from the September 2011 issue

Private equity fills venture capital void

The drought of exits in recent years has turned private equity into a convenient alternative. Israeli venture capitalists are worried. Start-ups and entrepreneurs ostensibly survived the 2008 crisis, but a deeper examination of the data suggests that they never recovered from the crash of 2001.

A new report by Ernst & Young may be a ray of light in the darkness. It says that private equity investment in global high tech rose 60% to $8 billion in the second quarter of 2011 from $5 billion in the corresponding quarter of 2010, boosting private equity's holdings in private technology companies to 10%. The trend is seen in Israel too. In the largest financing deal so this year - $50 million - Silver Lake Sumeru invested in PrimeSense Inc.

Young high-tech companies are desperate for private equity capital, in contrast to the past. 15 years ago, start-ups reached the capital markets long before they needed large investments. The drought of exits in recent years has turned private equity into a convenient alternative. Private equity funds could invest large sums into companies, and sometimes buyout tired investors.

Ernst & Young believes that the improved global economy and share prices - at least until August's plunge - encouraged investors and large companies to invest in high-tech companies. Ernst & Young global technology transaction advisory services leader Joe Steger says that private equity funds have a lot of money looking for good investment opportunities.

Israeli venture capital funds would be happy to grasp this opportunity with both hands. The funds are hemorrhaging; most have no money for new investment. Their outstanding portfolio companies are promising, but until the promise is kept, the funds won't sell them, and they need to raise follow-on funds - and this process requires a lot of patience.

In the past two years, Israeli venture capital funds sat on fence, waiting for the crisis to pass. Some fund executives have been to get ready, ironing their suits, polishing their PowerPoint presentations, and trying to leverage the upbeat mood among investment institutions. But this month's market upheaval upset the applecart, and no one knows if this is a temporary correction or a new crisis. The venture capital funds are moodily monitoring the condition of the primary market. If it shuts down, the global high-tech industry will go into a big freeze - again.

One of the first signs of the trend were seen with the acquisition earlier this year of Ness Technologies Ltd. (Nasdaq: NSTC; TASE: NSTC) by Citigroup Inc. (NYSE: C) unit Citi Venture Capital International (CVCI) for $307 million.

Although private equity funds do not invest in early-stage start-ups, but there are quite a few late-stage companies seeking capital to grow.

Reprinted from the Israel High-Tech & Investment Report September 2011

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