While $400 million may seem like a tremendous amount of money, it’s actually a disappointing figure in the world of Israeli private equity. In Q3 of 2015, Israeli companies scored $400 million in private equity (PE) investments from local investors and from abroad, representing a near 75% drop in PE in comparison to the second quarter of this year.
Does this three-fold plummet in PE mean we’re heading for a downturn?
According to the IVC Research Center, who published their quarterly IVC-Shibolet Private Equity Market Survey on Wednesday, not necessarily. The periodic review gives a rundown of the major trends in PE, which covers venture capital and other kinds of equity. The IVC Online Database boasts tracking the activity of 28 Israeli PE management companies that are holding $7.97 billion in investments. In general, they say Israel is in rather good shape and its tech sector is far too hot to worry about Q3’s numbers for several reasons.
Omer Ben-Zvi, a partner at Shibolet & Co, pointed out the drastic change quarter-to-quarter in domestic PE activity was too short a time span to indicate a turn in the private investment economy. Many large deals such as buyouts sometimes take around six months to close, which might obscure major transactions coming in Q4 2015 or Q1 2016.
“On the other hand, it’s important to note that the number of deals and volumes are very similar to those of the first quarter of the year, with the entire period constituting an especially strong first three quarters,” Ben-Zvi quipped.
A quarterly drop in an exceptional year
The PE numbers overall reflect an impressive year for Israeli private markets. Israeli startups have been doing exceptionally well in 2015 with more than $3.8 billion in exits so far this year. As the IVC Research Center pointed out in April, Q1 2015 was the second best quarter for startup funding in a decade at $994 million. Geektime’s report The Status of Israeli Startups showed Q1 and Q2 were tremendous, seeing an increase year-on-year in early-stage startup investments from 134 to 170 transactions, and in total cash, from $230 million up to $298 million.
The quarterly average for the last five years though is around $738 million in PE transactions. Over 20 quarters, that’s still a drastic drop. On the other hand, we’re comparing Q3 with a wildly successful second quarter. Q3 might not be able to compete with numbers between April and June, but all three quarters of 2015 have raked in $2.5 billion in 66 deals: the most successful Q1-Q3 stretch in Israeli history.
And the year isn’t over yet. Six major Israeli PE funds raised $1.1 billion in Q1-Q3 2015, while five smaller ones combined are expected to raise around $300 million by the end of 2015, according to the IVC-Shibolet analysis.
While domestic private equity investments have been fairly steady, foreign capital has been jumping around. Comparing 2015’s opening three quarters to 2014’s, there has been a modest uptick in the share of deals coming from native Israeli PE, with 27% of private equity transactions Q1-Q3 2015 compared to 24% over the same stretch in 2014. In real numbers, that’s a major jump from $543 million to $627 million.
But as we said and as Marianna Shapira at IVC pointed out, it’s the foreign PE funds that have rattled the numbers. There has been a general slowdown in foreign private equity activity, she said. Yet that shouldn’t worry Israeli startups, in particular the far too vibrant technology sector. There have been exceptionally high deals like the ones that drove up Q2’s numbers, which are also not so easily forecast quarter-to-quarter.
All in all, four major deals in the first three quarters of the year have accounted for $1.3 billion, or 52% of total foreign private equity in Israeli companies: XIO Group, a Chinese PE fund, acquiring medical device company Lumenis for $510 million; Francisco Partners’ buyout of ClickSoftware for $438 million; Northleaf’s investment in Ormat for $175 million; and TPG Growth’s investment in Infinidat for $150 million.
Both Q2 and Q3 also saw 11 notable deals in Israeli tech firms, even if the value of those deals dropped dramatically between the quarters ($1.3 billion to $233 million). In other words, according to the researchers, foreign equity will be coming back.
“In light of the consistent number of deals made by foreign PE investors and investments in technology companies in the last quarter, together with our estimate that more than a few technology companies in Israel are at a stage fit for private equity funds to join in, I would estimate that the private equity market’s uptrend we have been seeing in the last couple of years, will continue,” Ben-Zvi said.