The American investors in the Markstone Capital Group are expected to inject some $80 million into the financially troubled private equity fund in response to a $95 million capital call, but Markstone’s Israeli investors have opted out.
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“The duplicity of some of the Israeli institutions is outrageous. On one hand, as owners of units in the fund, they are refusing to inject money. On the other hand, as bondholders they are demanding to get all their money back,” said a source close to Markstone.
Israeli institutional investors put up about 10% of the fund’s capital, but it seems are not interested in putting in another $10 million to $15 million. Under the terms they invested in Markstone when it was formed in 2005, investors who do not meet the call could lose most of their stake in the fund.
Meanwhile, they plan on pursuing their legal battle to retrieve some 115 million shekels ($33.3milion) they are owed on the bonds issued by the Markstone subsidiary Phenomenal. The bonds, which are not secured, have been in default since February.
Among the Israeli investors who could lose almost their entire holdings in Markstone are the insurance companies Clal, Harel, Menorah and Phoenix, as well as Poalim Capital Markets, Meitav Dash and the Amitim pension fund. Phoenix, Menorah, Ayalon Insurance, ILD Insurance and the provident funds for employees of Israel Aerospace Industries hold bonds issued by Markstone or related companies.
All told, the fund owes $220 million to creditors.
Two weeks ago, Markstone founding partner Ron Lubash met with the fund’s council of investors, comprising Markstone’s seven largest backers, and told them that a capital infusion was the only option left that would allow Markstone to manage the sale of its assets while maximizing the return to investors. Lubash said all the other options would damage the value of its assets by preventing an orderly sell-off.
The private equity fund took out high-interest loans from a number of institutions in order to keep going. While the fund acts to sell off its portfolio – most notably the bookstore chain Steimatzky – it is finding it difficult to fetch what it considers fair prices because buyers know the financial pressures it faces.
Investors originally committed to putting $800 million into Markstone, but to date only $656 million has been paid in. Amir Kess, one of the cofounders and the managing director of Markstone, was killed in a bicycle accident two months ago, leaving Lubash to manage the fund since. Another cofounder, Elliott Broidy, pleaded guilty in 2009 to giving $1 million in bribes to New York State pension fund officials, and has long since left.
Markstone’s holding structure is complex. Markstone, at the top of the pyramid, is on the verge of insolvency. Amfic, a subsidiary, is already insolvent. Two other firms owned by Amfic – Phenomenal, formerly Prisma Investment House, in which Markstone invested 2 billion shekels before it collapsed, and New Phenomenal – are also insolvent. In addition, companies that Markstone bought, such as Steimatzky and the Magnolia jewelry store chain, are deep in debt or their shares have been put up as collateral for loans, or both. Both Steimatzky and Magnolia are up for sale.
Deutsche Bank has priority among creditors for a $65 million bridge loan it provided Markstone a year and a half ago at near-black-market rates of 15% interest. Israeli banks are owed in the range of 500 million shekels.