Buyout firms target cash-flush Israeli investors for fresh funds

Tel Aviv

GLOBAL private equity companies are seeking fresh capital from Israeli investors who have more cash than they could ever spend at home.

Executives from New York-based Cerberus Capital Management and Neuberger Berman Group LLC as well as London-headquartered Permira Holdings LLP were among firms in Tel Aviv last week to meet with Israel's biggest investment houses. Some, like Cerberus and Vestar Capital Partners LP, came to pitch new funds.

Israel's biggest institutional investors, such as Harel Insurance Investments & Financial Services Ltd. and Meitav Dash Investments Ltd., are flush with cash after the government changed a law in 2008 to boost savings. The sums far exceed what can be invested locally - public funds grew 161 billion shekels (S$61.9 billion) in the first quarter, more than 15 times the amount managed by the country's biggest private equity firm.

And while most money managers have increasingly been sending this new capital abroad, relatively little has been invested in areas like private equity funds and real estate.

"There's pent up capital that needs to be deployed," Roberto Quarta, chairman of Clayton, Dubilier & Rice LLC's in Europe, said in an interview in Tel Aviv. The firm, which was started 1978 and managed investments of US$28 billion in 85 companies, visited the country to broaden its investors base.

Institutional investors in Israel allocated about 13 per cent of their portfolios in private capital investments - half the level in the US and less than a third than in Europe and Asia, according to a report by HA Global, an Israeli strategic advisory firm. Just under US$10 billion, or 2 per cent of assets under management, has been funnelled to buyout groups, the data shows.

Central banks in developed countries have pumped trillions of dollars into the world's economy since the 2008 financial crisis, driving up asset prices while depressing yields on government bonds. Private equity firms yielded 18.2 per cent last year, capping off a 10-year run of more than 12 per cent returns a year, according to Preqin data. By way of comparison, the annual gain for Israel's benchmark equity index topped 10 per cent three times since 2010.

The combination caused a funding boom for private equity groups, about US$4 trillion in the last decade. Most institutional investors are lining up to bankroll the world's biggest buyout groups, forcing smaller outfits to seek backers in new markets, according to Vestar founder Norman Alpert, who started travelling to Israel for business around 18 months ago.

"The larger firms are hoovering up the capital," Mr Alpert, whose firm is in the final stages of raising a US$1.12 billion fund, said. "It's harder for the smaller ones to get new funds."

The rush of cash, combined with shrinking alternatives in public markets, has forced Israeli money managers to build from scratch capacities to analyse private investments, according to Yaniv Pagot, head of strategy at Ayalon Investment House, which manages about 10 billion shekels in assets. If it weren't for regulatory constraints, the sums from Israel directed toward private equity would be much larger, he said.

"You get on a plane to Tel Aviv, cross the road two or three times to take about 10 meetings with investors and you come back with a ton of money," he said. "Of course any good salesman would want to come." BLOOMBERG