Markstone Backers Looking at 40% Loss on Their Investment

Troubled private equity holdings valued at just $514 million after a decade of operation.

Daniel Tchetchik

The Markstone Capital Group, a private equity fund that has been buffeted by a series of bad investments and the untimely death of a founding partner, has so far generated losses of 40% for its investors, after a decade of operations.

In its third-quarter report, released over the weekend, the fund valued its portfolio of companies at just $514 million, 30% less than the $735 million it raised when it got started 10 years ago. Adding in the estimated $80 million in management fees Markstone has collected over the years, the losses to its investors amount to 40%.

However, the report also showed that the fund was finally steadying itself after a storm in the first half of 2014, when Amir Kess died in an auto accident and the bookstore chain Steimatzky — one of the fund’s key holdings — came close to collapse. Moti Weiss, formerly of the Viola Credit fund, came on board to help Markstone’s remaining partner, Ron Lubash, to manage the fund.

The key to stabilizing Markstone was raising some $80 million in fresh capital from investors six months ago. That was less than the $95 million it was hoping to get: Many investors, especially on the Israeli side, objected to putting more money into the fund.

In the end, however, Markstone’s foreign backers put in about $73 million. Realizing that they opened themselves up to further losses and possible loss suits, its Israeli investors — a group that includes the Clal, Menorah, Harel and Phoenix insurance companies as well as investment houses Meitav Dash and Poalim Capital Markets — added another $7 million to the kitty.

Markstone got another capital injection by selling its 20.7% stake in the nylon fiber maker Nilit to Leumi Partners, Bank Leumi’s holding company, for a price that could go as high as $50 million if Nilit meets certain milestones over the next few years. Money from the sale will reach Markstone’s bank account by the end of the month.

Markstone has introduced cost-cutting measures, cutting personnel to a staff of just four and moving to more modest offices in Ramat Hahayal. The fund has even stopped offering guests free parking.

The cash will enable Markstone to repay money it owed to Deutschebank, private equity fund Fortissimo Capital, banks and bondholders. After the Nilit cash comes in, Markstone’s debt will be under $100 million, less than half the $220 million it owned at the beginning of the year.

That remaining debt is linked to the fund’s last remaining major holding — a 23.2% stake in Psagot, Israel’s biggest investment house. Markstone owes about 100 million shekels ($26 million) to bondholders of a special purpose company called Phenomenal, that holds the Psagot shares, as well as up to 350 million shekels to banks.

The banks for now are resting easy because the Psagot holding, which acts as collateral for the loans, is valued at about $150 million.

The most likely candidate to buy the stake is Apax Partners, the British buyout fund that owns the rest of Psagot. But Apax is only willing to pay several tens of millions of dollars less than Markstone wants for the shares. Negotiations are for now stalled.

Meanwhile, Markstone is looking for another way to exit, a challenging effort given that Psagot is a closely held company with a single controlling shareholder. One way would therefore be to float the shares.