At the end of last week, Gemini Israel Funds announced that it had closed its fourth fund, having raised $200 million. Gemini is the second venture capital group of its kind to close fundraising in the past month; Pitango Venture Capital also raised a new $300 million fund.
Gemini now has $550 million under management, in four funds. Gemini raised the new fund in nine-months, after an initial close of $170 million a month ago. Outstanding investors include California Public Employees Retirement System (CalPERS), which invested $25 million; and Morgan Stanley, which invested $20 million. According to the CalPERS annual report, published in May of this year, Gemini lost about $38 million on paper, out of $110 million invested in the third fund. CalPERS has already transferred $1.37 million to Gemini, and has yet to see a return on its investment. Gemini recorded an internal rate of return of 17.6%, and the group's return on investment ratio is currently 0.65. In other words, the fund has written off 35% of its investments to date.
Last year's report showed that Gemini was the strongest Israeli venture capital fund in CalPERS's portfolio. The internal rate of return was 14%, and the return on investment ratio was 0.79, reflecting a $19 million write-off out of a $90 million investment.
Three new investors, who have never before invested in an Israeli venture capital fund, are Spur Capital Partners, Wilshire Associates, and Offit Hall Capital Management . Wilshire has $2.5 trillion under management, and a client base spanning 20 countries. The company represents 400 financial institutions in all areas of financial activity, and also invested in Pitango's fourth fund.
Among Spur Capital's managers is Prof. Paul Gompers of Harvard University; he has now joined Gemini's advisory board. Spur Capital specializes in investing in venture capital funds that invest in early-stage companies. The fund was established in 2001, and has $140 million under management.
Offit Hall, helmed by chairman and CEO Morris W. Offit, and president and CIO Kathryn A. Hall, manages $9 billion.
Joining these new investors are previous investors like Horsley Bridge Partners, the endowment funds of the University of Chicago and the Massachusetts Institute of Technology, an Oregon state pension fund, and 14 other investors.
The tide is turning
Partners Ed Mlavsky and Yossi Sela founded Gemini in 1993. Mlavsky today serves as president, and Sela is a general partner along with Lior Berger, Adi Pundak-Mintz, David Cohen, and Tali Aben.
Gemini Israel Funds principal Jonathan Saacks, who was part of the current fundraising round, said, "When we started fundraising, a little under a year ago, the atmosphere was entirely different, as was the market and the attitude towards venture capital in general. In retrospect, things went well, even though we were prepared for the process to take longer."
Due to the climate change in the market, Saacks says, Gemini tried to find different investors. Even before setting out on its current fundraising round, it was clear to Gemini, as it was to many other Israeli funds, that a good portion of their investors would not continue with them. The corporations that had invested during the bubble years were no longer investing in venture capital funds. Gemini parted ways with 55% of the investors in its third fund, including BellSouth (NYSE:BLS), which had invested $70 million into a fund totaling $200 million.
"We tried to find long-term investors, the sort who would provide a platform for follow-on funds. By this I mean institutions with a rich history of venture capital investment that are well known. The goal was to focus on long-term investors who knew the field, and were less sensitive to market volatility."
They say that [Grove Street Advisors managing partner] Clinton Harris was very helpful in introducing you to institutions unfamiliar with Gemini.
"Clinton Harris, as well as our other previous investors. Our new investors conducted thorough due diligence that included, among other things, discussions with the CEOs of our portfolio companies to see whether we were known in the field, and how we worked with our companies. They also interviewed existing investors in previous funds. Harris knows Gemini from day one. He's well-known in this field, and so it was natural that we would want him to help us, and natural that the new investors would ask him about us."
Middling exits
Why is it that investment institutions have suddenly discovered Israel?
"Investment institutions have taken a more global view. They look more at yields, and tend less to allocate money on a geographical basis. They compare us with other funds in the world, and not just against European funds. That's good on one hand, but on the other hand, it puts us in competition with the US venture capital funds."
Did they examine your rates of return? After all, your third fund hasn't made any heart-stopping exits yet.
"There are ways of examining companies that haven't yielded any profit yet. They look at our portfolio, and measure its potential."
Gemini's third fund has yielded a few mediocre exits: Riverhead Networks was sold to Cisco for $40 million; Envara was sold to Intel (Nasdaq:INTC) for $40 million; and Sanctum was sold to Watchfire for $45 million, and Business Layers was sold to Netegrity for $42 million.
This doesn't faze Gemini Israel Funds managing partner Yossi Sela. "Experienced investors know the start-up crop for the year 2000 as well as we do, and the harvest isn't over yet. True, it does seem like the average yield was low, compared with other years, but I think there's a chance that we'll succeed in achieving a higher than average rate of return. But we'll have to wait and see. Our investors are interested in seeing what we do with Gemini IV. They made an in-depth study, and reached the conclusion that it was worth their while."
What changed?
"I think that the Israeli venture capital industry has achieved recognition. We're ranked high internationally, after the US west and east coasts. We've superseded Europe in terms of venture capital funds. Investors search the world over, and choose to invest here. And not because they're Zionists, either."
Published by Globes [online] - www.globes.co.il - on Monday, August 30, 2004