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World's biggest fund discovers Tel Aviv
Author  Amiram Barkat

World's biggest fund discovers Tel Aviv

From Globs

Last year, Rami Levy joined BTI, the group of businesspeople that supports peace with the Palestinians for the sake of the economy. When this step raised some eyebrows, Levy, a dyed in the wool Likudnik, stressed that his political position was still far from that of those who support the Oslo process. But in Oslo, it turns out, there has actually been a move in Levy's direction recently, or, to be more precise, in the direction of Rami Levy Chain Stores Hashikma Marketing 2006 Ltd. (TASE:RMLI).

This stock is one of five Israeli stocks that in 2013 became part of the of the investment portfolio of the Government Pension Fund of Norway, the largest sovereign wealth fund in the world. At the end of 2013, the fund held shares in Rami Levy Chain Stores worth NIS 18 million, out of total holdings of NIS 3.5 billion in 62 stocks traded on the Tel Aviv Stock Exchange.

Was the decision to invest in Ramy Levy Chain Stores politically motivated? Unlikely. But in other instances of investment in Israeli companies, the fund has certainly acted out of avowedly non-economic considerations. So, for example, in January this year the fund announced that it was putting Africa-Israel Investments Ltd.(TASE:AFIL), controlled by Lev Leviev, and its subsidiary Danya Cebus, back on its blacklist.

This step was taken on the recommendation of the fund's ethics committee, which determined last November that the two companies were guilty of contributing to severe breaches of human rights through construction in East Jerusalem. As a result of this decision, the fund will sell off its holdings in Africa-Israel, which were worth NIS 7.3 million.

Another loser is communications equipment producer Mellanox Technologies Ltd. (Nasdaq:MLNX). During 2103, the Norwegian fund liquidated its holding in the company, which only a year previously amounted to some NIS 60 million. Its holding in Emblaze Ltd. (LSE:BLZ) was also liquidated last year. Similar things have happened in the more distant past. In September 2009, for example, the fund decided to sell its holdings in defense manufacturer Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT) because it provided equipment for the separation fence.

Wary of the gas partnerships

These instances are perhaps discordant to Israeli ears, but the general picture of the Norwegian fund's activity is actually positive from an Israeli point of view. In the course of 2013, the value of its investment in companies traded on the Tel Aviv Stock Exchange rose by 43% in nominal terms, from NIS 2.4 billion to nearly NIS 3.5 billion. Even discounting the boom on the stock exchange, the rise is impressive: the fund's proportionate holding in shares on the Tel Aviv 100 list grew by 21% last year, exceeding 0.5% of the total of shares listed.

At the same time, the fund raised it holdings of Israel government bonds from NIS 2.674 billion to NIS 3.75 billion. Another NIS 693 million of the fund's money is invested in Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA). The fund's total investment in the Israeli capital market is thus nearly NIS 8 billion.

The fund's largest equity holdings are in Teva, the banks, and Israel Chemicals Ltd. (TASE: ICL), with the best performing stock being Bank Hapoalim (TASE: POLI). Apart from Rami Levy, it is noteworthy that the fund has added to its portfolio two gas exploration companies,Delek Energy Systems Ltd. (TASE: DLEN) and JOEL Jerusalem Oil Exploration Ltd. (TASE: JOEL). In both cases, the investment is in the parent company, and not in the partnerships they control, Delek-Drilling, Avner Oil and Gas LP (TASE: AVNR.L), and Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L), which could indicate aversion in principle to investment in limited partnerships.

What lies behind the growth in the fund's investment in Israeli stocks? Journalist Anders Horntvedt of financial newspaper "Finansavisen" points in this context to the decision by the Norwegian Ministry of Finance in the summer of 2012 to include Israel in its emerging markets index. "Beyond that, it is no secret that the current government in Norway holds more positive views on Israel than the previous government, and that certainly can't harm," Horntvedt adds.

Indeed, on October 16, 2013, a new government was sworn in in Oslo headed by a center-right party, replacing a coalition of left-wing parties that took an openly pro-Palestinian stance. Since then, the new Norwegian prime minister, Erna Solberg, has declared her opposition to boycotting Israel.

Aharon (Orni) Izakson, who heads the Norwegian-Israeli Chamber of Commerce, can testify to the warming of relations between the two countries. Izakson points to growing interest on the part of Norwegian companies in Israel's oil and gas exploration industry, and mentions an Israel-Norway business conference planned for November in Israel. "I hope that it will also be possible to promote the signing of an R&D agreement between the countries," he says.

