The historic peace agreement struck between Israel and Palestine in October could lead to more investment opportunities in the Middle East, investors say, but most don't plan to invest more money in the region just yet.
Although investors hailed the accord, the majority described themselves as cautious, pointing out it will be several months before the peace process and Israel's withdrawal from Palestine become realities.
Some, such as the pension fund of General Electric Co., made small investments in Israel in anticipation of the peace agreement.
Investment in Israel has been exploding in the past three years, and has now reached $3 billion in venture capital alone, said Baruch Littman, executive director of the California-Israel Chamber of Commerce, Los Angeles.
"Nearly all the investment there is in venture capital, with $1 billion to $1.5 billion of that coming from the U.S., the rest from Europe and South America," he said.
"Venture capital deals will continue to be done in Israel. There is also a lot of talk that money will start to flow into Palestinian ventures," said Larry Buchsbaum, marketing manager PricewaterhouseCoopers LLP, New York.
The long-term impact will be positive, Mr. Buchsbaum said, "provided there are quality deals at the right price with an exit strategy that makes sense."
Jim Mara is senior vice president, international equities, at GE Investments, which oversees the $60 billion Stamford, Conn.-based GE pension fund. He said he recently established a limited partnership with Omega Partners, a venture capital fund based in Jerusalem that invests in life sciences and information technology.
"We spent time to find the right local partner, on the expectation that there would be a peace agreement, so we could position ourselves to be ready when it came," he said.
GE committed $10 million to the partnership, to gain a "toehold" in Israel, which reflects the fund's strategy of making small commitments and adding money as needed, Mr. Mara said.
"We're initially investing just with this partner, and expect he'll bring us other deals," he said.
Herbert Dyer, executive director at the State Teachers Retirement System of Ohio, said the peace accord wouldn't inspire the $44 billion fund to add to its small emerging-market investment yet. "The agreement is just words now. I want to see for myself that there has been a reduction in violence and in tension there. Then, we might decide to increase our investment," he said.
TRIP TO ISRAEL
He plans to join Carl McCall, New York State comptroller and sole trustee of the $105 billion New York State Common Retirement Fund, Albany, on an expedition to Israel early next year, to decide whether the Ohio teachers' fund should up its investments in the country.
Jeffrey Gordon, a spokesman for Mr. McCall, said that the comptroller is in the early stages of organizing a March study mission to Israel. The plan is for pension fund executives to meet with Israeli officials, companies, commercial bankers and some industry representatives.
"He (Mr. McCall) has reached out to a number of the larger public fund managers to join him on this mission," Mr. Gordon said.
The plan for the trip follows Mr. McCall's April visit to Israel, where he met with representatives from industry and tourism.
Jay Morrison, general partner at Newbury Ventures, San Francisco, said he believes the money going into Israeli ventures would have dried up had the peace accord fallen apart last month.
"The trend to investing there is well established," he said. "There may be some who are thinking about investing in Israel who will be motivated by the agreement, but I don't expect a lot of growth."
Newbury, which is always considering new investments in Israel, currently has in excess of $20 million invested in privately held telecom and datacom equity ventures there.
Douglas Karp, managing director at Warburg, Pincus Equity Partners LP, New York, echoed the cautionary mood.
"We have a limited exposure in the Mideast, but our view is that the accord will be viewed with great caution by investors. If long-standing issues can be resolved peacefully rather than violently, that is the form of stability investors look to. Israel has been very attractive to investors with or without the peace accord. This can only help, but it will be a very gradual process since investors will take a wait-and-see approach."
Some of the U.S. money already invested in Israel is from high-net-worth investors, such as the Bronfman family of Seagram Co. that owns the Claridge Fund, which recently acquired Shamrock Holdings, the Roy Disney family fund.
Most of the investments are in high-tech companies, but Shamrock and others also own industrial companies, Mr. Littman said.
The ongoing uncertainty about what might happen in the Middle East hasn't affected investments, he said. In 11/2 years, investments there jumped 50%.
Israel has a cutting-edge technology industry, the reason for the intense interest in companies there, especially those in high-tech, said Bennett Zimmerman, general partner of the Israel Emerging Growth Fund, a $1.5 million hedge fund based in Los Angeles.
INTEREST RATES KEY
Investment is more affected by the country's interest rates than by a peace accord, he said.
"You expect volatile headlines there. The companies there are unique and manage to raise money, no matter what," he said. "In 1994 and 1995, the best years of the peace process, investment was down because interest rates were so high. In the mid '90s, new trading markets opened, but it has taken time for them to develop. Despite the headlines, trade didn't stop."
Israeli companies that trade on the NASDAQ have $25 billion in market capitalization, Mr. Zimmerman estimates.
In the first half of 1998, $276 million was invested in venture capital projects in Israel, up 70% over the same period a year ago, according to PricewaterhouseCoopers' most recent MoneyTree survey, based on responses from 40 Israeli venture firms and 12 American funds.
The survey also found there was less interest in seed stage investments in the first half of 1998 than the same period in 1997. Only 4% of first-half 1998 money went into seed deals, vs. 11% in the same period in 1997. Investments in first- and second-round deals nearly doubled in 1998, while money going into third-round deals was nearly six times greater.
There was particular interest in communications and medical equipment, with communications getting 32% of invested dollars; followed by software, 24%; and medical equipment, 17%.
ACQUISITIONS REPLACE IPOS
But in the past several months, there has been a sea change in the way new money is being raised in Israel. The money for initial public offerings has dried up. Instead, large multinational companies have been acquiring small Israeli companies, putting liquidity back into the system, Mr. Zimmerman said.
Recent deals include the sale of Teledata Communication Ltd. to ADC Telecommunications for $200 million, and the sale of Mirabiliis Ltd. to America Online Inc. for $287 million. Several others are pending, such as the proposed sale of NM and MRI divisions of Elscint Ltd. to GE Medical Systems for $275 million.
Mordecai Soloff, managing partner U.S.-Israel business affairs, PricewaterhouseCoopers, predicted that as the peace accord is implemented, investors in Israel will add to their investments. The number of deals will escalate, and some will involve coinvestment with Arab companies, he said.
While Forstmann-Leff International, New York, is not invested in Israel, Walter Dec, managing director, believes there is great potential for a true regional vehicle that would include Arab countries. "But they have to come together the way Europe is coming together. If they would get out of their siege mentality, it could be the cradle of boom in the 21st century," he said.
Eliezer Manur, executive director of the Israel Venture Association, Tel Aviv, Israel, said the peace accord paves the way for more joint investments with Arab countries, particularly Jordan, and possibly Palestine and Egypt.
Shimon Peres, the former prime minister of Israel, recently closed a $100 million fund dedicated to high-tech projects in Israel and Arab countries, Mr. Manur said. It is a unique fund to help keep peace in the Middle East, and part of an outgrowth of the Peres Center for peace, which Mr. Peres established 11/2 years ago.
"There is nothing else like this fund right now, but there could be eventually," Mr. Manur said.