Israel is very much on the map of private equity investors. For a country that is half the size of Switzerland, with roughly the same population (around 8.5 million), this is no small feat. It is particularly surprising given that larger markets, and even entire continents, register barely a blip on the radar screen of investors.

There are multiple possible explanations for this attention.

A first possible reason is that Israel might help fill the ‘rest of the world’ asset-allocation bucket. However, many other markets could play this role, notably economic giants such as Japan and South Korea in developed markets; or India, China and Brazil in emerging markets. Arguably, Israel benefits from a real advantage: it is one of the rare significant private equity markets located in the grouping of “Middle East & Africa”. Besides South Africa, only Morocco could count as a relatively structured, albeit rather recent, local PE market. Israel has been active in PE for a comparatively longer time. Local fund managers have the advantage of having a track record, which supports fund raising efforts. This virtuous circle takes time to gear up. More recent African markets face the difficulty of building a PE industry without a long performance trail.

Another reason for the attractiveness of Israel is that it presents some of the characteristics that investors are familiar with. Although familiarity is a well-known behavioural bias of investors, it is difficult to shake out. In many respects, its economic model is very close to the American one. The dynamism of the local entrepreneurial culture has been described at length, as well as its research and development efforts. As a result, Israel is also one of the few countries with a vibrant start-up ecosystem that can effectively compete with its American and European peers. Carving an allocation to this market is tempting, especially as it can effectively diversify typical allocations to American and European venture capital.

Despite this relative importance, investors suffer from a relative lack of information on Israeli fund performance. For example, the country has leveraged buyout funds, but these are less well-known than their VC peers. The discovery of large offshore oil and gas reserves is expected to propel its industry further, triggering the need for investments and operational improvements. Fund managers could seize the opportunity to develop specific investment strategies. The lack of data might, however, deter investors from assessing fund investment opportunities. Fortunately, Pevara provides rich and reliable data to fill this gap. The focus of this issue of FrontLine is therefore on the comparison of the risk and return profile of Israeli PE funds with their peer group in North America and Western Europe.

Table 1 – Comparison of internal rates of returns (IRR): Israeli, Western European and North American private equity funds

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