NEW GUIDELINES RELEASED BY CHINA ON OVERSEAS INVESTMENT EXPECTED TO INCREASE CHINESE INVESTMENTS IN ISRAELI TECHNOLOGY
On August 18th, China’s State Council clarified a series of regulations related to overseas investment. In addition to a number of restrictions on investments in property, hotel, film, entertainment and sports, Chinese authorities gave explicit support for investments that will contribute to innovation, research and development, including its ‘Belt and Road’ initiative
These new regulations are expected to provide a strong tailwind for investments in Israeli technology, as Chinese investments in overseas R&D will likely accelerate in the upcoming months following previous restrictions. Given Israel’s ability to generate global-leading technology and its previous track-record in attracting Chinese investments, it is well positioned to attract a substantial amount of new Chinese capital as overseas investment accelerates. Restrictions on capital outflows increased last December, when the Chinese government expressed concern over ‘irrational’ acquisitions of assets in industries ranging from real estate to hotels and entertainment. At the time, Chinese regulators began to enact what was an unofficial policy that restricted ‘major’ investments and acquisitions (over $10 billion), investments in assets unrelated to the core business of the investor and investments in which Chinese investors obtained less than 10% of the target company. Local banks refrained from approving such transactions and referred investors to the Chinese State Administration of Foreign Exchange (SAFE) which frequently delayed the approval of such transactions. The recent codification is expected to provide more clarity for investors and a more targeted approach by SAFE. Chinese investors have been an instrumental part of the Israeli venture capital landscape in recent years, investing both through funds and directly. In 2016, Chinese investors accounted for the majority of M&A activity in Israel (in U.S. Dollar terms), acquiring six companies for over $6 billion. Recently, the Chinese government announced its intention to invest over $1 billion in Israeli startups through three dedicated funds.
AS THE SHIFT TOWARDS ALTERNATIVE ASSETS GROWS, THE FUND OF FUNDS MODEL EMERGES AS A FAVORABLE STRATEGY IN VENTURE CAPITAL
Over the past several years, we have seen significant developments in global financial markets, which have driven investors, private and institutional alike, to reconsider their traditional asset allocation framework. A persistent low interest rate environment, driven by demographic and technological trends, and increased uncertainty over the aging bull market in listed assets, have propelled investors to search for higher expected returns and portfolio diversification through increased allocations to alternative investments. In their recent report, PricewaterhouseCoopers (PwC) estimated that by 2020 the alternative assets market will grow to $13.6 trillion in their base case scenario and to $15.3 trillion in their high case scenario, an increase of 72.15% and 93.67% from 2013, respectively. Private investors are playing a dominant role in the transition towards alternative assets. According to recent data from Preqin, private equity (including venture capital) accounts for an average of 28.9% of a family office portfolio, up from 24.7% in 2012. Given a continuation in the search for yield dynamic and elevated valuations across liquid markets, we expect this growth will continue. Indeed, according to the Global Family Office Report issued by Campden Research and UBS, family offices increased their allocation to private equity by 2.3% between 2015 and 2016, the highest of any other asset class. What’s more, around 40% of family offices are looking to grow their private equity exposure in the near-term. Preqin similarly noted this trend among institutional investors, as 55% of institutional investors indicated that they will allocate more capital to private equity in 2017 versus 2016. In the venture capital asset class, the fund of fund model is emerging as a favorable strategy for allocating towards private markets. This is principally due to the diversification offered by the fund of funds model which allows investors to mitigate the risk traditionally associated with the asset class, while generating outsized returns. A recent study published earlier this year by the American National Bureau of Economic Research confirms this view by demonstrating that the average performance of global venture capital fund of funds exceeds the average performance of a random fund portfolio by at least 10% (depending on the formation of the random portfolio). These results indicate that fund of funds in venture capital are able to identify and access superior performing funds and thus have the ability to generate outperformance on a risk adjusted basis. The study also indicated that, during the sample period (1987 – 2007), venture capital fund of funds outperformed their public market equivalent (the S&P 500, by 16% on average, and the Russell 2000 by 12% on average). From an Israeli perspective, we find that a well-disciplined approach designed to take advantage of the sweet spots of Israeli venture capital can produce outsized returns for investors. This approach should include a focus on early stage investments in companies with a strong technological advantage, preferably in the business-to-business (B2B) space. Investing through a fund of funds strategy provides investors with access to top-rated fund managers, with an investment strategy that is well adapted to the Israeli market and a track record of outperformance.
