from the January 2016 issue

Investment in Israeli high-tech is unprecedented, and this will continue in 2016, says PwC Israel high-tech leader

"Israeli high-tech continues to provide investors with an impressive string of exits, with total deal value of more than $5bn for the fifth straight year," said PwC Israel high-tech leader Rubi Suliman in his 2015 report. "The Israeli market seems to have grown desensitized to the news of yet another exit. But, that's quite unjustified, because this is actually quite amazing, on a global scale."

Israeli high-tech M&As rose to $7.2bn in 2015 from $5bn in 2014. However, IPO activity by Israeli companies slumped to $3.5 billion in 2015 from 8 companies, from $9.8bn for 18 IPOs in 2014. The 2015 figure was so high mainly due to effect of the $5.3bn Mobileye IPO.

"The decline in Israeli IPOs is driven by several factors," observed Suliman." First, the window of opportunity has been closing in the US and the UK. It is not completely closed just yet, but certainly narrowed in 2015. Second, cheap private money is a very significant contributor to the decrease in IPOs. Only recently we have witnessed companies that were unable to raise in IPOs at the same valuations as they did in private placements. When the public markets do not give the higher valuation, the number of IPOs is set to go down."

IVC-Meitar: 2014 exits total nearly $7b
PwC Israel: Average M&A price up 48% in 2013

He added, "The increase in M&A deals is virtually fully explained by an increase in the number of deals, from 52 to 62. This increase is driven by continued appetite by large multinationals to use their massive cash holdings to acquire innovative future technologies as the best way to preserve value in the current environment of super-low returns.

Some of these funds are actually "locked" in tax structures that make the acquisition strategy seem even more attractive."

Suliman said, "Israeli hi-tech remains a focal point for international M&A deals. We have grown accustomed to the presence in Israel of global giants like Facebook, Apple, IBM, Qualcomm, Microsoft, Intel and more, which is actually far from being obvious. This year we have seen some new players in the local M&A market such as ARM, Amazon and Zynga. Israeli companies, such as Checkpoint, Mellanox, ironSource and Wix are also actively or potentially in on the action. The most active buyer by far is Microsoft with 5 acquisitions in 2015. In 2015, 56 buyers acquired 62 companies, versus 49 buyers that acquired 52 companies in 2014."

"While ranked top in terms of the number of delegations to Israel and interest they show, the Chinese are still on the sidelines and have not made significant acquisitions of Israeli hi-tech companies. However, the Chinese do make investments in Israeli high-tech, and have made quite a few acquisitions in other industries, so it's possible to assume that it is a matter of time before they get into the game."

Looking ahead to 2016, Suliman said, "The expected further hike of interest rates in the US and the belief that the economy is recovering out of "the seven lean years" since 2008, may impact the availability and alternative price of private money, and indirectly impact exits in Israel, given other investment opportunities. But, in fact, there are arguments that actually show why those changes can even intensify M&A activity in Israel. Be it as it may, such transitions take time to play out, and so, it is fair to assume that 2016 will also be buzzing with M&A activity. The amounts currently invested in Israeli high-tech are unprecedented, and it seems that this will bear fruits in the form of more innovative companies that will keep Israeli hi-tech rolling forward. The bottom line is that at this juncture, Israeli high-tech has all ingredients to continue producing larger than ever exits."

The seventh venture capital raising cycle that started early in 2015 - with 83North's $204 million closing announcement - followed a successful sixth cycle between 2011 and 2014, concluding with a total of $3.6 billion raised by 61 funds. The sixth cycle had been the strongest one since the early 2000s, ending with $1.2 billion for vintage 2014 funds, the strongest vintage year in the past decade. The sixth cycle's most evident trend was the increase in the number of micro-venture capital funds, with 33 micro funds raising capital during this period, more than three times the number of such funds in the previous two cycles.

2015 vintage was marked by the emergence of six new growth funds, an outstanding number of funds dedicated to growth stage companies. While it may be a bit early to tell, it seems this might be a new trend for the seventh cycle. The average 2015 vintage fund currently stands at $57 million and may increase to as much as $82 million when targets are reached by the funds still raising further capital.

KPMG Somekh Chaikin Technology group partner Ofer Sela points to another interesting trend: "Over the past year we've seen a change in the LP mix in Israeli VC funds. While Israeli institutional investors have expanded their involvement then what it had been in the past, they still leave the arena mostly to investors from the US, and increasingly, from China. We can also see Israeli high net worth individuals going into VC investments. We hope this changing trend will get even more institutional investors involved in the industry, either as LPs in funds or co-investors in financing deals."

In 2015, four seasoned Israeli venture capital funds raised a cumulative 59% of the total fund capital, with more than $100 million each. 83North stood out with its quick closing of $204 million, a third fund for the team, but the first under the 83North rebranding of Greylock Israel. Pontifax's fourth fund attracted a noticeable $150 million, in addition to another $40 million at first closing for the management company's AgTech fund. Pitango Growth, which is dedicated to growth stage companies, followed with a first closing of $125 million out of a targeted $250 million. Vintage's eighth fund closed $125 million for late stage investments, after having closed its $144 million seventh fund only a year earlier, of which 50 percent are allocated to investments in Israeli funds.

Sela added, "The local VC industry's viability is affirmed by two complementary trends. On the one hand we see veteran Israeli VC funds last longer than the average ten years, choosing to reinvest some of their returns, effectively increasing available capital. On the other hand, the VC funding cycles shorten as successful 2014 vintage VCs intend to start raising new funds during the last quarter of 2016, allowing them rapid cycles of first investments."

At the beginning of 2016, over $2 billion is available for investments by Israeli venture capital funds. Of this amount, a little over $500 million is earmarked for first investments. The remainder is reserved for follow-on investments. With nearly $1 billion expected to be raised in 2016, IVC and KPMG believe that more than $700 million may be available for first investments over the coming year.

Reprinted from the Israel High-Tech & Investment Report January 2016

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