Taking Stock / Markstone's Test

When the press first reported the establishment of a new fund that intended to raise $500 million overseas for investment in Israel, many snickered. There goes the press again reporting drivel, they figured.

The amount seemed outrageously large for a private equity fund operating in the local arena. Half a billion dollars is tremendous for such funds in local terms.

But one must make a distinction between Markstone and Israel's venture capital industry, which relies on the enduring good name of Israeli high-tech. Markstone isn't looking for sexy startups; it's targeting established firms operating in the domestic arena of Israel, a country still considered to be risky for investment.

However, the dubiety is being replaced with awe. Its first closing brought Markstone $400 million, and the fund is zooming in on its half-billion dollar target. Many questions come to mind about how it did it, but one thing's for sure: it is a major triumph.

So how did it do it?

`I believe in the Israeli economy'

The answer lies with two people, Elliott Broidy and Alan Hevesi. The fund was initiated by Broidy, an American businessman who managed investments for the Bell family for several years and founded the Taco-Bell fast-food restaurant chain. He keeps to himself and it's very hard to track down information on him, but to judge by Markstone's achievement, he's well connected and wields a great deal of clout in the U.S. investment scene.

As for Hevesi, he's the State of New York comptroller after having served 10 years serving as New York City's comptroller.

The comptroller is an elected position. Hevesi was voted in by almost two million New Yorkers, and now he, alone, calls the shots. He also manages the NYSCRF, the New York State Common Retirement Fund, for which he serves as sole trustee. He is the one who makes decisions regarding the fund, free of pressure from any managerial board. There is an advisory board, but it is powerless.

And that suits him well. Ten minutes after we arrived in fund's Third Avenue office three months ago, he demonstrated his world view and management style in his own way. He opened a desk drawer, rested his feet on it, leaned back and declared, "I have a great, big and wonderful job. I don't report to anybody. I am the sole manager of a $110 billion pension fund of State of New York employees. I decided to invest $20 million in Markstone because I believe in the Israeli economy and I don't have to get anybody's permission." End of quote.

The test of the market

From the Zionist perspective, it's a nice story. But since Hevesi, who is politically motivated, is the man who enabled Markstone to make its mark and raise $400 million, one cannot state with surety that the fund, its model and its managers passed the market test.

Markstone boasts two Israeli managers - Ron Lubash, former manager of Lehman Brothers Israel, and Amir Kess, who served as deputy manager of Arison Investments. Both won great esteem at their previous positions. But clearly without the Broidy and Hevesi team, it's doubtful whether foreign or local investors would have deposited half a billion dollars in their hands. The investment world is based on the managers' track record, and Lubash and Kess have no record of managing investments or businesses.

Moreover, the fund's model is something new. On the one hand, it aims to buy large chunks of established firms. Just last week, the press reported that Markstone is eyeing controling interest in Bezeq. On the other hand, Markstone's managers say they won't be involved in managing the portfolio companies.

Two questions come to mind. How many major transactions of the kind they have in mind happen in Israel each year? And can one significantly improve a company these days without becoming involved in management?

Dispelling market domination

Markstone's managers keep saying that the fund's advent portends the end of an era, the one of the big families. Namely, the 10 big groups that basically divvied up almost all the major deals going down, sometimes making decisions based on ego and prestige rather than yield.

From the perspective of market domination by the families, clearly the entry of a professional element with half a billion dollars in hand is a refreshing change. But despite all the bad things one can say about the way the families run business in Israel, it remains incumbent on Broidy, Lubash and Kess to pass the test of the market. They have to prove there is a place for a player like Markstone at the table, that it can locate worthy investments at good prices, make money on them, and get out in time.

Though the TASE climbed 50 percent in 2003, it isn't impossible to find alluring opportunities. But what's sure is that the opportunities aren't lining up to knock at Markstone's door.