Poalim Ventures is an unusual venture capital concern. Unlike some venture capital funds, which manage capital from financial or corporate investors, or investment institutions, Poalim Ventures is actually the investment arm of Bank Hapoalim (LSE: BKHD; TASE: POLI) subsidiary Poalim Capital Markets. In addition, Poalim Ventures also invests in other funds.
Through Poalim Capital Markets, Bank Hapoalim has used Poalim Ventures as its investment arm since 1990. Poalim Capital Markets has three kinds of business. One is underwriting, which it conducts through subsidiary Poalim IBI Underwriting and Investments (TASE: PIU). The second is investment banking, conducted through Corporate Finance, which is managed by managing partner and head Meir Jacobson and executive VP international corporate finance Amir Aviv. Poalim Capital Markets also represents Chicago-based investment firm William Blair and Company in Israel.
Over the years, Poalim Ventures has managed all of Bank Hapoalim’s non-financial investments, from options in companies to venture capital investments. Poalim Capital Markets president and CEO Nir Brunstein and Poalim Ventures managing director Eran Gersht are responsible for this activity. They also consult their advisory board, which consists of Joseph Atsmon (a board member at NICE Systems, Ceragon, and Radvision), Dan Falk (Sapiens International), Nathan Nissani (Suny Electronics), Yuval Cohen, and Poalim Capital Markets director and former Ministry of Industry, Trade, and Labor Chief Scientist Dr. Orna Berry.
Horizon, Poalim Ventures’ first fund, was recently declared inactive. Brunstein says, “The fund ended its life well, with good returns. It managed $30 million, and we returned $58 million.” Among Horizon’s prominent exits were AudioCodes, Technoprises (formerly BVR Technologies), and Medinol.
In 1997, when the high tech boom began, Bank Hapoalim decided to step up its venture capital activity by becoming a partner in two funds. Gersht says, “As part of our increased activity in the field, we decided to join forces with partners. We were involved in the Yozma 2 management companies, together with Ofer Brothers and Yigal Ehrlich. We owned 20% of the fund, which managed $80 million. It’s the same with Delta Ventures, which manages $63 million.”
Poalim Ventures also acts as purely financial investors, with limited partnerships in the Hyperion Fund, Formula Ventures, and Star Ventures. Brunstein says, “Bank Hapoalim has made Poalim Ventures responsible for all its venture capital activity, which includes limited partnerships in several funds.
”We have no plans to become limited partners in other funds in the future, although our activity did have positive effects. Delta Ventures was a partner, and also invested in Appilog, for example.”
Appilog was sold to Mercury Interactive for $60 million, and Poalim Ventures benefited in three ways. It made a return on its own investment, on the management company’s investment, and through Delta Ventures, which invested in Appilog, and in which Poalim Ventures invested.
No liquidity problems
Since 2000, Poalim Venture has invested $85 million that it raised itself in three funds. Gersht says, “The three funds we raised essentially operate as a single unit. They are divided for tax registration purposes, in order to enable foreign investors to receive all the benefits.”
Brunstein adds, “Each of the funds invests in a selected company in proportion to its size. None of the funds is allowed to choose the best investments.”
Another unusual feature of Poalim Ventures is that its investors are private individuals, rather than insurance companies, pension funds, gift funds of prestigious US universities, giant corporations, or foreign banks. Poalim Ventures’ investors are Bank Hapoalim and several hundred of its customers, who are apparently free of liquidity problems.
Brunstein explains, “The list of investors in the funds does not include a single institution, except for Bank Hapoalim. We’re aware of the controversy concerning the contribution of investors in funds. I know that some believe that strategic investors make a special contribution, while other praise financial investors. Our investors are expert investors, whose participation in this investment instrument the bank has seen fit to allow.”
”Globes”: They didn’t contact the fund?
Brunstein: ”All these investors have at least a certain minimum of equity, and some of them have hundreds of millions of dollars. What indicates to me that they’re satisfied is the fact that 90% of those who invested in Horizon continued with us, and invested in the follow-on funds in 2000.”