EXITS IN FIRST TWO MONTHS OF Q3/2017 SURPASS ALL OF EXITS IN H1
Following a subpar H1/2017, in which ‘exits’ accumulated to a mere $2 billion, Q3/2017 started off on a high note as ‘exits’ in the first two months of the quarter accumulated to $2.6 billion, surpassing all of H1 in the short time span. The first major ‘exits’ of the quarter came from two separate acquisitions by Symantec in the cyber security space, acquiring Fireglass and Skycure, for an aggregate amount of over $500 million. This was followed by the acquisition of NeuroDerm, a developer of treatments for central nervous system disorders, by Mitsubishi Tanabe Pharma for $1.1 billion. Most recently, Aristocrat, an Australian casino company, acquired Plarium, the developer of mobile games, for $500 million and EMK, a UK based private equity firm, acquired a majority stake in Luminati, a developer of IP proxy network for business, at a valuation of $200 million.
NOTABLE INVESTMENT ROUNDS
WalkMe, a Gemini Israel Ventures and Giza Venture Capital portfolio company, secured its series E funding for $75 million from Insight Venture Partners. WalkMe develops a cloud based guidance service.
Oryx Vision, a Maniv Mobility portfolio company, secured its series B funding for $50 million from Third Point Ventures, Walden Riverwood Ventures and Union Tech Ventures. Oryx Vision develops a depth-sensing solution for autonomous vehicles.
Signals Analytics, a TPY Capital and Qumra Capital portfolio company, secured its series C funding for $25 million from Pitango Venture Capital, Qumra Capital and Sequoia Capital. Signals Analytics develops a cloud-based analytical intelligence platform.
Arisocrat, an Australian casino company, acquired Plarium, a developer of mobile games, for $500 million. Gigi Levy, one of Israel’s most notable angel investors was one of the initial investors in the company.
LogMeIn, an American SaaS collaboration platform, acquired Nanorep, which develops a smart bot solution for customer service and e-commerce, for $45 million. Nanorep was a JAL Ventures, iAngels, Oryzn Capital and OurCrowd portfolio company.
Nielsen, a global information, data and measurement company, acquired VBrand, which develops an AI based solution for scanning of brand appearance on TV, for an undisclosed amount. VBrand was an UpWest Labs and Nielsen Ventures portfolio company.
NOTABLE FUND FORMATIONS
Vintage Investment Partners, announced the closing of its fourth secondary fund, with aggregate commitments of $215 million. The fund will focus on acquiring limited partnership interests in Israeli and European venture and growth funds, in select US venture funds, as well as holdings in private technology companies in Israel and Europe.
RECOMMENDED VENTURE CAPITAL READS
Benchmark sued the former CEO of one of its portfolio companies. As you might expect, some other startups are now reportedly "nervous" about dealing with the firm. [Recode]
Uber crafts share sale plan to prop up valuation [Financial Times]
The Koike family has grown cucumbers in Shizuoka Prefecture for nearly 50 years. Only recently did they start using AI to help. [The New Yorker] With his ongoing tour of the US, is Mark Zuckerberg trying to grow a political base or a user base? Maybe the answer is both. [Wired] If you shop on Amazon, you might be buying more things directly from the company than you think. Examining the ecommerce behemoth’s secret portfolio of brands. [Quartz]