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Could Israel's institutional investors fill the gap left by venture capitalists?

Israel's high-tech industry has been suffering from a lack of venture capital in the past year as a result of the global financial crisis, meaning less money for investing in start-ups. As a consequence, fewer fledgling ventures can get off the ground. Figures in the VC field predict a drop in exits over the next few years.

Finance Ministry officials, however, believe that institutional investors could fill the gap.

The institutionals currently have about NIS 800 million to invest in assets including corporate bonds, the prices of which plummeted during the financial crisis. The institutionals currently have no more than 0.3% of their capital in private equity funds and venture capital funds, compared to 2% among many of their foreign peers.

Ministry officials have discussed how to encourage such investments, even though many venture capital funds revealed lower profits for the last year. The matter was addressed at a meeting on promoting Israeli industry held over the weekend. Participants included Prime Minister Benjamin Netanyahu.

The ministry also seeks to encourage mergers of the type that have made Israeli high-tech companies, such as Check Point, among the largest in the world.

In addition, the law to encourage investments is to be amended to make the introduction of innovative technology by companies a precondition for government assistance. Until now, grants were issued to companies that built new production facilities in peripheral areas of the country. Now firms will have to present some sort of innovation that will make them more competitive internationally in order to receive a grant.

In addition, Netanyahu asked Finance Ministry Director General Haim Shani to examine ways to increase exports to China, in advance of Finance Minister Yuval Steinitz's visit to China as the head of a delegation of Israeli businessmen.

Netanyahu expressed dissatisfaction with the level of Israeli exports to China, which stands at about $1 billion annually despite a one-year-old Industry and Trade Ministry and Israel Export Institute program to encourage exports.

Participants at the meeting said exports were not higher due to Chinese consumption habits. Israel's main exports are advanced technology and defense. Israel cannot sell defense equipment to China due to an American veto, while most Chinese manufactures use relatively inexpensive technologies, where Israel has no relative advantages.