Will we see more Norwegian money invested in Israeli know-how?

"I hope and believe that we will, although in my view it would be better to develop relations on a mutual basis, of investment by both sides."

According to Horntvedt, the Government Pension Fund of Norway will continue to increase its investment in Israel and to reduce its under-exposure to the Israeli market. "The fund is growing rapidly, and so there is every reason to assume that its investments in Israel will continue to grow," he says. "There is nothing at present to prevent the fund from investing in Israel, apart from matters relating to the settlements."

Do you think the ban on Africa-Israel will be broadened to other companies?

"Any company that has activity in East Jerusalem or in settlements on the West Bank runs the risk of being put on the blacklist. Like it or not, that is the fund's declared policy."

Published by Globes [online], Israel business news - www.globes-online.com - on June 9, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

Globes - World's biggest fund discovers Tel Aviv

 

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The leading deals were 3M’s acquisition of Attenti, estimated at $230m; Mellanox’s $218m purchase of Voltaire, a Ra’anana-based provider of scale-out data-centre fabrics; and the $213m acquisition of network processer-maker Wintegra by PMC-Sierra, which already has a presence in Israel.Tel Aviv-based Attenti is a leading supplier of remote people- monitoring technologies, used to keep tabs on people awaiting trial or on probation, and by healthcare staff to assist in the care of elderly patients. The company’s CEO, Yoav Reisman, says: “3M’s culture of innovation fits well with our own, and its research-and-development capabilities and global reach will help accelerate the growth of our business.”Saul Singer, co-author of Start-Up Nation: The Story of Israel’s Economic Miracle, points out that no matter how hi-tech their products, the founders of Israeli businesses are entrepreneurs. When they reach the stage of scaling a company up, they become bored, preferring to move on to their next idea. “It’s not a bad thing,” he says. “Look at the career of an entrepreneur who is productive and able to build a few start-ups, then compare that productivity to someone who remains in the same company”.In his view, the pace of change over the next 20 years is likely to be greater than that of the past 50. “We don’t know what will happen, and in that situation it’s preferable to be in a start-up economy where there is much more flexibility. Start-ups are much better equipped to deal with rapid change as opposed to big companies and that makes them more valuable.”One problem is that Israel is a young nation with little experience of developing world-beating companies of its own. According to Todd Dollinger – chief executive of The Trendlines Group, which invests in and develops innovation-based businesses in the life sciences, cleantech, IT, security and other markets – few managers have “grown up” in large enterprises, meaning they lack the skills to engineer a company’s expansion. “Israelis who develop real skills in the sales and business- development realms do so while outside Israel – in the US, the UK and elsewhere,” he notes. “When they come back to Israel after succeeding abroad, they don’t stay in business development, they seem to move on to new ventures and their skills are lost.”A more serious hindrance is the lack of capital. Mindful of the rewards of a hi-tech culture – namely jobs, profits, investment opportunities and knowledge – governments in the 80s and 90s hatched Israel’s incubator system and various seed-funding mechanisms. Yet even at their peak, Israeli venture-capital funds were unable to offer large investments and following the global capital-market downturn, they struggled to raise cash. As a result, Israeli companies turned to foreign sources, which in many cases entailed basing their headquarters and senior management in the funder’s city. This has been exacerbated recently by a change in the R&D law – a cap on the penalty paid by companies if their operations are moved abroad. Dollinger adds: “The government’s insufficient support for education is a potential disaster. It’s bad for the country in every conceivable way.”“In general, start-ups can go two ways,” says Michael Eisenberg, a partner in Benchmark Israel II, a Herzliya-based fund that specialising in seed, start-up, and early-stage investments in ICT companies. “Either they sell or go public, otherwise the investors can’t get their money back. It’s about making money for the investors.“In Israel there is an issue about companies selling early and not going all the way to becoming a large company. A few reasons can be attributable to that: there has been some short- termism from fund managers looking for quick exits. There is a sea change and the trend is now for there to be larger, venture- capital backed companies, which is exactly what is needed, and the entrepreneurs are dreaming bigger, which will help the venture environment and lead to greater opportunities.”The financial crisis of 2008, which severely impacted institutional investors, was the major impediment to raising new funds. In 2009, only $234m was raised by Israeli VC funds and $200m of that was raised by just one of them, Sequoia Israel. In spite of improved macroeconomic conditions, Israeli VC funds were unable to attract new capital in 2010. Capital-raising trends in Israel generally correlate with trends in the US, which experienced a 50% reduction from 2009 levels.Last year, the government announced an incentive programme for Israeli institutions to invest in domestic VC funds that is expected