Not a Partner for Expensive Deals

How Ishay Davidi, perennial pessimist, strengthened FIMI.

Ishay Davidi invested $15 million of his own money in First Israel Mezzanine Investments' fourth and last fund (for the time being, anyway). That tells us two things. One: He really believes in his and his six partners' skill in managing companies. He thinks that $15 million will birth a lot more money. Two: During his 15 years at FIMI he made not only his investors but himself a lot richer.

FIMI is the most successful private equity fund in Israel. It's too early to tell if Davidi did well by putting his own money into the fourth fund. Granted, the fund raised a tremendous $500 million, but it hasn't turned a profit yet. On the contrary, since FIMI 4 was launched just before the crisis began, it's mainly lost money: At the peak it was down about $100 million on paper, but the rally has all but wiped out that loss. Even so, Davidi's backers aren't accustomed to receiving reports awash in red ink.

Davidi isn't stressed. Asset prices may be down, but losses aren't locked in until the asset is sold. He knows that crises are fated to end and that his advantage is FIMI's tremendous liquidity and his talent at taking advantage of opportunities, at good prices.

In the next two or three years FIMI means to invest about $1 billion, some borrowed from banks, through FIMI 3 and FIMI 4. Given the credit and cash flow difficulties major companies and rival investment groups are experiencing these days, FIMI's huge kitty gives it a huge advantage.

Seizing opportunities at low prices is why FIMI put no less than $200 million into buying companies last year. It bought the group of industrial companies operating under Inro -- NirLet, Urdan, Orlite, Ytong and Carmit -- from Itschak Shrem and Yair Fudim. FIMI also bought the controlling interest in Retalix, which makes retail software, and Ophir Optronics.

Moreover, under Davidi, FIMI increased its holdings in portfolio companies. At the height of the uncertainty, he decided to stop buying and wait for the dust to settle. Come the second quarter of 2009, he turned on the afterburners again. While Davidi guided FIMI through the storm, some rival equity funds floundered and foundered. Among others, Markstone of Israel and Cerberus of the United States ran into terrible trouble. What's Davidi's secret?

Perennial pessimism, that's what. With constantly whirring radar, he never takes his eyes off the exit door. Which means when he buys a company, he immediately prepares an elegant exit. He'll also sell if he realizes he can't better an investment, as happened with Formula Systems.

He also suffered less because he eschewed investment in real estate and finance companies, and didn't go overboard with borrowing. Davidi is willing to contemplate leverage of no more than 50%. FIMI pays the rest of the bill itself.