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Ron Lubash had a dream.

At the end of 2002, as terrorism raged and blood poured in the streets, Lubash decided the time was ripe to establish a giant fund that would raise $300 million worldwide for investment in Israel.

The era of the great Families was nearing an end, he told potential backers. It was time for giant swathes of the Israeli marketplace to change hands, specifically those of experienced investors. Throughout the world, private equity funds were becoming dominant players and Israel's turn had come.

Naturally, however, Lubash encountered dubiety wherever he turned - $300 million! An astronomical amount; the kind of money that goes to hi-tech, and nothing else. For Israel? Why would anybody want to invest in a country with zero diplomatic horizon? End of the Families era? Ha ha.

Three years later - and nobody's laughing. Lubash and his partners, Elliott Broidy and Amir Kess, put together not $300 million but $800 million, of which 90 percent came from foreign investors, mainly American pension funds.

In a year and a half, their fund, Markstone, has pulled off a list of major transactions, including buying chunks of huge Israeli concerns such as directory company Golden Pages, bookstore giant Steimatzky, Nilit, and smart-irrigation systems maker Netafim.

Opportunity knocks

But the fund's greatest opportunity lay in the historic reform of Israel's capital market that began three months ago. After an unprecedented public battle, the Finance Ministry pulled it off - a reform that severed the great banks from their provident and mutual funds.

The Markstone management did not hesitate or falter. In the last month, the fund snapped up asset management companies from Bank Leumi and Bank Hapoalim, with more than NIS 60 billion worth of assets.

Markstone's newfound clout poses a threat to many market players, which constantly snipe that the fund is paying too much for its acquisitions. These prices will affect the internal returns it generates for the American pension funds; but fixating on that misses the real story, which is the structural reform of the Israeli economy and the capital market, in which Markstone is playing a crucial role.

A giant arises

For the first time in Israeli economic history, a new, big player has arisen, financed by foreign money and operating in markets that until now, foreign investors had eschewed. Markstone's transformation into one of the three biggest players in investment management in Israel may yet prove to be a milestone in the history of the local marketplace.

Some 10 years ago, the capital market was ruled by the two big banks - Hapoalim and Leumi. Then, the insurance companies got into the game too. The banks were plagued by grave conflicts of interest and blocked the capital market's development. The insurance companies were also a disappointment, as most of the money they raised for life insurance policies remained locked up in their coffers, thanks to the protection of the treasury's own capital market and insurance commissioner.

Until a year ago, Israel's private brokers lived on the margins. They were negligible in terms of volume. They only started to become players in 2005. Markstone, on the other hand, turned into a giant overnight, and as such, it can, if it wants, create a new business culture in the capital market, a culture that places the investor in the center.

Even though the money belongs to the institutional investors managing our money (in pension funds, insurance programs, mutual funds), until now the rules of the games on the Tel Aviv Stock Exchange were set by the corporate owners, the underwriters and the bankers. Most of the institutional investors, who are supposed to represent us, proved over the years to be negligent or simply useless against the real powers.

The Markstone Family

With its NIS 60 billion in liquid cash, Markstone can change all that. It can boycott corrupt managements. It can fight inflated executive pay. It can lead the fight against insider transactions.

It would not be altruism, it would be horse sense. New rules of the game in the capital market would increase returns for investors. If Markstone leads the battle, it will reap dividends by turning into the address of choice for investors.

But it won't be easy, not at all. Lubash and Kess, the fund's partner-managers, know the local business scene inside out. They are friendly with most of the top-tier management in Israel whose members will have one thing to say: Don't fight us. Join us.

Lubash and Kess have to make a strategic decision. They have to build an impenetrable Chinese wall around their investment managers and give them utter freedom to fight wars for the investors in the provident and mutual funds Markstone bought.

Kess and Lubash can learn from the biggest investor of all in Markstone, the man who can claim the true credit for its success - Alan G. Hevesi, the state comptroller of New York and manager of the city workers' pension fund who put $200 million of that fund's money into Markstone.

Two years ago, Hevesi spearheaded the pension funds' war against corrupt companies and managements on Wall Street. He led a giant class-action suit against WorldCom's directors, based on his tenet that you have to hit rotten directors where it hurts - in their own pocket.

Two years ago, I asked Hevesi why he was putting so much money into Markstone. Without a second's hesitation he said it was an excellent investment; but he also had a Zionist motive. He wanted to contribute to Israel.

The greatest contribution Markstone could make to Israel is not that $800 million it has for investment in local companies. It is the opportunity to impose new rules - no to mediocrity, no to conflicts of interest, and primarily, no to the back-scratching habits of the Israeli oligarchy.

Markstone has the money, the power and the status to change it all. The question is whether its managers really want to make their mark, or if they simply want to become the "Markstone Family," just another name in the list of local oligarchs.