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Bank Leumi has agreed to sell its investment fund management company Psagot Ofek to York Capital Management for NIS 1.35 billion.

Migdal Insurance had been widely expected to win the bid. Lev Leviev's investment company Africa Israel as well as the Apax investment group were also in the running.

Market sources believe Migdal lost because its partner, Bear Stearns, refused to increase its price.

The selling price is based on 4.5 percent of Psagot Ofek's NIS 30 billion worth of assets under management. Of that amount, NIS 20 billion is managed in mutual funds and the rest in provident funds and exchange traded funds (ETFs), an investment instrument that tracks a specific index.

Psagot Ofek is a wholly owned subsidiary of Leumi and its management is led by Gabriella Ravid.

Leumi announced that its board of directors had approved the pact involving Psagot Ofek and its subsidiaries, Psagot Mutual Fund Managers-Leumi, Psagot Provident Fund Managers-Leumi, Ofer Financial Products, and Ofer Financial Instruments.

The deal, which includes the firms, their assets and their goodwill, is contingent on regulatory approvals, Leumi noted.

Leumi received an option from York to buy half of the company that will manage the investment portfolios, which, in effect, gives the bank a mechanism to maintain contact with Ofek's high-quality client base.

Founded in 1991, York is headquartered in New York City, with about $6 billion in assets under management. It was the last contender to make a bid for Psagot Ofek, and signed the requisite paperwork to maintain confidentiality just last Moday, the same day it held its initial meeting with Leumi management.

With Psagot Ofek sale, Leumi has completed the sale of assets pursuant to the Bachar reform, which was drafted by treasury Director General Joseph Bachar and his team. One of the key goals the reform has achieved is to increase competition in Israel's insular capital market.

Although the banks were given several years to sell their asset management companies, once Leumi realized it could not hold off the reform, it decided to sell off its assets quickly.

The bank sold provident funds with almost NIS 14 billion in assets to the Markstone-Solomon group for NIS 473 million late last week, and also sold NIS 16.3 billion worth of funds to the Harel insurance group for NIS 675 million.

The initial deal was in September, when Harel bought Leumi's mutual funds management company Leumi Pia, which has NIS 16.3 billion assets, for NIS 535 million.

Migdal officials said it chose to drop negotiations after consulting with its shareholders and partners when it learned that the price had exceeded its ceiling. Officials said Migdal is not interested in provident funds.