to increase investment by $220m in 2011-12. According to IVC CEO Koby Simana, the situation is critical. “Without improvement, it threatens the survival of numerous Israeli hi-tech companies that cannot raise needed capital.Moreover, VC funds will not be able to finance new companies or, in some cases, support their existing portfolio companies.”Looking ahead, IVC is cautiously optimistic about capital- raising, based on a positive outlook for the local economy and government steps to stimulate investment. “However, most of the impact of the government plan will only be felt in 2012,” says Simana, “since local VC funds must first raise substantial amounts – 60% of the total capital of each fund – from foreign investors. It’s a real challenge for Israeli VC funds.” Many hi-tech companies that have not managed to raise capital face a threat to their very survival, he warns.Yoram Tietz, managing partner of Ernst & Young Israel, points out that Israel’s main assets are human capital and innovation – and says that without more investment, the country risks losing its crucial innovative edge. Faced with such a crisis, the Ministry of Finance and the Ministry of Industry and Trade have intervened, introducing a programme called the Competitive Advantage National Plan. Yuval Wollman, an adviser to the finance minister, explains: “Given that this is the growth engine of the Israeli economy, we thought that it would be wiser, strategically speaking, to capitalise on the advantages that we still have, examine the weaknesses and see what measures should be taken.”The ministries concluded that potentially innovative companies were being starved of capital from the Israeli market. At the moment it is common to exit start-ups early, with entrepreneurs aiming their initial public offerings at the US or agreeing mergers and acquisitions with large American companies. The government’s idea is to encourage companies to have their IPO in Israel so that they contribute to the economic ecosystem.The measures also include encouraging minorities, such as the Arab and ultra-orthodox Jewish communities, to join the hi-tech workforce through the higher education system. In addition, a fund is being established that will match government funding to private capital, facilitiating the transition of ideas from academic institutions to industry.To address the dramatic decline in the capital raised from local pension and provident funds (institutional investing domestically is only 0.2%, compared with 2% abroad), the government has allocated approximately $55m as a way of participating in the investment risk of Israeli institutional investors.And with seed-stage companies short of cash – raising only $39m in 2009, down 56% on the previous year – the government will allow investment in an R&D-focused company to be reported as an expense on day one, deductable against income from all sources over a three-year period.In addition, there will be tax incentives for large Israeli tech companies, such as the security specialist Check Point, to buy local start-ups, creating sub-industries within the Israeli market.Alan Feld, founder of Vintage Investment Partners, is convinced that the industry will get back on its feet, given time. His firm, which manages around $460m, has a database of more than 3,500 Israeli tech companies and tracks 90% of funds related to the sector on a quarterly basis. “We probably have the most active database of what’s happening out there,” he says.According to Feld, the decline in the amount invested in Israel between 2008 and 2009 is not dramatically different to what happened in the US in that period. While the drop in the amount invested was approximately 40%, the drop in the number of venture deals was only about 10%. Funds are investing in a far more capital-efficient way, he notes. In addition, venture funds have raised the bar by looking for better quality companies and being much more careful about how they invest. “We view that as being good for the industry as well. So, despite the drop in dollar terms, what’s more important is the number of deals done, which indicates a healthy level of activity.”A dramatic increase in angel investing, along with an increase in the number of venture funds returning to seed investing, also bodes well for the industry, and Feld believes that $600m-$900m will be raised by venture-capital funds this year – not far off the average raised after the crash of 2001. “We anticipate committing to at least three funds in 2011,” he says.As far as Singer is concerned, Israeli tech has huge opportunities for growth. “The ecosystem that has developed with American companies has barely begun with the same kind of companies in Europe, Latin America and Asia,” he says. “Siemens, Deutsche Telecom and Samsung are in Israel, but so many other companies outside the US are not. Why shouldn’t these other regions gain the same advantage as US companies have by injecting themselves with Israeli innovation?”There is considerable room for US firms already in Israel to increase their involvement, says Singer, and for those that are not in Israel yet. As well as exporting technological innovations, the country is making a name for itself in the field of innovative business models. In recent years two of its more conspicuous successes have been Better Place, which provides electric- vehicle networks and services internationally, and food company Strauss-Elite, whose coffee division operates in 12 countries (including Brazil, where it merged with a domestic operator to form the nation’s second-largest coffee manufacturer).It may be down now – but if history is anything to go by, Israel is far from out. 
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