What makes Israel’s secondaries market different from others?
Most secondary transactions in international markets are buyout and growth fund related. The buyout market is relatively small in Israel. Israel’s core strength is in technology. So, as most of the investment activity in Israel is venture-related, most of the secondary activity is related to venture assets.
Not surprisingly, that is our focus: buying secondary positions in venture backed companies and in venture funds. We do so in both Israel and Europe.
A fairly significant amount of the venture investment in Israel is in hard core technology, such as data mining, advanced image processing, cybersecurity, semiconductors, communications, storage technologies, medical devices, etc. In Europe, most venture portfolios are concentrated on b2c companies, marketplaces and b2b software for small and medium sized businesses where the drivers are more the business model and execution and less a core technological advantage.
Understanding and evaluating core technology companies that are often pre-revenue, or with limited revenue, is a challenge for most secondary buyers. That is why we have built a very large investment team comprised both of direct venture investors and operational people with many years of either R&D and/or product management experience. We are the only secondary fund that I know of that has a chief technology officer as a partner in order to dig deeper into technology trends and to better understand the competitive positioning of the companies into which we buy direct positions or the underlying portfolios of the funds we are buying.
What types of secondaries deals are most prevalent in Israel currently?
You see many of the same kinds of transactions that you see in other markets: buying LP stakes in venture funds, shares of venture-backed companies and tail end portfolios. As with other markets, you are seeing standard purchases, structured transactions and synthetic secondaries.
How does pricing in this market differ from in the US and Europe?
There is no clear benchmark for comparative pricing of Israeli-related secondaries as compared to other markets so I cannot answer that question definitively. Having said that, we do not believe in standard discounts to net asset value in pricing venture assets. Every transaction we do is priced based on a bottom-up assessment of each fund, company by company. We typically meet 10 to 15 companies a week and regularly meet VCs to review their portfolios as well, even when there is no transaction on the table. This gives us a 360 degree view of the portfolios well in advance of deals. It is not clear how one can effectively price assets in this area without a deep understanding of the trends in this industry, the technology and business models of the underlying portfolio companies, their competitive positioning and of course the quality and stability of the general partner. By focusing almost exclusively on venture and technology investing and having a relatively large investment team, we feel that we can effectively price opportunities. This has allowed us to sign hundreds of term sheets and letters of intent over our 12 years in operation and never have to renegotiate or withdraw from any, even non-binding, commitment we have ever made.
How has competition in the region evolved in recent years?
The Israeli secondary market is a relatively small market. There are a few local competitors in Israel. In addition, we are seeing an increasing appetite by some international secondary funds for venture assets. However, we have worked successfully with a number of international secondary funds on transactions, where the international secondary fund leverages our due diligence capabilities and we partner on transactions. In addition, we have built close relationships with many of the funds in the market and try to be helpful. We are getting three to four LP calls a week about the market and the GPs active in the venture market and we are an active reference for funds where we have made secondary or primary commitments. In addition, we have been leveraging our database of close to 5,000 Israeli and European private technology companies to help our portfolio funds and their companies and our direct holdings. We have created a team to provide a free service of helping large public technology companies on the one hand and Fortune 5000 companies on the other to identify appropriate technology providers in Israel and Europe. This is a win-win-win in the following ways: the strategics and large corporates find emerging, disruptive technologies that they may not know, the underlying portfolio companies of our funds get unique access to decision makers at potential customers and strategic partners and Vintage is seen as added value by both funds and companies and gets great due diligence input on the underlying companies as a result.
How would you characterise the current market for early secondaries?
We are very active in early secondaries and have completed 10 transactions over the last number of years. However, our early secondary activities are completed through our fund of funds programs. In early secondaries, particularly in those that have called less than 40 percent, one has far less visibility into the portfolio (as the portfolio will be very young at that stage) and much of the capital will not have been invested. Therefore, the driver in these deals is more the quality of the general partner and less the underlying portfolio to that date. Therefore, our low-funded secondaries are focused on GPs that we would support in our primary fund program. Our primary fund and low funded secondary programs invest in venture funds in the United States, Europe and Israel.
Our sense is there has been a slowdown in the low-funded secondary activity in venture. LPs are flush with cash. Some LPs who dropped out of venture after at the beginning of the last decade are coming back to the sector so we do not currently see LPs paring back significantly on post 2010-2011 vintage venture funds. Having said that, venture, like all sectors, is cyclical. At some point in the next number of years there will a downturn in the market or at least a correction and then the less committed investors will sell and the investors who are long term committed to the asset class will buy.