Israeli Government Seeking Firms to Run Medium-sized Business Funds

Small- and medium-sized businesses, a major driver of Israel’s economy, employ 22% of business sector workers.

Ofer Vaknin

The government issued a request for bids on Thursday seeking firms that would establish capital government-supported growth funds in support of medium-sized businesses. The tender calls for two funds, each with 400 to 450 million shekels ($102 to $115 million) in assets, to be set up. The funds will support businesses of moderate size that have growth potential but have had difficulty obtaining bank financing.

The new funds are designed to help businesses step up to the next level with respect to their marketing or acquisition of equipment, with an aim to boosting their revenues. The public bidding process is expected to close within 10 months.

The government will be investing more than 100 million shekels in each of the funds. About 300 million shekels in additional funding in each is to come from private and institutional investors. The state is committing to bear more than its share of losses in an effort to reduce the risk for the funds’ other investors. On the other hand, if there are profits from the venture, the investors other than the government will be given a preference.

The establishment of the funds is considered a significant development in the medium-sized business sector. The Israel Manufacturers Association and particularly Lior Levy, who chairs the organization’s small- and mid-sized business division, have been pushing for the funds to address the problem of the unavailability of credit for businesses that are too small to attract capital from private equity funds and for whom banks often impose burdensome conditions on loans that they are willing to provide.

Sources at the Finance Ministry said the funds are not geared to medium-sized businesses in the real-estate, financial and high-tech sectors.

The funds will be limited to investment in companies with annual revenues of up to 100 million shekels. At least 30% of the capital will be invested in companies of up to 60 million shekels in annual turnover.

“At the initial stage, fund managers will be selected who have demonstrated substantial experience in issuing loans or investments and experience in managing companies,” the director of the Economy Ministry’s Small- and Medium-Sized Businesses Authority, Ron Kiviti, noted. “In the second stage the selected firms will have to go to investors, who in all probability will be mostly institutional investors for the most part, to try to convince them to invest. Each investor will be able to choose just two managers for the money that they will inject. Those who bring in commitments from investors for at least 300 to 350 million shekels will advance to the final phase. The management entities will also be required to invest in the funds, in addition to the government, which will invest 25% into each fund. The fund management fees will be 1.8% of the investment that the fund raises.”

The plans for the funds were developed following research carried out by the Economy Ministry’s Small- and Medium-Sized Businesses Authority that demonstrated the relatively dominant presence of such businesses in the economy. They employ 22% of business sector employees, and account for 16% of total business sector output and 15% of business sector revenues. Nonetheless, it was found that more than 80% of the credit extended to mid-sized businesses is from banks, mostly for recurring capital needs and fixed assets, despite the fact that the major need that such businesses have is growth capital.