Israeli private equity deal-making fell to a mere USD419 million in 20 deals in the third quarter of 2015, following an exceptionally high Q2/2015, when 27 deals accounted for USD1.6 billion (the third highest quarter in the last four years).
Moreover, the amount was 43 per cent below the five-year quarterly average, which stands at USD738 million, but the number of deals was the same as the average.
That’s according to a report by the IVC Research Centre, in conjunction with Shibolet & Co, which highlights that despite the substantial quarter-over-quarter fluctuations, the Q1-Q3/2015 period turned out to be the most successful three-quarter span in Israeli private equity performance, with nearly USD2.5 billion invested in 66 transactions. These figures are higher than the USD2.3 billion invested in 60 deals in the first nine months of 2014, or the USD1.7 billion in 58 investments during the same period of 2013. In Q1-Q3/2015, Israeli private equity funds invested USD672 million or 27 per cent of total. This was a 24 per cent increase, compared with USD543 million (24 per cent) invested in the same term in 2014. The three largest deals over this period were buyout transactions, which accounted for 30 per cent of Israeli PE fund investments, the largest of which was the USD97 million buyout of Hadera Paper by FIMI in Q2/2015. While foreign private equity funds maintained their activity levels in terms of number of transactions, the volume of investments dropped to just 29 per cent of total deal-making in Q3/2015, compared with 81 per cent in Q2/2015, and 84 per cent in Q3/2014 – the two strongest quarters for foreign PE activity in Israel. The largest deal in Q3/2015 was a USD50 million buyout of e-commerce company Payoneer performed by Wellington PE fund. In Q1-Q3/2015, the four largest deals performed by foreign private equity funds accounted for almost USD1.3 billion, or 52 per cent, of total investments. Omer Ben-Zvi, Partner at Shibolet & Co points out a number of concurrent trends: "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 sizeable portion in capital investment. It is also important to note that PE deals often take around six months to close,” Ben-Zvi explains.
In Q3/2015, 11 technology transactions accounted for USD233 million or 56 per cent of total private equity investments. The amount was sharply down from USD1.3 billion (80 per cent) invested in 11 deals in the previous quarter, and far below the USD1.6 billion (95 per cent) invested in Q3/2014. However, the number of transactions has kept stable, compared with 11 deals and 10 deals closed by private equity investors in Q2/2015 and Q3/2014, respectively. (Figure 2)
According to Marianna Shapira, research manager at IVC: “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 USD100 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.”
Shapira 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,” she concluded.
Omer 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 USD7.97 billion under management.
In the first nine months of 2015, six Israeli private equity funds raised approximately USD1.1 billion, and five other funds are engaged in fund raising, expected to close some USD0.3 billion by the end of the year.