BlackRock, the world’s largest investment house, has announced its entry into the financing of startups and technology companies with the acquisition of Israeli-European loan fund Kreos Capital. The move puts BlackRock into competition with the banks, among them Israeli banks Leumi, Hapoalim, Discount, and Mizrahi Tefahot, which have benefitted from the demise of what was the leading lender to the technology sector, Silicon Valley Bank, three months ago. Many startups in Israel have sought finance from these banks.
The acquisition will give investors in BlackRock exposure to lending to the high-tech and life sciences markets and to diversify their investment portfolios in this way without having to one of the existing loan funds. BlackRock manages private equity amounting to $45.5 billion, and private debt products amounting to $79 billion.
From niche market to new growth engine
Startups have increasingly sought loan finance recently because of the dramatic decline in the financing capacity of the venture capital funds and the rise in the price of investment that they are demanding from entrepreneurs. Rather than absorb falls in the valuations of their companies and dilute their holdings, entrepreneurs are preferring to take loans. Funds such as Kreos and Viola Credit (formerly Plenus), the venture lending arm of Viola Ventures, have been active in the market since the late 1990s and early 2000s, but the market was always considered a small niche, since entrepreneurs preferred to raise capital in exchange for shares and to use loans only at very late stages when the risk was low, or when they encountered financial difficulties.
In the past year, since the stock markets began to fall, banks and investment houses have been discovering the increasing demand for loans and credit on the part of technology companies, and have started to regard this niche as a new growth engine. For their part, in the past few years entrepreneurs have come to see loans as a new instrument that can enable them to grow their companies or cut prices in order to penetrate more markets. 2021, which was a peak year for raising funds in exchange for equity, was also a peak year for debt raised by technology companies..
BlackRock is not buying Kreos’s loan portfolio or its investment funds but the management company with its managing partners and staff numbering 45 people in Israel, the UK (where it is headquartered), Sweden, and Germany, whom it will hire and who will manage its technology loans portfolio for it. Among the Israeli partners are Raoul Stein, one of the founders, and Uri Galai, a young partner who joined in 2019. Kreos has so far raised seven funds, and all the loan deals that it has made up to now will remain within it.
The acquisition price for Kreos Capital has not been disclosed, but it is estimated at $300-350 million, higher than the price at which competitor WTI (Western Technology Investment) was bought nearly a year ago by investment house P10. Last August, P10 paid $170 million in cash and shares for WTI, which manages $7.8 billion. The price represents a multiple of 13 on EBITDA of $12.5 million.
Kreos Capital is the largest venture lending firm in Israel. Unlike SVB, it is purely a lender, and does not deal in deposits, currency conversions, current accounts, and the like. Venture lending, or private lending, firms provide loans to technology companies that are usually high risk, often in a mixed format involving shares or options. Kreos has commitments amounting to over €5.2 billion ($5.56 billion) in credit to some 750 companies, about a quarter of them Israeli technology and biotech companies, among them SolarEdge, Riskified, LiveU, Zerto, and BioCatch.
James Keenan, CIO and Global Head of BlackRock Private Credit, said, "Over the past 20 years, BlackRock has built leading private debt capabilities to help clients achieve a variety of investment goals by aligning proven investment excellence with long term market opportunities. The Kreos team has built a world class investment process and delivered for clients through multiple cycles. Coupled with our expectation that growth and venture lending will figure prominently in the expansion of the global direct lending opportunity set going forward, we believe this is an opportune time to welcome the Kreos team to BlackRock."
Kreos co-founders and general partners Raoul Stein and Ross Ahlgren said, "We are excited to see BlackRock’s continued commitment to private debt in general, and growth lending specifically. The combination of BlackRock and Kreos will provide a wide range of credit solutions to the growth ecosystem. The acquisition of Kreos by BlackRock is a testimony to the strength and importance of the innovation and technology sectors to the world’s leading asset manager."
Published by Globes, Israel business news - en.globes.co.il - on June 8, 2023.
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