Israel enlists money managers to help fund struggling startups

[TEL AVIV] Israel's largest institutional investors manage a hoard of more than 1.9 trillion shekels (S$769.01 billion) that has long drawn interest from government officials looking for ways to support the local technology industry. With the coronavirus pandemic battering money-starved startups, those funds stand to aid the sector's survival.

Since financing is increasingly difficult to come by particularly for smaller companies, the government is making available its own money, while at the same time pushing local institutional investors to allocate their funds. As an incentive, the government plans to provide guarantees as protection against potential downside.

"The world has changed," said Sagi Dagan, head of the growth division at Israel's Innovation Authority. "We see this crisis as an opportunity both for the institutional investors, and for the Israeli high-tech sector - and for the people saving money in their pension funds to have a bigger portfolio."

Israel's tech sector - including more than 6,000 startups - is a critical component for the country, accounting for about 10 per cent of all jobs. And with lucrative salaries and high productivity, the industry is disproportionately vital for the fate of the overall economy.

But as foreign investors dominate financing, much of the funding has dried up as financiers abroad grow more cautious and travel less. As a result, government officials expect both tech sales and private investment to take a 25 per cent hit, a potentially debilitating blow for smaller firms with little sales and cash reserves. Data from the IVC Research centre already showed a slowdown in venture deals in the first quarter.

To avert a broad collapse, Israel's government is planning to step into that void with a multi-faceted support plan, amplified by private sector co-investment. The smallest firms will have access to 500 million shekels in government investment, while big companies with more than 200 employees will be able to secure guaranteed loans. Israel will also put in place tax incentives for angel investors, and mergers and acquisitions.

In addition, officials will coax Israel's institutional investors into putting 2 billion shekels into mid-stage tech companies. The co-investment model is aimed at shortening due diligence and bridging the knowledge gap. If successful, the mid-tier program could support about 100 firms, while hundreds of smaller firms would benefit from the early-stage fund, Mr Dagan said.

It may be difficult to actually bring the money managers on board. Already last November, the country's Innovation Authority rolled out a grant program to develop tech expertise among such firms so they could expand investment in the sector and eliminate a "market failure", but progress is slow going. And this time around, institutional investors are wary of the risk that comes with the market rout.

For example, less than 0.5 per cent of assets at Meitav Dash Investments are invested in startups.

"We'll need to check it and then to understand what is the risk and what the guarantee is for us," said Guy Mani, who manages roughly US$15 billion as chief investment officer for Meitav Dash's provident and pension funds. "Still, startups are a very dangerous sector because it's hard to know what will fail and what will succeed."

Along with the potential for downside, some investors see an opportunity amid the crisis. While the industry may slim down, overall adoption of technology will accelerate and deals may be more attractive to investors still looking to spend.

"It's very hard to raise new funds in this environment," said Gilad Shany, a managing partner and co-founder of ION Crossover Partners. "If we're really able help these companies' growth in this environment, they can take market share globally."

BLOOMBERG