Israeli pension funds are expected to get a waiver that will allow them to invest in four new high-tech funds for which the government issued new tenders this week.
The new mutual funds, meant for both private and institutional investors, are to be traded on the Tel Aviv Stock Exchange, TASE. They come in response to the high ratio of foreign-to-domestic investment in the country’s burgeoning start-up scene.
“It’s our understanding that the Capital Markets Authority will give waivers for pension funds to invest in these funds even though they charge management fees,” Avi Laor, deputy manager at the mutual funds supervision unit at the Israel Securities Authority (ISA), told CNBC.
Under Israeli regulations, pension funds are not normally allowed to invest in funds that charge management fees, he explained.
The relatively low ratio of domestic Israeli investment in the often lucrative high-tech scene, with some estimates as low as 10 percent, has bothered both the industry and policymakers in recent years. When Intel, for example, bought Israeli autonomous driving start-up Mobileye earlier this year for $15 billion, some of the joy at the country’s high-tech achievement were tempered by the realization that most of the investors profiting from this windfall were foreign and that local institutional investors such as pension funds were not involved.
Pension funds usually will not go through the complex due diligence process for such investments if the amount involved is under $100 million, said Laor. “Those (new) funds are a great solution for that problem. The pension fund can look at this as a fund that puts together a portfolio that is balanced and is run professionally and invest in that.”
Apart from opening up the high-tech and start-up markets to regular Israeli and institutional investors, the funds also aim to keep companies in Israel in the long term by facilitating domestic start-up financing. Right now, said Laor, too many R&D (research and development)-based companies leave.
“At some point they either close or move abroad. So the Israeli market does not benefit from their success,” he said.
The ISA and the Ministry of Finance is aiming for four high-tech funds with a minimum each of 400 million Israeli shekels in investments, currently some $113 million. The government is making a total of 200 million Israeli shekels available in investment guarantees, 50 million Israeli shekels per fund, and another 100 million Israeli shekels per fund in backing for credit. The ISA and the ministry announced on Sunday that they’re looking for managers for the funds.
The funds will need to have a minimum of 30 percent of their assets invested in Israeli start-ups after five years, which can be expanded up to 50 percent. The rest can be invested in traded high-tech firms, with a ceiling of 25 percent on investments abroad. Since the funds themselves will be traded on the TASE, they’re also open to foreign investors but Laor was confident they’d attract Israeli investors foremost.
Several investors in Israel’s start-up scene reacted positively to the new funds. “We don’t view more players as competition, we love more players,” said Jon Medved, CEO of equity crowdfunding platform OurCrowd. “I don’t worry about my piece of the cake, I’m just happy the cake’s getting bigger.”
He said the new funds are an important signal that the government is serious about opening up the high-tech and startup market to domestic investors: “This is just the beginning of what I think will be a series of moves both regulatory and financial, funding, that will ultimately create a safe space for Israeli financial institutions to back in a much more serious way the local startups.”
He pointed at other initiatives such as the launching of a bi-national tech fund with India announced during Prime Minister Narendra Modi’s recent visit, and government support for incubators as positive developments. But in the end, the market would have to be left to its own devices.
“The government has been helpful, I don’t want to overstate it, but I hope it will be prodding the market and then move back, let the private market do its work,” he said.
Yoav Leitersdorf, managing partner at YL Ventures, also welcomed the new funds: “It serves as a signal to Israeli and foreign investors and entrepreneurs, who choose to found start-up companies, that the Israeli government believes local start-ups are positioned to thrive in the long run.”
Yet, he did sound a note of caution over the risk that government guarantees could adversely affect the due diligence process that is so crucial with such high-risk, potentially high-reward investments: “Careful decision making and valuable contribution to startups would be the best way to grow the Israeli high-tech industry,” he wrote in an emailed comment.[“Source-cnbc”]