Israel: Business as usual?

Given the harrowing pictures to emerge from Israel in the last year, as the long-running regional conflict flared up once again, LPs would be forgiven for dismissing Israel as an investment destination.

Yet Israel’s private equity market is still active. In October, Viola Private Equity, an Israel-based growth capital firm, sold down a third of its stake in Matomy Media Group to French communications giant Publicis. The deal has generated a 5x return for Viola’s investors, of which a third is currently liquidated, according to Harel Beit-On, Viola’s founder and general partner.

The timing is helpful for Viola, which is currently attempting to collect $250 million for its second growth capital fund. In early September, the firm held a $100 million first close, and has since amassed an additional $50 million, Beit-On tells Private Equity International. The vehicle will invest in Israeli-based technology companies that are export-orientated and in expansion phase, with minimum revenues of $15 million.
Approximately $2 billion a year gets deployed in Israeli venture capital. This has created hundreds of companies that now have revenues of between $20 million and $30 million, Beit-On says.

However, the gap between venture funding and the public markets is too wide, he argues. “In order to list, you need to have $80 million of revenues a year. So post venture capital and pre-IPO, there’s a gap of several years where there’s room for expansion-stage investors. We believe we can work with companies to help them to [achieve] both non-organic and organic growth.”

So far, Viola has attracted a mix of Israeli and international investors including a US fund of funds, a German fund of funds, a German pension fund and a few Asian family offices. Viola’s GP commitment is $27 million, which would make up just over 10 percent of the fund, creating the “perfect alignment of interest,” Beit-On suggests.
The firm, which is working with Acanthus Advisers on the fundraising, aims to reach a final close early next year. The vehicle will be larger than Viola’s debut fund, which closed on $164 million in 2009 and has invested in 12 companies. In addition to the Matomy partial exit, another two of these deals have been fully exited.

Viola is not the only firm that is managing to attract foreign capital for Israel. In October, Israel-based Vintage Investment Partners closed its latest fund of funds, Vintage Investments VII, on $144 million, above its target of $100 million. The firm secured commitments from Israeli institutions as well as American and Canadian investors.

Despite the conflict in Israel, investors remain optimistic about the investment prospects, according to Beit-On. “Business-wise there has really been no interruption to business. We took one company public in March and we took one public during the conflict; so the interruption was not very meaningful. This region has been riddled with conflict for a very long time, and the Israeli high-tech industry has emerged during that period. I think prominent leading institutional investors have consistently [invested] in Israel and the performance of the private equity industry has been very good.”

And while valuations are creeping up in Western Europe and the US, this hasn’t been the case in Israel, he adds. “In other markets like Europe and the US, valuations for growth stage investments have been increasing significantly over the last several years. I believe the price for companies here is 30 percent to 40 percent cheaper than in West European and the US.” ?