Meitav Downgrades Markstone After Questioning Reporting

The Meitav investment firm has reduced its valuation of the Markstone fund by 30% following what it thinks are unrealistic figures in the fund's financial reports, TheMarker has learned.

Meitav is restating Markstone's value at a little less than 56 agorot for every 100 agorot of stated value on the financial statements in the provident funds under Meitav's management.

There are two accounting methods used in assessing investment funds, but Meitav is rejecting both for Markstone. With one approach, the profit from dividends received is recorded and the value of the fund is reduced. With this method, since Markstone has so far distributed dividends representing about 23% of its investments, its value would be 79 agorot. Under the second method, profits are not recorded nor is the rate at which the fund is assessed reduced, and Markstone's value at the end of the 3rd quarter of 2009 would have been valued at 102 agorot. Meitav conducted its own assessment, however, setting a value for Markstone at 55.8 agorot.

While Meitav takes a dim view of Markstone's value, other parties that have invested in the fund have set the fund's value higher.

At Harel Insurance, Markstone is said to be valued at 102 agorot, at Clal Insurance it is reportedly at 87 agorot and at Phoenix 118 agorot.

Meitav is the first investment firm to openly deal with Markstone's value, but the fund has already faced anonymous criticism from the private investment fund sector.

"We believe Markstone is assessing the value of the fund at a higher rate than its true level," said Meitav's provident fund investment manager, Yaniv Zalel. He refused to go into detail as to why Meitav thought Markstone was overvalued, but according to industry sources, Meitav's view is a result of Markstone's valuation of the Netafim drip irrigation firm and of Phenomenal Holdings.

Phenomenal has a 24% stake in Psagot and owns 45% of the trust fund operations of Excellence Investment. Netafim's value on Markstone's books was originally at issue at the end of last year when it became apparent that, despite Netafim's poor financial state as a result of the world financial crisis, Markstone had assessed the irrigation company's value at $677 million, which is more than double the assessment by Tene Investment Funds, which also has a stake in Netafim.

If Markstone had valued Netafim as Tene did, the net yield for Markstone's investors would have dropped to single-digits.

The assessment issue involving private investment funds is not unique to Markstone. About a week ago, a senior partner at the BDO Ziv Haft accounting firm, Udi Savitsky, penned a column under the headline "The private funds' white lie" in which he wrote that "the primary problem issue in assessing corporate values and yields in [investment] funds is that it involves private companies, and the corporate and portfolio valuation rules are flexible and ill-defined. There is a difference between corporate value on the date of purchase and its valuation in financial statements."

From the standpoint of provident fund clients who are invested in Markstone and other private funds, this is no small matter. The implication of inflated valuation is that funds managing an individual client's money are reporting yields that are higher than the true returns they should be presenting to their clients.

Markstone has reportedly been trying of late to acquire a stake in the Yes satellite television company from Shaul Elovitch for about NIS 600 million, which was a surprise, because several Israeli institutional investors had asked that Markstone refrain from new investments following revelations of bribes given by Markstone's Elliott Broidy to senior New York State pension fund officials.

From a legal standpoint, Israeli investors have no grounds to ask Markstone to stop making new investments, but it is thought investors made it clear to the fund that no new deals should be in the offing and that Markstone had said in the past that no new investments would be made until the end of the Broidy affair.

For Ron Lubash and Amir Kess, who manage the Markstone fund, that affair came to an end when Markstone reached a settlement on the matter with the New York attorney general, enabling Markstone to resume new investment activity.

With regard to the valuation issue and the matter of new investment Markstone issued the following statement: "All value assessments are made by outside parties according to accepted accounting principles. In the 3rd quarter of 2009, we showed a return of 11% and since its founding the fund has provided its investors with a substantial cash return. With regard to new investments, the heads of Markstone took the voluntary decision to suspend new investments until discussions with the investors are completed."

Markstone has $800 million in commitments from institutional investors and has called in $550 million of this sum. Among the institutional investors with a stake in Markstone are Clal Insurance, which is the fund's largest investor at $18 million; Menorah Insurance and Phoenix, which have each put $5 million into the fund; $3 million each from Harel Insurance and Ayalon; the veteran Mivtachim fund with $2 million; and Meitav at $1 million.

When asked whether it had any objection to new investments by Markstone, Meitav said "[we] hold less than 0.4% of Markstone's assets, [but] are following developments at the fund with concern. We have met with [the fund's] management and we are considering our further course of action consistent with [available] practical options for the sake of our clients."

Clal Insurance said they would meet soon to discuss a future course.

Harel Insurance said no final decision had been made on the matter and Menorah Insurance declined to comment.