The wave of declines in the markets in recent weeks is causing many investors insomnia in the face of the rapid contraction in the value of their securities portfolio. While stock market indices are painted almost daily in bright red, do those who remain in the market find themselves with the eternal question of such periods – to sell and cut losses, or to stay and hope for a long-awaited correction, which will come in a few months or years?
However, not all investment bodies see the negative trend in stock exchanges as a blow to their businesses. There are also those for whom the situation created opens up an opportunity that can be used to expand the business in a way that will yield them a handsome return in the future. This refers, among other things, to private equity funds (private equity), which in recent years have seen a significant slowdown in the rate of transactions they have made, in light of the continuing tide in the stock markets. This is even if they have found ways to harness it in favor of the exit of some of their portfolio companies.
Managers of the largest private equity funds in Israel, including Phimie, Fortissimo, Tene, Kedma and Sky, enjoy a proven reputation in terms of improving and selling local companies in the fields of industry, services and trade, and selling them at a high profit. Despite the impressive returns they have generated for investors in the past, in the last three years they have had to observe from the sidelines the inflation in the value of companies in which they wanted to invest, which in their estimation has become disconnected from reality. This was reflected in a period of drought in everything related to making new investments. Now that the alternative posed by the stock market is almost non-existent, their meeting schedule is filling up again.
“The multipliers return to sanity and quickly,” says one of the fund’s top executives. “This is a very important thing for us, because the alternative that was to issue a company in the capital market is almost non-existent today. It brings more interesting deals to private equity.”
Rising interest rates and inflation are improving conditions
The local private equity funds raise their money mainly from institutional bodies and qualified investors, with liquid capital of millions of shekels. The five largest funds control managed assets of more than $ 10 billion, and a fund Phimie Led by Yishai Davidi is the largest among them, with dozens of portfolio companies and a managed asset volume of about $ 7 billion. They have enormous liquidity – and for all of them, an era of climbing interest rates, inflation and especially a stock market crash, is changing the rules of the game for the better.
Yishai Davidi / Photo: Itai Belson and Ohad Harech, Weizmann Institute of Science
Thus, only about a week ago, it was possible to see a change in the balance of power, when the business information company Sterncast, which planned to issue its shares on the Tel Aviv Stock Exchange, and already had an open prospectus, was suddenly acquired by a fund Fortissimo Directed by Yuval Cohen.
The conditions of the initial public offerings, which in fact closed in recent months in the face of stock market declines, led Sterncast’s controlling shareholders, including senior executives Valio Base, to choose the private equity option and sell the company to such fund for NIS 180 million – 10% lower than expected In an IPO. In doing so, they spared the question marks regarding the success of the move in the capital market, and also received a relatively generous value, in cash.
Yuval Cohen – Fortissimo / Photo: Shlomi Yosef
The Sterncast deal is one swallow that signals the rapidly changing market conditions. Others indicate the appeal or cancellation of purchase transactions signed in the public market before the declines in the markets. Thus, about a month ago, the real estate entrepreneur Canada Israel’s takeover deal with Norstar, which owns the commercial real estate giant G City (formerly Gazit Globe), which was established and managed by Haim Katzman, was frozen.
With Israel Canada Barak Rosen and Assi Tochmeier began taking over Norstar at the beginning of the year, and even offered to buy the company at a value of more than NIS 2 billion, but the stock market crash led to their withdrawal from the offer, and are currently trading Norstar At a value of only NIS 1.1 billion (about half the value of the deal).
Another deal that has been made in the public market and is being undermined recently is the acquisition of control of the old insurance company Ayalon By the young digital insurance company Vishur, which was founded by veteran insurers Emil Weinschel and Nitzan Tze’ir-Harim (both former executives at Ayalon).
This week signaled Assurance Because it may withdraw from the deal, which amounts to almost half a billion shekels, after it claims to have found significant discrepancies in some of the data provided to it before it was signed last year. However, it would not be a wild guess if we estimate that the drop in the share price, which made the purchase deal twice as expensive as Ayalon’s current market price, played an important role in the new direction the deal took.
“Interest is the mega-event that happened here”
It seems, therefore, that the declining values, the drought that has resumed in the issue market and the complicated purchase transactions are fertile ground in terms of private investment funds. “The interest rate is the mega-event that happened here,” says a senior executive at a prominent private equity fund. “We are after a decade where interest rates were zero. This has led some companies in the economy to grow through the use of generous leverage. This is a huge event because all companies that are now in a real financial need are having a hard time finding an answer, and it is creating opportunities for us.”
According to the same manager, “In recent years, everything has become detached from the ground of reality. We have seen this especially in technology, when companies pour money on giant signs on Ayalon routes. It burns more and more money on employees. Net income should be presented more, and companies were measured by revenue multipliers. “
Indeed, rising interest rates have been seen as a trigger leading to recent stock market crashes. Since the beginning of the year, the flagship index on the local stock exchange, the Tel Aviv-35 index, has fallen by 7%, while on Wall Street stock exchanges there has been a much sharper collapse in indices led by the technology-oriented Nasdaq, which plunged more than 30%.