How do you work with hundreds of limited partners?
Gersht: ”We have a well-oiled mechanism for distributed information. Poalim Capital Markets VP Marketing and Client Relations Eliana Fishler is in charge of relations with investors, and in addition to talking with them, we have a newsletter, quarterly reports, and guidance and explanation material. We definitely put effort into relations with our investors.”
Brunstein: ”It doesn’t matter whether someone has invested $500,000 or $15 million. We give them the same attention.”
What about giving unused money back to the investors?
”The active fund are about to give the investors back 15-18% of the money they invested. Everyone predicted an awful fate for the funds that were raised in 2000, but as of now, it doesn’t look so bad, particularly in view of the fact that we have invested only half of the fund.”
Despite the return of uninvested capital, high tech and venture capital unquestionably appeared to be a very worthwhile investment instrument in 2000. Many private investors put money down, and lost it. In the last few years, many of these have refrained from investing in high-tech companies or venture capital, but Brunstein sound confident: “We’re in the process of raising money for a private equity real estate fund, and a large proportion of the venture capital investors also plan to invest in this fund. That shows something about our relations with them.”
Brunstein adds that he assumes that they will begin to raise a new $100-150 million fund in 2005. “Less than that isn’t worthwhile, and more would make people feel less comfortable,” he explains.
Some will say you’re being conservative.
”We have over $30 million available for new investments. I assume that when we want to raise a new fund, we’ll definitely consider including investment institutions. We’re considering a model with half from institutions and half from private investors.”
Gersht has a different slant on things. He says, “The bad times have passed. We’ve closed companies; it wasn’t easy. There was one company, Celvibe, that we wanted to liquidate, although it still had money in the bank, and it meant writing off the investment. We preferred giving investors $0.30 back on the dollar to giving them zero on the dollar. I know that there are investors who don’t like doing that in venture capital. Some will say we’re conservative, but I feel we behaved correctly.”
When you do invest, and continue to support a company, how does it work?
Gersht: ”We invest $2-4 million in the early stages, and another $5-8 million in an advanced round. The fields are mostly IT and telecommunications, because those are the fields with which we feel comfortable. We don’t invest directly in the life sciences. We’re looking for companies from the first round through the mezzanine round. We have directors in almost every company in which we have invested, and we feel that our contribution is significant.”
Gersht cites Appilog and PowerDsine, Poalim Ventures’ last two exits, which have also been through difficult periods. Gersht was on PowerDsine’s board of directors for six years. He says, “We went through all the stages together with them. We led the financing round in 2000, and we helped in the big financing round in 2001. Even in hard times, we knew it was an excellent company. It was the same with Poalim Ventures VP Shirley Sheffer, who was on the Appilog board. We entered during a crisis. It was hard, but the company survived it.”
Investing again
Brunstein: ”We feel comfortable with what we’ve done. We made almost no investments in 2002. We weren’t napping; we made a decision to continue following the deal flow, but made our selection process very rigorous. We were left with a lot of time to devote to the companies in which we had already invested, and we were left with a lot of money in the bank. It’s true that there was pressure from the investors sometimes to go back to investing, but we managed to persuade them that it was the right thing to do. The moment we saw signs of recovery, we started investing again.”
Over the past twelve months, Poalim Ventures has made four new investments, and expects to invest in another two companies before the end of the year.
Unlike other venture capital funds, in which huge corporations or large financial institutions invest, Poalim Ventures’ list of investors does not include Cisco Systems (Nasdaq: CSCO) or IBM (NYSE: IBM) as limited partners, together with an active and involved liaison person.
How do you help your companies?
Gersht: ”We’re have contacts with all the people that the other funds are in touch with. The only difference is that they aren’t our investors.”
On the other hand, as investors in other funds, you’re exposed to what’s going on with people who might be competitors for deals.
Brunstein: ”We haven’t yet come across a conflict of interest. Besides, as limited partners, we get the news three months later, in quarterly reports.”
Published by Globes [online] - www.globes.co.il - on July 29, 2004