Shrem Fudim Kelner Technologies (TASE: SFKT), the investment arm of the Shrem Fudim Kelner group, has accumulated NIS 54 million in losses, while achieving no exits. SKFT CEO Yehoshua (Shuki) Gleitman, however, is not deterred; he is planning to raise another fund. “We’ll think about raising a new $120 million fund in 2005, depending on market conditions. We haven’t had any exits yet, but I believe the situation will change by then,” Gleitmann says.
SFKT is an oddball on the Israeli venture capital scene. A Tel Aviv Stock Exchange (TASE)-listed company, it invests directly in companies, and also manages other funds. SFKT manages a total of $280 million in Israel and overseas, both directly and through associated funds.
Founded in 2000, SFKT took over several of the Shrem-Fudim-Kelner group’s holdings. It raised $20 million from private investors, issued NIS 60 million worth of bonds, and raised NIS 28 million on the TASE. “We began investing in 2000, at the most difficult time, when the bubble burst,” Gleitman says. “We held our financing round at the very last moment, but surprisingly, no investor made any complaints. No one made a fuss.”
The uniqueness of SFKT is its extensive activity in the Far East. SFKT manages the South Korean Ministry of Information and Communication-sponsored Korea Global IT Fund (KGIF). SFKT, which owns 63.1% of the fund, has widespread connection in South Korea, and currently engages in locating technology investment in Israel for Samsung (KSE: 830). Gleitmnn, a former Ministry of Industry, Trade, and Labor Chief Scientist, is Honorary Consul-General of Singapore in Israel.
”When we founded the system in 2000, it was important for us to find a unique angle,” Gleitman explains. “There was nothing to distinguish us from other venture capital funds operating regularly in the US. Our advantage was working in the Far East. The assumption was that the biggest future business potential was in the Far East. We thought that the right model was an investment company taking part in the founding of venture capital funds, and which would invest in them. The advantage of this model is that we can use our connections to help make the fund more effective.”
Unsolved puzzle
Gleitman explains that investors felt that investment from Japan was lacking. In 2002, Marubeni Corporation of Japan invested NIS 5 million in the fund, thereby joining other investors under the group’s management, including Bank Hapoalim (LSE: BKHD; TASE: POLI), Bank Yahav for Government Employees, Bank Leumi (TASE: LUMI), the Soros Funds, Lehman Brothers, and others. The public holds 20% of the fund. Marubeni’s investment, made at a $31.6 million company value, 50% higher than SFKT’s market value at the time, gave the Japanese company a 16.7% stake in the fund. “Marubeni helps our portfolio companies. It also recently made a study of radio frequency identification (RFID) companies, and met sixteen of the eighteen Israeli companies in the field for the purpose.”
Among SFKT’s most prominent investments are Advanced Dicing Technologies (ADT); Environmental Energy Resources (EER), which develops innovative methods of treating household, radioactive and medical waste; Pitango Venture Capital’s third fund; and DS Polaris. SFKT has only part ownership of some of the funds it manages. One is SFKT I, which manages $24.2 million, of which SFKT itself invested $1.5 million. SFKT I has invested 70% of its money to date. SFKT charged 2.75% management fees until 2003, and is now entitled to 20-25% of the fund’s profit, after paying obligations to investors. SFKT I’s notable investments include Quantomix, Axis Mobile, ForeScout Technologies, and Transpharma Medical. As of now, SFKT I has invested in ten target companies, and has written off two of its investments.
From Platinum to Singapore
SFKT also enjoys half the management fees of Platinum Neurone Ventures (PNV), which manages $120 million, as well as an 8% success bonus. PNV was the result of a 2002 merger between the Platinum fund, owned by the Shrem Fudim Kelner group and Singapore company Keppel T&T, and Neurone Ventures, founded by Yigal Livne and Amiram Dotan. Before the merger, PNV managed two funds. The first, founded in 1997, had $14 million, and the second, founded in 2000, had $55 million.
Platinum’s investment portfolio currently has twelve companies, after three closed down. The portfolio includes Genoa Color Technologies (a 15.8% holding, fully diluted), Voltaire (5.4%), TopSpin Medical, Scopus Network Technologies, software company Zend Technologies (7.1%), WideMed (which develops biomedical signals processing technology) (10.5%), and Celerica, which develops radio products (5%).
SFKT also manages Danbar Technologies (TASE: DNTE), which manages $8 million in capital. SFKT receives management fees totaling 2.5% of Danbar’s shareholders equity, which amounted to NIS 35 million as of June 30, 2004, and 5% of Danbar’s profits on its investments, both before and after SFKT began managing the company. SFKT is a limited partner in Danbar with a 10.5% stake, together with Prof. Michael Blumenthal and Elitzur Maccabi. Danbar has invested in 20 companies so far, of which the most prominent are Mango DSP, Advanced Recognition Technologies (ART), Millimetrix, XTL Biopharmaceuticals (LSE: XTL), and Enigma Information Systems.
Spreading out over the whole world
SFKT owns 43.7% of DS Polaris, the management company of the Polaris II fund. DS Polaris manages $125 million, and charges management fees of 2.25%. SFKT receives 20% of the funds success bonus.
