Published On: Wed, Nov 4th, 2015

Israeli private equity investment fell sharply in third quarter

IVC-Shibolet reports: Israeli private equity investment fell to just $419 million in 20 deals.

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  • Q3/2015 Israeli PE deal making drops 43 percent below the 5-year quarterly average
  • Technology sector attracts $1.8 billion – 75 percent of all PE transactions in Q3/2015
  • Foreign PE funds cool down in Q3/2015 – only 29 percent of all Israeli private equity investments

In the third quarter of 2015, Israeli private equity investment fell to just $419 million in 20 deals, according to the latest IVC-Research Center – Shibolet & Co. Law Firm report. This fall follows an exceptionally high preceding quarter, when 27 deals accounted for $1.6 billion (the third highest quarter in the last four years). Moreover, the third quarter total was 43% below the five-year quarterly average of $738 million, but the number of deals was the same as the average.

Despite the substantial quarter-over-quarter fluctuations, the first nine months of 2015 have been the most successful three-quarter span in Israeli private equity performance, with nearly $2.5 billion invested in 66 deals. These figures are higher than the $2.3 billion invested in 60 deals in the first nine months of 2014, or the $1.7 billion in 58 investments during the corresponding period of 2013.

In the first nine months of 2015, Israeli private equity funds invested $672 million or 27% of the total. This was a 24% increase, compared with $543 million invested in the same period of 2014. The three largest deals over this period were buyout transactions, which accounted for 30% of Israeli PE fund investments, the largest of which was the $97 million buyout of Hadera Paper by FIMI in the second quarter of 2015.

While foreign private equity funds maintained their activity levels in terms of the number of transactions, the volume of investments dropped to just 29% of total deal-making in the third quarter, compared with 81% in the preceding quarter, and 84% in the corresponding quarter of 2014 – the two strongest quarters for foreign PE activity in Israel. The largest deal in the third quarter of 2015 was the $50 million buyout of e-commerce company Payoneer by the Wellington PE fund. In the first nine months of 2015, the four largest deals closed by foreign private equity funds accounted for almost $1.3 billion, or 52%, of total investments.

Shibolet & Co. partner Omer Ben-Zvi said, “On the one hand, it can’t be denied that private equity investments in the third quarter of 2015 were relatively low. This fact may be attributed to the volatility in capital markets in recent months, which is crucial when large deals in late stage companies are concerned. 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. Therefore, I wouldn’t conclude that the trend is turning, or that the Israeli private equity market is weakening simply based on the third quarter results. It is too early to conclude a down trend based on a single quarter, partly because the survey figures are strongly impacted by single large-size deals. Such deals are always few, but make up a sizable portion in capital investment. It is also important to note that PE deals often take around six months to close.”

In the third quarter, 11 technology deals accounted for $233 million or 56% of private equity investments. The amount was sharply down from $1.3 billion (80%) invested in 11 deals in the previous quarter, and far below the $1.6 billion (95%) invested in the corresponding quarter of 2014. However, the number of transactions has kept stable, compared with 11 deals and 10 deals closed by private equity investors in the preceding quarter of 2015 and the corresponding quarter of 2014, respectively.

IVC research manager Marianna Shapira said, “While we observed a slowdown in in the last quarter, in the long-run the technology sector accounts for the largest part of private equity deal-making in Israel, being also the main target for the foreign PE investors. As demonstrated throughout the years, the ultimate majority of large transactions above $100 million in Israel are performed by foreign private equity investors in technology companies. Therefore exceptionally high quarterly figures, such as those we’ve seen in the second quarter, usually stem from the remarkably large deals in this sector, especially when foreign investors are involved.”

She believes the results in the third quarter have reflected a slowdown in foreign PE fund activity, which is temporary, “considering the increasing number of growth-stage high-tech companies in Israel, which represent potential PE targets. “We expect to see the numbers turn back up for private equity deal-making by the end of the year or early next year, ” Shapira stressed.

Ben-Zvi agrees, “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.”

The IVC-Online Database maintains data on 28 active Israeli private equity management companies with a total of $7.97 billion under management. In the first nine months of 2015, six Israeli private equity funds raised approximately $1.1 billion, and five other funds are engaged in fund raising, and are expected to close some $300 million by the end of 2015.

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