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Gabi Pearl, Gabi Trabelsi and Tal Keinan, the owners of Israel's three leverage funds, will earn millions of shekels in management fees over the next few years, thanks to a Finance Ministry decision to help the capital market weather the local fallout from the global economic crisis.

The purpose of the three funds - Breishit, Origo and KCPS - was to help publicly traded companies pull through the credit crunch by extending loans from institutional investors, combined with funding from the state budget. Six months after the establishment of the funds, however, it turned out that the leverage funds had missed their target and the state had become an investor in companies that did not need any help, some of which were owned by deep-pocketed businessmen. As a result, the funds have come under considerable criticism from various capital market players.

A senior Finance Ministry official told TheMarker Wednesday that the treasury is not pleased with the funds' investments so far. The official noted that the original intention was not to give money to strong companies, but rather to offer a solution to companies that were encountering financing difficulties. The accountant general is apparently trying to figure out what to do next.

In the months since the leverage funds were established, the capital market has recovered faster than anyone expected, resulting in distortions in the leverage funds' investments. The Finance Ministry source explained that despite the funds' deviation from their goal, what is happening is the lesser of two bad scenarios, and from the state's point of view there might be no negative effects - some yields might even be generated and the money recouped. Still, since the investments were government-backed, the Finance Ministry is going to look for a way to make the funds use the money for its intended purpose.

Eran Heimer, the new director of the financing division at the accountant general's office, even told the representatives of the three funds how the Finance Ministry feels, when he met with them shortly after taking office. "The fund representatives were informed of the accountant general's expectations," a senior Finance Ministry official told TheMarker following that meeting. "He wants to see more investments in industry and manufacturing, and less in real estate and holding companies. On the other hand, we need to remember that the fund managers are the ones in charge and have sole discretion over the fund's investments."

The leverage funds raised about NIS 4.5 billion, with just under 25% coming from the state and the rest from institutional investors. The funds have so far invested about NIS 750 million and are in talks with two companies for additional investments totaling NIS 270 million. The funds' investments are mainly in real estate, with none in industry and practically none of the investment money's recipients needing financing assistance.

The strangest investment of all is in Gilatz, a company controlled by Roni Biram and Gil Deutsch. Gilatz is an income-producing real estate company interested in expanding into the green energy field. The company has NIS 80 million in its coffers, its equity is estimated at NIS 275 million and the yield on the company's bonds is about 3% - indicating that Gilatz is a company that can raise capital without much difficulty from the market and the banks. Deutsch and Biram are among the richest businessmen in Israel, but even so, the state approved a NIS 120 million investment in Gilatz.

Another investment is in Eliezer Fishman's Home Center, which is described by the Israel securities rating company Maalot S&P as having "good profitability and the ability to generate cash flow." Maalot's analysts further wrote that Home Center "has good access to local capital markets."

The leverage funds also invested in Kardan Israel, the Israel Land Development Corporation, Nissan Industries, Hanan Mor, Mishkenot Clal and Eldan. The groups that are managing the leverage funds earn 1% annual management fees, or about NIS 45 million.

The grumblings against the leverage funds in recent weeks have come from all directions. "I haven't understood what those funds are doing for a long time," remarked a lawyer. "Eventually someone is going to petition the High Court of Justice about them."

Indeed, Shlomo Dovrat's Plenus Venture Lending filed an administrative petition against the leverage funds in the Jerusalem District Court, asking the court, among other things, to forbid the state from approving investments by the funds in companies that do not meet the criteria listed in the state tenders for the funds' establishment. Plenus also petitioned the court for a temporary injunction against any further illegitimate investments until the court rules on all the issues in the petition.