Last Thursday, through an almost technical event, a historic event took place that could change the local high-tech industry as well as the local capital market, and dramatically impact the pension portfolios of the entire public.
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On this day, the list of winners in the tender was published by the Ministry of Finance, the Innovation Authority, the Capital Market Authority and the Securities Authority for protection of investment in start-ups. The winning entities are Clal Insurance, Migdal Insurance, Phoenix and Menora Mivtachim; (Through Discount Capital), Hapoalim, Mizrahi Tefahot and Leumi, through the real estate investment arm Leumi Partners (see distribution in the chart).
As part of the tender, these ten entities undertake to make investments in start-ups within 18 months, as part of investment rounds of up to NIS 120 million and in cooperation with other entities such as venture capital funds, as well as continuing to hold the investment for seven years, and the state guarantees 40% of their total investment. To the extent that a loss is recorded on it. For the benefit of this safety net, it provided a sum of about NIS 2 billion, which means that during these 18 months, NIS 4-5 billion will be channeled into the local high-tech industry. According to government officials, the sums will be invested within 12 months.
This makes financial entities significant players in the local arena, as in 2019 the volume of investments in local high-tech companies reached an all-time high of $ 8.3 billion. In the previous year, investments amounted to $ 6.4 billion. Due to the corona crisis, in the current year and next year the amounts are expected to be closer to those of 2018. That is, investments of close to $ 1.5 billion on the part of local financial entities make them players who control about 20% of the market. But the meanings go beyond that.
Push for the small bodies
First, the tender puts the largest financial entities in Israel on the front door, and the expectation is that not only will they not leave the market afterwards, but that their presence will increase. First of all, due to the entities’ commitment to own start-ups in which they will invest for seven years. In order to maintain their relative share in these companies, they will need to participate in future investment rounds. According to government officials, the institutional bodies will invest at least another billion shekels as a result. These funds will not receive a safety net from the state.
Also, if they see that as good, they will expand their investment spectrum, beyond raising NIS 120 million. And they have how. The banks and institutional bodies each manage between tens of billions of shekels and hundreds of billions of shekels. So for them, raising NIS 120 million is a little money. This is also the expectation of Nir Adler, managing partner in the Israeli venture capital fund SOMV, which is making investments together with Menora Mivtachim, which won the tender. He said, “This tender is a shot at encouraging investment in larger amounts.”
In addition, if the institutional entities are satisfied with these investments, other institutional entities may also follow suit and invest in high-tech. In contrast to the banking sector, which actually went all the way to tender and won (except the International Bank), among investment houses and insurance companies not all players approached, or did not win, and so very strong entities like Harel Insurance Company and Altshuler Shaham Investment House were left out. Therefore, it is estimated that now they too will put their hand in their pocket and invest in start-ups.
Those who will benefit from the move are, among others, small start-ups that are currently having difficulty recruiting, all the more so due to the corona crisis, for the simple reason that competition in the market will increase. The domestic market is currently dominated by foreign money, mainly by venture capital funds and American institutional entities (such as the California Pension Fund, Clappers), along with several large Israeli venture capital funds, such as Pitango, Viola, and JVP. The purpose of the auction is to change the balance sheet, but it will also make it easier for more start-ups to raise funds.
Indeed, in the presentations made by the Israeli financial entities during the tender, many of them stated that they do not intend to compete for investments in the traditional areas of the high-tech industry, but to invest in new areas that are thirsty for investments such as Podtech, Biotech, Halthaker, Fintech and Inushrtech.
But not only small start-ups will be able to benefit from the institutional entry into the market, but also small venture capital funds. A manager at one of these funds told Calcalist that “if in the past we could invest up to $ 5 million in each round, then with an Israeli institutional body we could already offer double the amount and compete for investments with all the major funds.”
At the same time, there is the fear that due to the increasing competitiveness, and in the case of the winners of the tender, the money will also flow to not particularly successful start-ups. It is true that the financial entities that won the tender must make the investments together with venture capital funds and other entities that specialize in such investments, but due to competitiveness, those entities may try to share with Israeli financial entities investments in which they believe less, and prefer to make investments that are very promising. There is also a fear that competition will inflate the value of companies. Adam Fischer, a partner in the American venture capital fund Bessemer, and one of the most prominent investors in Israeli high-tech, thinks this is a waste. “Israeli high-tech is on fire and the State of Israel is only adding fuel. This is the last place in the country that needs help at the moment, and I am ashamed.”
The risks in question are basically a risk to public funds. However, one of the senior figures in the local high-tech market told Calcalist that “the chance that public money will be wasted does not exist.” In fact, the same person is so confident that he said that “the financial entities that won the tender will not use the collateral they received from the state, simply because the chance of an investment of hundreds of millions of shekels will yield a negative return. If that happens, it will be marginal. “One good investment compensates for many other less good ones.”
Barkat goes into battle
Another potential beneficiary is the public pension. Today, institutional investors rarely invest in high-tech companies, which ensures that the public’s savings do not benefit from huge billions of dollars in exits. Aharon Aharon, CEO of the Innovation Authority, stated in an interview with Calcalist that for him, it is impossible for savers in Israel not to enjoy the fruits of Israeli high-tech, while American savers, who are exposed to investments here through their pension funds, do.
It seems that the Supervisor of Insurance Companies and Institutional Bodies, Moshe Barkat, who is in charge of the capital market, thinks so too. He said, “The fact that a significant part of the allocation went to the banks and not to the pension savers will lead the authority to demand the expansion of the outline, so that NIS 2 billion will reach the pension savers.” On the other hand, senior officials in the Innovation Authority rejected the claim, saying that “in order to produce structural change in the market, competition and an ecosystem must be created. We need a variety of players because everyone works differently and brings a different quality.”
*The article has been translated based on the content of Source link by https://www.calcalist.co.il/markets/articles/0,7340,L-3852953,00.html
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