A Globes survey shows that close to NIS 200 billion “evaporated” from the aggregate value of companies traded in Tel Aviv, compared to the last record set by the indices in January this year. At that time, the value of all shares traded was almost NIS 1.2 trillion, compared with less than NIS 1 trillion today.
“It will take them time to internalize the new value”
“There is no doubt that the crazy bubble that has been in the stock markets for the past two years, especially in technology prices, has caused private equity executives to be almost thrown out of the game,” says another Israeli private equity fund manager. “You could say we weren’t carried away by the trend, but when every teenager with an ETF recorded fantastic returns, it was hard for us to get in. Now that the companies are returning to justified value levels, a return to normalcy begins.”
The falls lead the company executives to knock on your doors, so you can arrange an exit for them?
“It’s not happening yet. First of all because there is nothing like footwork and initiative on our part. But there is also a psychological effect. A high-tech company that was worth $ 8 billion in the public market a few months ago, and is now only worth $ 1 billion – and there are lots of such companies cut 80% “90% – will not come to me on its own initiative. The managers of the venture capital funds that have invested in it are also still trying to digest what happened. It will take them more time until they internalize their new value.”
According to the same source, “The institutional bodies in the country have also invested a lot directly in all kinds of technology companies, through special routes created for them by the regulation here. Now they will be snatched. After their direct transactions, we will return to specialized funds You don’t just throw money away. “
“Every interest rate is immediately deducted from the net value”
The issue on which fund investment managers find it difficult to agree is the state of the local economy. Some believe that the situation is more difficult than it seems now, and that the data that will be published soon will be surprisingly negative. One of the people we spoke to described our situation as “a big event that is impossible to predict where it is going.” Another partner in one of the funds actually believes that the state of the economy is still good.
“In the first quarter as well as in the second we are still in a very good position. We do not see dramatic changes in demand, in the companies we hold. When there is a general breakdown of the economy immediately feel it, but for now the companies are fine.
“It is true that companies have a challenge, which is mainly due to over-leveraging. The money was free, so every NIS 100 million in debt, when a percentage or two is added to the interest, is immediately deducted from the net profit line. This is what erases the value.”
Whether the economy is in a deep crisis or not, the sweeping weakness in the stock markets is an existing fact, and as mentioned, it may produce a new wave of transactions in the private equity market. The same fund partner estimates that “in the near future the funds will be active, they have opportunities created. Institutional investors are wary of stock markets, and for them investing in private equity has made sense. Our value is usually measured once every five years, when there is an exit. To the institutions that are close to the screens now. “
Funds joined the IPO celebration, but investors did not always enjoy it
Although the stock market crashes will increase in the future, it is estimated, the number of potential transactions facing private equity funds on the one hand, but on the other hand they will block one of the main exit routes available to them – IPOs.
In recent years, the prominent funds in Israel have taken advantage of the celebration in the stock market to promote the issuance of some of their major portfolio companies in the fields of technology, retail, industry and logistics.
In most cases, the portfolios of the portfolio companies were carried out while incorporating them in a put offer, in which the funds separated from a significant part of their holdings, with the proceeds flowing directly to them and not into the company’s coffers. Unfortunately for investors, a large proportion of these issues caused them losses, even before the recent stock market declines.
Even today, when the IPO market in Tel Aviv freezes, you can still find at least one company that submitted a prospectus and is controlled by the Private Equity Fund.Tene Foundation. A vertebral issue was launched several months ago, and it is unclear if and when it will be completed. Shareholders expected a value of NIS 800 million, but the tough situation of the IPO market will make it difficult for them to achieve this.
Ariel Halperin, Chairman of the Tene Foundation / Photo: Yonatan Blum
As stated, the use of private equity funds on the stock exchange for the purpose of realizing holdings in recent years has been fruitful. On the eve of the outbreak of the current crisis, in February, the Pimi Foundation was able to complete the issuance of the satellite photography company Image International (ISA). The company was finally issued at a value of $ 300 million (before the money) and the offering included a sale offer in which part of the proceeds went to Raise to Phimie, Discount Capital and executives at the company. Despite the positive reputation of successful IPOs led by Phimie in recent years (of the companies Inrom, Overseas, Novolog, G1 and Polyram), Image shares have fallen by 28% since the IPO.
Shortly before that, last December, a company was issued on the Tel Aviv Stock Exchange Icon Group (Which owns the iDigital network), an importer of Apple products in Israel, over which it has the largest control Sky Foundation Led by Zvi Yochman and Nir Dagan. The raising, which included a sale offer of the fund, was made at a value of NIS 775 million, lower than the original intention set at a value of NIS 1 billion.
Zvi Yochman, Sky Foundation / Photo: Eyal Yitzhar
However, the cut in the IPO was also inflated, after a few months after the IPO, Icon reported an expected increase in competition, after a major customer, the KSP computer network, received approval to import Apple products itself, which led to a drop in the company’s share price. %.
And there were also IPO attempts by the funds that did not materialize. For example, the issuance of the steel import company Iskor, which is controlled by the Kedma Capital fund (which had previously successfully issued the Ace product chain), was recently canceled. The dreams last November were big, when Iskur planned to raise NIS 500 million at a value of NIS 1.5 billion before the money against the background of the tide in the metals market, but the institutional investors refused to pay the desired value and the move fell by an hour.