Benchmarker / Only the Strong Survive in the Jungle - and at Psagot

Two years ago David Edry and Shai Ben-David, at the time Psagot Investment House executives in charge of managing its proprietary investment portfolios, were arrested at the behest of the Israel Securities Authority. The pair was accused of manipulating portfolio securities. But the investigation didn't stop there: It steamed ahead until reaching the top of Psagot's hierarchy - then-CEO Roy Vermos.

Apax Partners was considering buying Psagot back then. In October 2010 it wrote out a check to York Capital for NIS 2.75 billion, signed by Apax Israel CEO Zehavit Cohen. The amount Cohen was prepared to pay raised eyebrows in the capital market: This was the priciest investment house acquisition ever. At the end of 2010 Apax valued Psagot at NIS 4.1 billion.

Tomer Appelbaum

Cohen viewed things differently than the eyebrow-raisers; she saw about NIS 140 billion in assets from middling management fees and said to herself, What worked for Tnuva will work here too: We'll raise management fees, economize a bit, and voila - the Ebitda will soar. A beautiful plan. That's also how Cohen would have explained the high valuation to Apax management in London and how, for goodness sakes, they'd make a tidy profit on the deal.

But what Cohen didn't take into account was a minor detail called "ongoing financial crisis." Because of the crisis, income-generating assets in Psagot's funds, the same funds producing fat management fees, had shrunk. Adding insult to injury, the regulators capped provident fund management fees at 1.05%.

Last week, when results for Apax were disclosed, it turned out Psagot is now valued at NIS 2.9 billion. More than NIS 1 billion evaporated since the last valuation, and this probably isn't the last write-down Apax will need to make on Psagot.

Apax clients are now in the process of receiving the valuations of funds they hold, and Apax management needs to explain how the value of Cohen's promising Psagot acquisition dissipated. In the business world the trick isn't just presenting strong results but also knowing how to explain what went wrong.

Psagot CEO Ronen Tov is the one being thrust into the hot seat to provide the explanations. Although Tov didn't buy the firm at an inflated price and isn't responsible for the continuing economic crisis - he's only held the position for a year - it seems the law of the jungle applies to the business world too: Only the strong survive.