Could China Supplant U.S. as Top Source of Israeli Tech Capital?

Hundreds of millions pledged to Israeli high-tech.

A slow but significant change has been coming to the Israeli high-tech sector over the past year. Chinese investors have started pouring money into Israeli firms.

For years, Americans and Europeans were the sole investors in the sector but now, after countless delegations have visited Israel from the Far East in recent years, Israeli companies and investment funds are starting to see more Chinese interest.

The Chinese investment model is often different than the American one that Israelis are used to. The Chinese do not always invest in companies directly, but they still may offer a major source of capital for Israeli firms.

Partners in many venture capital funds can feel the shift. $40 million of the $270 million raised by Pitango for its latest fund came from China. In this case, Pitango spent years and lots of effort laying the groundwork and building relationships with the Chinese offering a look at what it takes to win them over. Many other funds are now interested in taking advantage this opportunity and attracting investors from the Far East, instead of American pension funds, which have cut back on their venture capital investments.

Another indication of the growth of Chinese interest in Israeli high-tech is the Horizon Ventures fund of Li Ka-shing, the Hong Kong billionaire. His fund was the most active in investing in Israel, according to the ranking by IVC Online that monitors Israel's high-tech industry.

A major milestone in the new relationship came last summer when China’s Fosun bought Alma Lasers for $240 million.

'To grow organically in China'

This week, a number of funds and other Chinese organizations will announce investments in Israel. On Tuesday, for example, WBP Venture Partners will announce a $50 million initial fund raising round. Both American private investors and the Chinese government have put money into the fund. The announcement will be made as a part of a conference on the opportunities for Israeli high-tech firms in China sponsored by IVC Online.

“The goal of the partnership is to create infrastructure that will allow the companies to grow organically in China and control their businesses,” said Zvi Shalgo, the CEO of the PTL Group and a partner in WBP Venture Partners. The fund will close and start making investments in the third quarter of the year. The fund will invest in Internet and industrial technology startups looking to move into the Chinese market.

The fund will invest in firms that already have products ready for the market, and that are also interested in moving into the Chinese market. Life sciences and medical equipment, clean tech, telecom, mobile, and online media are the major areas of interest for investments. The average investment by the new fund is expected to be in the several millions of dollars each.

Easy access to innovation

The Catalyst CEL fund is a joint venture of the Israeli private equity Catalyst fund, headed by Edouard Cukierman, and state-owned China Everbright. The fund will announce the closing of its first $100 million for the new fund. The fund, which was announced last October, can now start investing in Israeli firms - at the same time it continues to raise money. The fund is looking to raise $200 million, with an option to increase that to $300 million. China Everbright has invested $75 million so far, and other investors have come from Europe and emerging markets.

Catalyst CEL will make relatively large investments of some $20 million in companies that have tens of millions of dollars in sales. As opposed to most Chinese investors, the fund will not limit its investments only to companies that are interested in developing their business in the Chinese market, but companies that wish to do so will be able to benefit from the connections with Chinese investors.

“The fund will invest in companies that have innovation and international growth potential. Not only in classic high tech but also in medical equipment, water technology, agriculture and materials,” Cukierman said.