth, in the sense that a venture capital fund’s ability to help companies is limited. You can open doors, but no customer will buy products because he’s somebody else’s friend. On the other hand, what venture capital can do is help raise capital and recruit professional management, particularly where Israeli companies are involved.
”I’m more modest about what I think we can do for companies, although I come from an operational background. I was at Comverse Technology (Nasdaq: CMVT) when it had only a few million in sales, up until their sales reached $1 billion. I understand what our portfolio companies are going through, but we do our work, and they do theirs.
”In essence, today I believe that the utility that venture capital people can bring to companies is almost personal, based on the fund’s experience and methods. Judgment and ability should lead, without interference.”
Perhaps he’s right. If you look at Apax Partners from the most important measure return on capital Apax 2 is the only venture capital fund in Israel that made money for its investors. In its most recent report on the venture capital funds in which it has invested, the California Public Employees Retirement System (CalPERS) stated that Apax Partners was the only Israeli fund on which it had made money. Gerlitz is glad about this fact, but notes, “At this early stage, keep in mind that both losses and profits are on paper, and only on paper. Everyone realizes that the fund’s performance will be measured after seven to ten years. Very little can be learned by measuring after one year.”
Published by Globes [online] - www.globes.co.il - on July 8, 2004