SFKT splits KGIF evenly with Korean Development Bank (KDB) Capital and STIC Ventures, a South Korean venture capital management group. KGIF manages $100 million, and charges 3% annual management fees. SKFT’s share of success bonuses is 6.67%. KGIF has invested in eleven companies, none of which have been written off. The most prominent are Airwalk, Canesta, Softpixel, Intromobile, and Duxondass.
”In the future, we plan to create another fund on the South Korean model in another place. The fund will jointly manage capital with local partners in the countries where it operates. We now have offices in Singapore, Taiwan, South Korea, and Palo Alto. We are capable of providing good assistance, and we have a unique presence in Far Eastern markets,” Gleitman says. SFKT finished the second quarter of 2004 with a NIS 2 million profit, on revenue of NIS 11.3 million. As of June 30, 2004, the company’s shareholders equity was NIS 80.4 million, and it had NIS 72 million in liquid assets. The market, however, prices the company at only $15 million. “I think our model is hard to understand. The capital market doesn’t realize how much potential the company has,” Gleitman complains. “For example, the South Korean fund, which give us annual revenue of $1 million, isn’t priced in the market. DS Polaris isn’t priced, nor is our 30% holding in ADT, which is worth $30 million.”
Who will bring you your first exit? SFKT has been lucky in its timing. The bursting bubble and four tough years in the technology industry forced the company to write down significant investments in Persay, Fantine Group, and other portfolio companies. The first is ADT, which has 150 employees, and recently celebrated its first birthday. The company, which was founded on the ruins of Kulicke and Soffa Industries’ (Nasdaq: KLIC) unsuccessful business in Israel, develops and markets machines and blades for cutting and separating components in the electronic components industry. ADT recently tried to raise NIS 23 million on the TASE at a NIS 100 million company value, but decided to wait for better days instead. ADT earned a NIS 3 million profit on NIS 30.43 million in revenue in the second quarter of 2004, compared with a NIS 3.23 million profit on revenue of NIS 29.4 million in the first quarter.
Had the issue gone through, SFKT, which owns 30% of ADT, and the other investors (Yitzhak Zoran and a group headed by Rami Gutterman and Gershon Shtrichman) could have claimed a very rapid exit, since the investors put up a minimal sum of only $1.2 million last year. Gleitman explains, “We went through the entire process of preparation for the issue, including approval from the authorities. We also got very positive responses from our road show, but when the underwriters (Leader Holdings and Investments and Tamir Fishman Underwriting) tried to see how much we could get in the issue, it turned out that the market was willing to price the company at only half of what we wanted, so we chose to wait.
”The company has sales of NIS 30 million a quarter. We were concerned that an issue at a low value would disrupt the company’s business. Later on, we may float the company overseas, but as of now, it hasn’t been around long enough for an issue on either Nasdaq or the London Stock Exchange’s Alternative Investment Market (AIM).”
TV and waste
The second company that may provide SFKT’s first exit is Genoa, which develops electro-optical solutions for better display quality. SFKT owns 20% of Genoa through Platinum Neurone and Danbar, after investing $13.6 million since Genoa was founded. Genoa CEO Ilan Ben-David founded the company in 2000, which has raised $10 million to date. Genoa’s first financing round early this year raised $3 million at a $22 million company value, after money.
The development that Genoa is working on takes the information in a television broadcast, and translates it into five basic colors, instead of three, as at present. As a result, the color range is far more sensitive, and is closer to what people really see. Genoa has a strategic cooperation agreement with Philips Consumer Electronics for marketing rear projection television sets, which will be launched on the market in the second quarter of 2005.
The potential market, amounting to 8-12 million units annually, is expected to benefit from regulatory changes requiring US users to switch to televisions operating on digital frequencies. Gleitman says that won’t come out with a new product for televisions with a plasma screen, but will probably soon launch a solution for the liquid crystal display (LCD) screen market.
Another company, in which SFKT has invested directly, is EER, which has developed a product for treating medical and radioactive waste. The company’s product makes it possible to confine waste within a glass container, and bury it in the earth. The solution shrinks the storage volume, and reduces the risk in leaving waste containers underground and under water. In recent months, Tokyo Financial Group (TFG) has made two investments totaling $9 million in EER, giving it a 15% stake. The second of the two investments was a few months ago, at a company value of NIS 355 million, after money. The investment diluted SFKT’s holding to 2.9%.
Finally, SFKT owns 17% of WideMed through PNV. Founded in 2000 by Aryeh Mergi and president and CEO Dr. Amir Geva, WideMed has raised $2.5 million to date. The company, which markets to sleep clinics, has developed a system for diagnosing sleep disorders. According to Gleitman, the company’s market totals $2 billion in the US, most of which is covered by medical insurance. WideMed has a significant agreement with the largest provider of diagnostic and treatment services for sleep and seizure disorders in the United States.
Another investor in WideMed is US company Guidant Corp. (NYSE, XETRA: GDT), which has a market cap of $20 billion. Guidant invested $1 million in WideMed last year. The two companies have an agreement to develop an algorithm that will enable pacemakers to detect irregular cardiac activity, process the information, and give warning of the probability of exceptional events, such as heart attacks. “Of all our portfolio companies, WideMed is one of the investments that can really make a difference in the length and quality of life,” Gleitman exclaims.
Published by Globes [online] - www.globes.co.il - on September 23, 2004