When Intel agreed to buy Mobileye for $15.2 million last month, a lot of people stood to make money. But few of the beneficiaries were Israels institutional investors, the companies that invest the publics savings.
Not long after, the missed opportunity prompted a meeting between Israels high-tech and venture capital leaders and Finance Minister Moshe Kahlon. They urged him to take measure to correct the long-festering problem of Israeli savings failing to get a piece of the countrys high-tech action because Israeli institutions have traditionally shunned investing in the countrys venture capital funds.
With investment capital so hard to raise, Israeli VCs have been crowded out by foreign funds: Only 13% of all money invested in high-tech companies last year came from Israeli funds. Kahlon was sympathetic to the problems, but perhaps that is because he didnt know the whole story.
The fact is Israeli VCs have not turned in competitive returns over the years, a survey by TheMarker has founded. Among other things, none were invested in Mobileye, the biggest exit ever by Israeli tech company.
As private investors, VC funds do not have to disclose their performance metrics, but some of the funds returns can be discovered by looking into the financial reports of the few institutions that have invested in them.
The Capital Markets Authority reports that Israeli institution had just 3 billion shekels ($820 million) invested in VC funds, 2.5 billion of it in domestic funds at the end of last year. That is just 90.2% of their assets
TheMarker compared VC performance with the Tel; Aviv Stock Exchanges TA-125 index, although that is an unfair comparison because the stock market is a liquid investment while VCs are long-term ones. Ordinarily the premium for having funds tied up for so long should be 20% to 30%.
In addition, its the nature of VC funds that they invest in their early years and only see the returns much later when their portfolio of companies exit. TheMarker avoided this problem by surveying older funds.
Moreover, venture capital funds collect management fees of 2-2.5% annually, which is much higher than provident funds collect (1.05% from the principal and 6% on deposits) or pension funds 0.5% and 6%, respectively).
All of that works against institutions investing in VCS. At the end of the day, the goal of institutions is to achieve the best possible retain for its investors at a reasonable level of risk – its not our money, said on institutional investment manager.
Looking at funds that were formed around the year 2000, theres a big different in performance. The best of them, with a 60% return was the Delta Fund, while the worst, Hyperion), had a negative return of 63%, including management fees. In any case, investing in the TA-125 would have yielded a return of 156%.
Two funds dating from 2002-02 both showed poor performances – Aviv 1 had a negative return of 42% and Vitalife had a negative return of 18%, while the TA-125 generated a 180% return. For 2005-05-vintage funds, the top-performing JVP 4generated a 778% return – good but less than the TA-125s 96%.
Funding firmed in 2007 have generated negative returns of between 38% and 72%, versus 35% for the TA-125.
In the past institutions invested not a little money in VC funds, said one institutional investors, who asked not to be named. The problem with these funds is that the level of risk is very high mainly because they are investing an in industry where only 5% of the companies succeed. In addition, then funds are volatile. One bad year is enough to ruin yields for years following. And because its a fund, its not an investment that you can exit – your stuck for 10 years.
That said, he said he saw signs that the Israels VC industry was maturing. In the past too much VC money was chasing after two few companies, raising valuations and making it harder to earn returns. Now theyre raising significantly less money, he said.
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